Why You Should Love HSBC & Kiss Banker Phil
[Written by Larry Burchall]
You gotta’ thank Philip Butterfield CEO, HSBC (Bermuda) Ltd and HSBC Holdings Ltd. At the moment, you may not know why. But when you’ve finished reading, you’ll probably want to hug and kiss the guy – and thank Phil’s bank HSBC (Bermuda) Ltd.
The story starts with Bermuda’s Minister of Finance. Back in May and June 2009, the Minister was scrambling for funds to keep the Government afloat. Over a six week period in May and June 2009, the Minister went into the global money markets and borrowed a total of $175,000,000 in four parts.
In May 2009, the first part ($45 million for five years) came with a 6.55 percent interest cost. Still in May, the second part ($30 million for seven years) came with a 6.98 percent interest cost. In late May and early June, the third and fourth parts together ($100 million for ten years) came in at 7.38 percent interest cost.
You can see that the interest cost went up over the six week period. The final cost of 7.38 percent was some 12.67 percent higher than the cost of the first borrow of $75 million. In turn, this 7.38 percent was thirty-seven percent higher than the last borrow of $75 million that had happened in 2007 and that attracted an interest rate of 5.39 percent.
However, even that big $175 million borrow was not enough. Bermuda’s spending problem got bigger and worsened. The Minister quickly found that she needed an additional $500,000,000.
So, still strapped for cash, the Minister had to go back into the global money market one year later, in June 2010. It is reasonable to anticipate that, one year later, the interest cost asked would be at least 7.38 percent or even higher. But that didn’t happen.
That’s where “Phil the Banker” and HSBC Ltd step in.
HSBC Ltd is a well-run global bank. HSBC is the world’s largest bank with a presence in over two hundred countries and territories. A week ago, the HSBC Group declared a profit, from all global operations, of eleven billion dollars for the year ending June 2010.
In 2007, when the UK’s Northern Rock showed up as the first creak in the UK’s looming financial crisis; and the USA’s sub-prime mortgage crisis was in its earliest stages; the sagacious ‘suits’ who run HSBC had already done their homework, seen the coming economic problems, and were busily divesting and getting out of the looming problem areas.
HSBC avoided the worst of the financial messes and storms that obliterated Bear Stearns, Lehman Brothers, Washington Mutual, etc…; and that almost broke Royal Bank of Scotland (RBS), AIG, Merrill Lynch, and hundreds of other banking and investment firms. HSBC stood apart as a well-managed well-run bank that was not involved in the worst of the derivative schemes that were smashing so many other corporations.
Globally, then, as other big banks and investment companies tanked and sank, HSBC’s credibility and reputation rose and rose. After a profit dip caused, in part, by its relationships with other banks and investment houses, HSBC’s profits recovered.
Fast forward to June 2010. Bermuda’s Minister for Finance needs to borrow $500,000,000. For Bermuda, this will be a first step into the global market with a Sovereign Bond issue of this size. By extending as much as $100,000,000 in overdrafts, “Phil the Banker” and HSBC had been helping to keep the Bermuda Government afloat since March 2008. By November 2009, with BNTB in trouble, HSBC was single-handedly keeping the Bermuda Government afloat.
Naturally then, “Phil the Banker” and HSBC provided support for the Minister and Bermuda. HSBC puts its excellent name and reputation behind the Minister’s request for $500,000,000. HSBC managed the ‘investment roadshow’ that started in Hong Kong and ended in New York.
Why start in Hong Kong? Because that’s where HSBC’s roots are. (Hong Kong and Shanghai Banking Corporation Limited).
With HSBC in close support, in June 2010, investors saw Bermuda differently than they had one year earlier in May and June 2009.
When the ‘roadshow’ was over, Bermuda had sold $500,000,000 worth of Bonds with a 5.603 percent coupon. Without HSBC in support, I believe that those Bonds would – might – have attracted around 7.38 percent – or even higher.
