Supporting clients during adversity: A story of 2020
COVID-19 has caused an unparalleled global economic dislocation, which in all likelihood could take many years to recover from. The pandemic sparked frenzied activity in equity and debt capital markets as companies desperately sought out liquidity to shore up their cash balances. Simultaneously, government interventions designed to stop the spread of the pandemic to the population while supporting businesses have reached an unprecedented scale. COVID-19 is also accelerating a number of existing trends, namely the growing integration of ESG (environment, social, governance) principles into core business values. HSBC has played a critical role in supporting clients during this period and reflects on some of the notable developments that have shaped 2020.
Companies turn to equity and debt capital markets
“When the existential implications of COVID-19 became clear, there was an urgent scramble by corporates for liquidity, with many initially turning to their banks for emergency credit lines before tapping the wider capital markets,” said Patrick Nolan, Head of Client Leadership at HSBC.
Fuelled by the unprecedented stimulus packages launched by the Federal Reserve (including a pledge to purchase corporate bonds for the first time) and other Central Banks - capital markets have broken a number of records in 2020. According to Refinitiv, USD5.5 trillion was raised in the global capital markets during the first half of 2020, a 35 per cent year-on-year (YOY) increase and the highest amount since records began in 1980.1 The report added that international bond offerings rose by 38 per cent to a record USD3.1 trillion with Germany, France and the UK accounting for a fifth of the total issuance.2 In equity markets, Refinitiv found that USD447 billion was raised in the first half of the year, a 41 per cent YOY increase, and the highest amount since 2015, with the US accounting for 43 per cent of this issuance.3
When the existential implications of COVID-19 became clear, there was an urgent scramble by corporates for liquidity, with many initially turning to their banks for emergency credit lines before tapping the wider capital markets
Patrick Nolan, Head of Client Leadership at HSBC
Securitisations: Bracing for a rebound
Although the securitisation market experienced a significant contraction at the beginning of the year in the immediate aftermath of the Covid crisis, the market has now seen a significant recovery across most asset classes. Issuance levels are being held back by the availability of central bank funding but many non-bank issuers continue to retain access to the market. “We are beginning to see a bit more activity in the Asset-Backed Security (ABS) market as financial sponsors start to look at buying distressed portfolios. When the banks start to recycle their loan and mortgage portfolios, it will be a catalyst for increased ABS activity,” commented Nolan. Although the crisis is still far from over, Nolan highlighted that the recent break-throughs in vaccine development were likely to spur increased institutional investor appetite for non-performing loans (NPLs). Giovanni Fenocchi, Global Head of Issuer Services at HSBC, concurred, saying that investors were already starting to scope out lucrative return opportunities in the NPL market, with many looking to make use of HSBC’s escrow solutions.
HSBC’s Issuer Services business has continued to invest in its digitalisation strategy and is collaborating closely with a number of dynamic fintechs, said Fenocchi. Notable developments include the recent launch of the bank’s Investor Reporting portal, which is designed to facilitate seamless information sharing with clients, an aspect particularly critical in the securitisation space. The mobile-friendly platform will provide clients with a personalised dashboard, giving them easy access to new reports and transaction data. Through innovative APIs (application programming interfaces), clients will be able to extract data in a way that is most compatible with their own internal technology infrastructure.
Government intervention during COVID-19
In addition to turning to capital markets, a number of investment grade companies facing short-term cash flow problems have benefited from emergency government funding. In the UK, the Bank of England and HMT – through the COVID Corporate Financing Facility (CCFF) – have provided GBP30 billion to companies since the crisis began.4 Meanwhile, the Term Funding Scheme for SMEs (TFSME) has given funding to help banks and building societies to provide additional financing for the real economy. However, Nolan warned that some businesses – in sectors that have been heavily impacted by the pandemic such as retail, commercial real estate, hospitality and travel – are likely to struggle over the long-term. HSBC’s Issuer Services business was instrumental in ensuring that clients were able to access the government liquidity schemes. “We had more than 100 mandates helping clients access the CCFF. Given the urgency of the situation, the speed at which we were able to execute these transactions made a significant difference to our clients,” said Fenocchi.
