2020-04-04 IFR Asia

International Financing Review Asia April 4 2020 1

Upfront

OPINION INTERNATIONAL FINANCING REVIEW ASIA

Political dividends

E

arlier this year HSBC's army of loyal shareholders

in Hong Kong were probably thankful the bank

had decided in 2016 to remain headquartered in

London, rather than move to Hong Kong. Protests at China's

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and Hong Kong investors could comfort themselves that

the bank's bosses were 6,000 miles away and somewhat

detached from the politics.

Many Hong Kong investors may have taken a different

view last week, however, when the Bank of England forced

UK-headquartered banks including HSBC to scrap their

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dividends for 2019, which had already been promised. The

latter included a US$4.3bn pay check for HSBC investors

due on April 14, of which more than US$1.4bn was destined

for Hong Kong retail shareholders.

HSBC prides itself on the stability of payouts, and

generations of Hong Kong retail investors have bought into

that concept. They own over a third of the bank's shares.

The shares often stay in the family for years, providing

valuable income every three months, or accumulating

thanks to a healthy scrip uptake (26% of the dividend was

taken as shares last year).

Investors, understandably, have directed their anger at

the distant regulator. Did it not know the bank made 35% of

its revenues in Hong Kong last year, and a whopping 55% of

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leaks to newspapers, that HSBC is once again considering

moving back to Hong Kong. The people spinning that line

should remember why the bank moved to the UK in the

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Surrendering the bank to the control – and that is what

it would eventually be – of the Chinese Communist Party

is not the legacy that any HSBC CEO should want to be

remembered for.

It is just 27 more years before Hong Kong is due to be

fully reabsorbed into mainland China – and yes, for a bank

that traces its origins back to 1865 and makes much of

its storied history, “just” is exactly the right word. A bank

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HSBC bosses can be forgiven for feeling aggrieved that

they have been forced to let down their investors over the

dividend but there are bigger issues at stake just at the

moment. Rather than reigniting the debate about the right

place for its headquarters, HSBC top brass should be putting

their energy into supporting the real economy, making a

success of its latest restructuring and ensuring that when

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growth in the share price and not just dividend payouts.

Caught out

T

he resilience of the Asian offshore bond market in

recent years has given issuers and investors a false

sense of security.

US dollar bonds from Asia used to hold up to bouts of

global volatility far better than those in Eastern Europe or

Latin America, partly thanks to the buy-and-hold nature of

many of the investors in this region – not to mention the

fact that many offshore Chinese deals are placed entirely

with Chinese investors.

It turns out that one major reason why so many Asian

investors buy and hold is because there is no market when

they want to sell. On top of that, some smaller Asian funds

would rather not mark to market in a downturn, let alone

realise their losses by selling.

The Reg S-only market has been Asia's strength during

bull markets, offering an alternative pool of liquidity driven

mainly by Chinese investors trying to diversify away from a

weakening renminbi.

However, it only works as long as there is a functioning

secondary market to provide price transparency. During the

current crisis, bids and offers have been more than 10bp

apart for investment-grade bonds and 10 price points apart

for junk. It's pointless to try calculating the right new issue

concession when no one can even agree on the secondary

curve.

Perhaps unsurprisingly, US dollar liquidity is now

concentrated in the US, and that means that Yankee or

Global offerings are the way forward until markets improve.

It also means that Asia's notoriously price-sensitive issuers,

especially quasi-government names, will need to break their

aversion to paying new issue concessions if they want to

raise money.

Asia's frequent issuers may not be so desperate for

dollars, having locked in funding in late 2019 and January.

Some will be reluctant to take on more foreign exchange

liabilities while their own currencies are looking vulnerable.

But eventually the focus on price will have to change,

especially now that American blue chips have showed

the importance of maintaining market access rather than

quibbling about a few basis points while absolute yields are

so low.

The credit market may well take longer to recover from

the Covid-19 pandemic than it did from the 2008 crisis, and

US issuers certainly seem to think it is worth paying up now

to ensure they have cash on hand, rather than risk being

caught out if the primary market closes too.

The insiders considering moving

HSBC back to Hong Kong should

remember why the bank moved

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