That $500 million at 5.603 percent will cost $28,015,000 a year and $280,015,000 over the Bond’s ten year life. Had the coupon cost been 7.38 percent, the annual cost to Bermudian taxpayers would have been $36,900,000 and $369,000,000 over the ten-year life. That is $88,850,000 more over the whole ten years.
HSBC are not a charity. HSBC did charge us for their support. I am advised that a $500 million Bond offering for a good client might carry a commission of about two percent. So “Phil the Banker” and HSBC would have made about $10,000,000 on Bermuda’s $500 million Bond deal.
In the end though, “Phil the Banker” and his bank, HSBC Ltd, have probably saved us taxpayer Bermudians about – or at least – $78,850,000.
Next time you see “Phil the Banker” run up to him and plant a nice big kiss on his chubby cheeks – if you’re female.
If you’re male, shake his hand.
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Next time you see Phil, ask him how much the Bermuda Gov’t paid HSBC in fees for a bond issue that was 4 times oversubscribed at a ridiculously high yield when interest rates are at an all time low. He and HSBC did us no favors. The PLP government is the “sucker at the poker table”.
What a load of drivel. That article has so many errors and misunderstandings in it I just don’t know where to start. The cost of debt to Bermuda is NOT driven by absolute rates but by a combination of credit risk and thus a spread off US Treasuries. If US Treasuries have dropped from 5% to 3%, Bermuda’s debt cost would likewise be expected to drop by 2% assuming no change in perceived credit.
And Bermuda borrowed $175m at terms of 5 to 10 years? Really? From whom? I’d bet HSBC has their fat little finger in there. And since this borrowing appears to have been done quickly, without any offering document or road show, you can expect to pay a higher spread.
And to say HSBC was single handedly “keeping the Bermuda government afloat” requires a little clarification. Did BNTB withdraw from a relatively risk free, high margin loan to this financially incompetent government or were they removed? Brother “Phil the banker” might shed some light but he’s not going to say now is he.
And lets not even try to sell the HSBC “reputation” as part of this deal.
Larry, this article really needs a good edit.
What a load of drivel. That article has so many errors and misunderstandings in it I just don’t know where to start. The cost of debt to Bermuda is NOT driven by absolute rates but by a combination of credit risk and thus a spread off US Treasuries. If US Treasuries have dropped from 5% to 3%, Bermuda’s debt cost would likewise be expected to drop by 2% assuming no change in perceived credit.
(Larry replies…..True that the Market sets rates, but a good market-maker or syndicate leader helps get the best coupon price. Had that $500 million been backed by a market-maker that was less well known or less respected; the price would certainly have been higher. That’s how the bond markets really work.)
And Bermuda borrowed $175m at terms of 5 to 10 years? Really? From whom? I’d bet HSBC has their fat little finger in there. And since this borrowing appears to have been done quickly, without any offering document or road show, you can expect to pay a higher spread.
(Larry replies…Government’s Financial Statements show that between Mar 09 and Oct 09, Government had hastily arranged overdraft facilities of $157 million with HSBC and $50 million with BNTB. In the middle of this period [May/June 2009] Government took up the $175 million in notes. The Market, as ever, sets the rates.)
And to say HSBC was single handedly “keeping the Bermuda government afloat” requires a little clarification. Did BNTB withdraw from a relatively risk free, high margin loan to this financially incompetent government or were they removed? Brother “Phil the banker” might shed some light but he’s not going to say now is he.
(Larry replies…Government’s own Financial Statements show that at the end of Oct 09, BNTB – now having severe problems of its own – ended its $50 million overdraft arrangement with Government. From 01 Nov 09 through to 31 Mar 10; HSBC and only HSBC extended first a two month $107.5 million O/D facility, then for three months [Jan, Feb, Mar 2010] let Government have a $100 million O/D facility. Government’s deficit for 2009/10 was well over $100 million. So from 01 Nov 09 to 31 Mar 10, HSBC, and only HSBC, was ‘floating’ the Bermuda Government. I stress that this is Government Financial Statement information [fully accessible by the public] and not what a wee birdie whispered to me.)
