Investors put in over US$10bn of orders for HSBC's AT1

(UPDATES throughout)

By Will Caiger-Smith and Alice Gledhill

LONDON, May 24 (IFR) - Strong demand allowed HSBC to launch its US$2bn Additional Tier 1 deal well inside initial price thoughts on Tuesday.

The perpetual non-call five deal, rated Baa3/BBB by Moody's/Fitch, is the first AT1 in dollars from a UK bank so far this year.

Buyers placed over US$10bn of orders, according to two investors.

The UK's impending referendum on EU membership, which is less than a month away, appeared to have little effect on demand and HSBC was able to ratchet launch pricing in to 6.875%, inside IPTs of 7.25%.

"The UK is only one part of their operations," said Simon Adamson, a senior analyst at CreditSights. "The risks around Brexit are probably diluted compared with other UK banks."

While Brexit remains a concern, much of its impact has been priced in, said one banker, and recent polls have been in favour of a vote to remain.

HSBC's launch level was right around fair value, based on the bank's existing 6.375% perp non-call 10s, trading at a yield to call of 7.2%, and 5.625% perp non-call 5s at 6.5%, said three buyside sources.

BROADER CONCERNS

But while the deal's success is encouraging for the AT1 market, which suffered a brutal sell-off in February, market participants warned that not all issuers could access the product, considered the riskiest type of bank debt.

"[HSBC is] pursuing a strategy of just executing deals, regardless of market conditions. It (Other OTC: ITGL - news) 's admirable, not all banks can do that," said one banker.

HSBC has said it will be busy with capital and funding issuance every quarter for the next three years, as it seeks to raise US$70bn by 2019 to refinance maturing debt and meet regulatory requirements.

But not all banks enjoy HSBC's high credit ratings in AT1, and investors are still wary of restrictions around coupon payments that torpedoed the asset class in February, said Phil Jacoby, chief investment officer at Spectrum Asset Management.

Suggestions that European legislators will loosen those restrictions have buoyed AT1 investors, but more clarity is needed before lower-quality issuers will be able to access the market, said Jacoby.

"Lesser names will need to come and find liquidity, so these MDA [Maximum Distributable Amount] rules are needed," he said.

Even HSBC has not been completely immune to investors' repricing of the AT1 asset class.

Its US dollar perp callable 2020s and perp callable 2024s issued in September 2014 carry much lower coupons of 5.625% and 6.375%.

"The premium comes from the product," said a bank capital structurer in London. "It still hasn't recovered from investors' first quarter worries."

"Investors just realised the product is risky." (Reporting by Alice Gledhill and Will Caiger-Smith, editing by Julian Baker and Shankar Ramakrishnan)