HSBC DISCO Action Group Presses Bank for More Transparency Over DISCO Reclassification

LONDON, August 6, 2018 /PRNewswire/ --

A group of eight asset managers holding investments in four issuances of DISCO bonds (Discount Perpetual Floating Rate Securities) by subsidiaries of HSBC Holdings plc is pressing the bank for clarification and more transparency around its decision, disclosed in a public announcement on 4 May 2018, to reclassify these bonds as eligible Tier 2 capital under the EU capital adequacy regime.

The unexpected reclassification of the bonds has cut their value by up to 20%, and the bond prices have continued to be volatile in the wake of the announcement. The HSBC Disco Action Group represents holders of 28% in aggregate amount of the DISCO bonds impacted; the total amount outstanding of the bonds is just under $2bn.

Prior to the announcement on May 4, and since 1 January 2014, these bonds had been classified by HSBC as grandfathered Tier 2 capital under the EU Capital Requirements Regulation (CRR), but ineligible as Tier 2 capital upon full implementation of the CRR from January 1, 2022.  

HSBC's action in reclassifying the bonds as eligible Tier 2 capital under the CRR is at odds with most other major European banks who have assigned (and continue to assign) a more conservative capital adequacy treatment to their similar old-style floating rate subordinated bonds (i.e., ineligible as Tier 2 capital from 1 January 2022), or have chosen to redeem them.

In  letters to HSBC, the Action Group highlighted that, in addition to the confusion caused by the unexplained reclassification of the bonds, the continuing existence of the bonds was potentially at odds with the policy statement of the Bank of England's Resolution Unit published on June 13, 2018, which encourages banks to redeem old-style perpetual floating rate instruments issued by operating subsidiaries of bank holding companies, such as these bonds, because they may present a barrier to resolution, and, thus, frustrate attempts to ensure that taxpayers are not forced to bail out banks which are "too big to fail".

The Action Group highlights that HSBC has failed to provide any meaningful rationale for the reclassification, or to explain whether these bonds are intended to be included among debt capable of being bailed in as part of a resolution strategy, despite several requests made to HSBC over the past twelve weeks.  

It calls on HSBC to take the earliest opportunity to update the market to explain and justify the reclassification of the DISCO bonds from a capital adequacy point of view, and to explain to the market whether it intends these bonds to be treated as liabilities eligible for inclusion in the minimum requirement for own funds and eligible liabilities (MREL) under the EU Bank Recovery and Resolution Directive and, therefore, subject to the risk of bail-in.

Although the Action Group recently received one response from HSBC in relation to their concerns, the response was short and perfunctory and did not substantively address the concerns raised by the Action Group, or other s more broadly, since the announcement was made on 4 May.

The Action Group is being advised by Akin Gump LLP, the US law firm.

 Details of the bond holdings  

       The action group's holding

Per issuance:

1.    ISIN GB0005902332 (US$750m):  c25%

2.    ISIN XS0015190423 (US$500m):  c25%

3.    ISIN GB0005903413 (US$300m):  c38%

4.    ISIN GB0004355490 (US$400m):  c29%