And lets not even try to sell the HSBC “reputation” as part of this deal.
(Larry replies….See my first response, see HSBC’s Financials, see how HSBC stacks up against – say – RBS?)
Larry, this article really needs a good edit.
(Larry replies….Really?)
So what about all these people down Tuckers Town who drive their golf carts with their fancy wheels wherever they want? I guess its different rules down there…..
As far as i know if a road has more than 3 or 4 houses then its a road under the road traffic act private or not. As such you need insurance and vehicle licence.
Are you kidding me? There are so many things wrong with this debt issue that I, like Billy, don’t even know where to start. But Billy’s comments are right on the money.
This is not to mention that a half-way responsible government should be able to run a small village of 65,000 people with a $1 billion budget! They shouldn’t even need to borrow a nickel from anyone else.
To implement Billy’s suggestion of a “good edit”, I suggest printing this article out and then ripping it up (a la Burch) and starting all over again… this time focus on the fact that Philly is Ewart’s brother.
Having read a few of Mr Burchalls opinion letters on the subject of Bermudas debt I can assure you he is no supporter of this lunatic governments handling of the public finances. I think perhaps he is trying to make the best of a bad situation.
However at the end of the day Mr Burchall has done a fabulous job at once again highlighting HOW MUCH the PLP is p1ssing away in interest payments and how the Brown oligarchy is benefiting hand over fist. Walton Brown has an interest in this bernews site, do you think this article would have been published if it had said that Phil Brown was just another vampire at Bermuda treasury.
How the hell did a tiny village of 65000 people with one of the highest GDP and earnings per capita get 1 billion in debt!!! and the next bond issue in 10 years it will probably be 5 billion.
Hi, thanks for your comment, but one clarification….just a slight mix-up; Walton Brown doesn’t have any interest in Bernews. We are often confused, but his news site is Bermuda News Network [link].
HSBC is not a charity organisation and has never claimed as one. What Larry is pointing out is simply that HSBC has stepped in to help Bermudians in a timely fashion. The fact that HSBC is superior to the majority of the international banks is a fact not a myth. The discussion is not on how good or bad the Bermudian government is. I wish folks will stick to the point.
Look, I am no fan of Phil or his brother but if they were going to award the bond lead locally (and you can argue that they should not have) only HSBC has the size and global presence to manage it.
Now with regard to the yield, the fact that it was issued at 2.50% above similar maturity US government bonds and was 5-6 times oversubcribed and is very quickly started trading at 2.10% over US bonds tells you that the government paid too much. Without comparing where previous issues were launched as a spread to US treasuries, you can’t just say 7.38% is higher than 5.60%.That’s daft.
HSBC did a crap job of correctly assessing demand for AA rated sovereign paper, even though Bermuda was a relative new comer to the market, the concession was way too much.The only people who should be hugging Phil are the bond sales people at HSBC who will get a nice bonus on a sweetheart deal.
This is spot on but, correct me if I am wrong (as there is no “sarcasm” font), I dectected a tongue in cheek tone throughout the article…. of course Bermuda had to pay a premium for money it should never ever have needed to borrow – we are not a good risk – how many government CF financial statements have received qualified (unclean) audit opinions in consecutive years and been a good lending risk? If I went to a bank and asked for a loan but a team of independent auditors told the bank they could not verify the accuracy or completeness of my income and expenses or value all of my material assets, and that every year, I went and asked for extensions on my overdraft because I spent more than my pre-approved budget (as Burchall correctly pointed out in the supplementary appropriations article some time ago) do you think I’d even get a loan? Maybe from a shark… and HSBC is playing that game charging above market rates and Phil & Co are making out like the thieves they have replaced… same bank, different opportunist at the top.
In this case the bond market is the loan shark. Even at 210 over the yield is much higher than similarly rated bonds, which shows that the buyers are ignoring the ratings agencies and likely taking into account Bermuda’s fiscal mis-management.
It was the “extra” 40 basis points that was unecessary and thus no reason to kiss Phil, unless you’re getting paid to sell them.