The Manila unit of the global financial-services provider HSBC is even now doing the spade work that makes possible for even lower-ranked or lower-rated financial institutions to access the domestic debt market just as quickly and as easily as their bigger and more profitable rivals without having to pay an arm and a leg for it.
This was learned from Wick Veloso, CEO at HSBC Manila, who said the government’s continuing effort to draw a fixed-income road map should now make it possible for financial innovators to offer new products that benefit not just yield-oriented investors but allow the Philippines to widen and deepen the domestic capital market.
Veloso said HSBC is prepared to do the difficult transactions if only to offer investors new avenues for yield or return. But beyond that, HSBC is perfectly in position to offer investors a credit spread-trading platform that connects lesser-rated corporate-debt issuers to investors willing to take the risk.
What HSBC has in mind is a product that takes off from the government-drawn fixed-income road map that is even now being crafted to achieve a larger, certainly deeper and even more investor-friendly debt market.
A credit spread-trading market is one in which a lesser-rated bond issuer is allowed to access the debt market on roughly the same footing as triple A-rated corporation and without having to pay a much more prohibitive cost for the capital funds it requires.
Ordinarily, a corporate issuer with a triple-B rating, say, may raise funds by issuing bonds and pay bondholders far more in interest terms than an issuer with a double- or triple-A rating. But with a credit spread-trading mechanism in place, a bond issuer in collaboration with HSBC is able to find investors willing to take the risk, and provide the capital funds required.
In this manner, lesser-rated bond issuers are able to sell bonds at more competitive rates because investors are more willing to buy them, Veloso explained.
He also said such an instrument when finally allowed for sale by the Bangko Sentral ng Pilipinas, should help radicalize the market because even the smaller corporate issuers, and not just the top-tier corporations have access to cheap funds.
“In theory, anyone with a financial statement can take advantage of the credit spread-trading market. This will make issuers happy because they now have access to funding [at competitive cost] and happy as well for investors who now have a wider choice of investment tools,” Veloso explained.
No longer is the domestic investor limited to a narrow range of investment tools ranging principally to deposits, government securities, corporate bonds, equities, so-called repos and now the credit spread, he reiterated.
Repos are, in essence, short-terms loans that allow banks to borrow from colleagues at preset prices that they subsequently redeem at predetermined dates in the future. Financial institutions in the Philippines typically use government securities (either Treasury bills or Treasury bonds) as security.
Veloso’s optimism on eventual regulatory approval of such a mechanism is anchored not only that credit spread trades happen as a matter of course in developed markets but also because the domestic market itself will demand that such a mechanism or product is available.
“A credit spread product has less capital bite,” he said of the fact that regulations require banks and financial institutions to set aside a portion of their capital as ‘reserves’ relative to the extent of their exposure to a particular credit.
Reserves act as a tax on the ability of banks and financial institutions to deploy funds for investment purposes and from this viewpoint dampen their zeal to lend more.
In summary, Veloso said the government-drawn “fixed-income road map will help whatever volatility is in the government securities market, and help pave the way for new products that will allow issuers and investors to access the debt capital market and have an alternative investment. As we evolve, more and more benefits will arise because as we have the ability to buy and sell credit, we are able to fix some of the challenges the banks face, such as the single borrower’s limit or SBL.”