COVID-19 elevates corporate commitment to ESG
Although ESG is not a new premise, the crisis has forced organisations to put it as a higher priority on their agendas. Having observed the economic damage which COVID-19 has unleashed, businesses increasingly recognise that sustainability, including but not limited to climate change risk, is a topic that needs to be urgently addressed. “Many of our clients – including those in the oil and commodities sectors – are making some ground-breaking changes to their business models in terms of ESG,” said Nolan. Conscious that climate change could lead to major financial losses in unsustainable business sectors, institutional investors are pressuring issuers to take put a stronger focus on the matter and integrate ESG into their operating models. The push towards sustainability is also regulator-led, especially in the EU, which from March 2021 will demand that investors outline how they factor sustainability risks into their investment decisions.5 The EU is also developing a Taxonomy Regulation, which will establish a framework identifying what economic activities are environmentally sustainable,6 in what could lead to a seismic shift in investor behaviour.
Many of our clients – including those in the oil and commodities sectors – are making some ground-breaking changes to their business models in terms of ESG
Escrow – a solution with many uses in unpredictable times
While escrows have traditionally been associated with M&A transactions, it is a highly flexible product with an extensive range of diverse applications. HSBC has seen a renewed interest in the solution by clients navigating the pandemic and its related financial implications. “As a risk mitigation tool, escrows can be used widely. During the pandemic, a number of corporates and governments used escrows when procuring PPE from new suppliers. Now, as vaccine distribution efforts become increasingly important, in particular within the pharmaceuticals industry, escrows are a relevant solution to help support their requirement. Within Issuer Services and across the bank, we are developing specific solutions not only for pharmaceutical companies but the entire supply chain involved in distribution of the vaccine. With our strong balance sheet and global expertise across multiple markets, we are in a strong position to support clients during this challenging period,’ explained Fenocchi.
As a risk mitigation tool, escrows can be used widely. During the pandemic, a number of corporates and governments used escrows when procuring PPE from new suppliers.
A wine company (Party A), headquartered in Asia-Pacific instructed HSBC to act as escrow agent for a +USD1 million marketing fee that would be paid to a clothing company owned by a high profile figure within the entertainment industry (Party B). In return, Party B will market Party A's new wine collection through their clothing and apparel. In addition to demonstrating the cross-border expertise available at HSBC, the transaction is a clear illustration that escrows can be used to support a number of different use cases.
Services and across the bank, we are developing specific solutions not only for pharmaceutical companies but the entire supply chain involved in distribution of the vaccine.
HSBC can provide an assortment of bespoke services (e.g. finance and advisory, treasury, cash management, escrow solutions, etc) to corporate clients through a single access channel, making for a joined-up customer experience, said Fenocchi. Nolan also noted that Issuer Services is a pivotal value-add to HSBC’s existing product suite. Banking counterparties, which can offer a wide range of solutions under one roof, will be the net beneficiaries moving forward as corporates increasingly look to consolidate wallet share.
- The European Securitisation market in 2020: Navigating uncharted territories
- Watch the video: Did you know an escrow is not a standard bank account?
To find out more about HSBC Issuer Services:
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1 Refinitiv (July 16, 2020) Global capital markets smash records
2 Refinitiv (July 16, 2020) Global capital markets smash records
3 Refinitiv (July 16, 2020) Global capital markets smash records
4 UK government data
5 Sidley Austin (June 25, 2020) ESG disclosures for asset managers under the EU Sustainable Finance Disclosure Regulation and Taxonomy Regulation
6 Sidley Austin (June 25, 2020) ESG disclosures for asset managers under the EU Sustainable Finance Disclosure Regulation and Taxonomy Regulation
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