HSBC isolates fallout from subprime debt

PUBLISHED : Tuesday, 27 November, 2007, 12:00am
UPDATED : Tuesday, 27 November, 2007, 12:00am


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Bank to revamp investment vehicles

HSBC Holdings plans to reorganise its two structured investment vehicles (SIV) to prevent quality assets from being forced into liquidation, given funding difficulties in the sector, the world's fourth-largest bank by capitalisation announced.

The bank yesterday said that by August next year it would provide a combination of liquidity facilities and term funding, expected to total US$35 billion.

An option will be offered to investors of HSBC's two SIVs, Cullinan Finance and Asscher Finance, to exchange their existing papers for the notes issued by one or more new vehicles when their debt falls due.

These new vehicles will be funded either by commercial papers backed 100 per cent by liquid facilities, or by HSBC's term financing.

As a result, an additional asset and related funding of US$45 billion from Cullinan and Asscher would be consolidated into HSBC's assets.

The bank said the move would have no material impact on earnings or capital requirements.

Standard & Poor's Ratings Services last night retained its AA-minus/stable/A-plus ratings on the group, calling the restructuring 'a proactive step' to 'avert the potential fire-sale of the SIVs' assets'.

HSBC shares fell 2.12 per cent to 809.5 pence (HK$130.41) in late trading on the London exchange.

'We believe that HSBC's actions will set a benchmark and restore a degree of confidence to the SIV sector while providing a specific solution to address the challenges faced by investors in Cullinan and Asscher,' said Stuart Gulliver, the chief executive of HSBC's corporate, investment banking and markets division.

In its statement, the bank said that a near-term solution for the SIV sector 'is not likely'.

The value of SIVs has plunged as investors started to shun mortgage-related debt when the US subprime crisis surfaced.

Most SIVs were unable to fully roll over their senior funding in the form of commercial paper or medium-term notes. Some SIVs also came under further pressure from a continued decline in the market value of assets which has limited the vehicles' operating flexibility.

HSBC said its two SIVs were funded beyond this year, with Asscher funded to April next year, and the credit quality of the assets owned by the SIVs was strong with an average asset rating of Aa1 and AA-plus and no downgrades of any asset-backed securities or structured-finance securities so far.

'HSBC has to help fund its SIVs. If not, their asset value would fall even further,' said Bonnie Lai, an analyst at CCB International.

Ms Lai added that the tangible impact on HSBC would not be excessive given its huge balance sheet.

Despite the subprime woes, Lehman Brothers last week backed HSBC, paying at least HK$10.7 billion to raise its stake from less than 3 per cent to 3.7 per cent.

The US brokerage is now the third-largest HSBC shareholder after Barclays and Legal & General, with 4.38 per cent and 4.06 per cent respectively, according to Bloomberg.

Goldman Sachs forecast HSBC would set aside US$12 billion more in subprime provisions on top of US$4 billion in the past quarter. It also expects HSBC Finance's net loss to more than double this year to US$1.8 billion from last year and the parent's earnings per share to fall 6 per cent in the same period.