naked capitalism

Bloomberg, Reuters, and FT Alphaville report that HSBC Holdings, the biggest bank in Europe, will restructure two SIVs whose assets total $45 billion. HSBC’s SIVs had been performing a bit worse than the norm, in part due to the fact that one of them, Asscher, had about 10% of its assets in collateralized debt obligations. The restructuring will take place via a new facility that will be in place by the end of this year or early next year, and will require up to $35 billion of loans and funding support from HSBC by August 2008.

This development is noteworthy for three reasons. First, HSBC indicates that the restructuring will not have a meaningful effect on its capital base or earnings. Second, this development confirms one, perhaps two doubts about the SIV rescue plan sponsored by Citigroup, JP Morgan, and Bank of America: that the plan would come into being too late, since SIVs are under pressure now, and the better capitalized banks would be deterred by the plan’s sizable fees and would choose to go it alone. Third, the bank will not be taking on losses on behalf of investors. As FT Alphaville informs us:

Investors in the vehicles are left with with underlying risk in the asset portfolios. So, the bank says:

As existing investors will continue to bear all economic risk from actual losses up to the full amount of their investment, HSBC expects no material impact to its earnings. HSBC also expects limited impact on regulatory capital requirements because of this first-loss protection.

The market took it all in its stride. HSBC shares held flat in trade on Monday.

BreakingViews points out another wrinkle: HSBC’s move puts pressure on other SIV sponsors. If they don’t follow a similar course, it indicates that there are problems with either their SIV’s holdings or with their capital base.
From Bloomberg:

HSBC Holdings Plc, Europe’s largest bank, will bail out two structured investment vehicles, taking on $45 billion of assets to avoid a fire sale of bond holdings.

Investors in Cullinan Finance Ltd. and Asscher Finance Ltd. will be allowed to exchange their holdings for debt issued by a new company backed by loans from HSBC, the London-based bank said in a statement today. HSBC said it doesn’t expect any “material impact” on its earnings or capital strength.

Banks are trying to prevent SIVs, companies that borrow short-term to invest in higher-yielding securities, from collapsing and forcing fund managers to sell their $320 billion of assets. Bank of America Corp., Citigroup Inc. and JPMorgan Chase & Co. are trying to persuade competitors to help finance an $80 billion “SuperSIV” fund to bail out the companies.

HSBC is “using their balance sheet scale and strength to reassure investors in these vehicles and create a long-term solution,” said Antony Broadbent, a London-based analyst at Sanford C. Bernstein & Co. in London. “It prevents the need for a fire sale of the assets” and means HSBC is less likely to join the “SuperSIV,” he said.

HSBC’s SIVs have more than $34 billion of senior debt, according to Moody’s Investors Service, making it the second- largest bank sponsor of SIVs after Citigroup. The companies, HSBC’s only SIVs, have enough funding to last beyond the end of the year, the bank said….

HSBC is the second bank to restructure its SIVs. Dusseldorf- based lender WestLB AG provided a credit facility to Kestrel Funding Plc, a SIV it manages, that allows the company to repay all its commercial paper as it matures.

Cullinan and Asscher’s assets have an average rating of Aa1 by Moody’s Investors Service and AA+ by Standard & Poor’s, the second-highest ranking. They include asset-backed securities and bank debt.

HSBC plans to make a formal offer to investors in the SIVs’ lower-ranking mezzanine and income notes later this year or early 2008. It expects to complete the restructuring by August 2008.

The bank will provide the new company with funding and loan facilities of as much as $35 billion. The financing will remove the risk of a forced sale of the SIVs’ assets because of declines in the net asset values. Investors will still bear the losses stemming from defaults in the underlying assets, HSBC said…..

HSBC said Nov. 14 that emerging-market lending and a $1.3 billion accounting gain lifted third-quarter profit, offsetting losses on U.S. subprime mortgages. The bank set aside $3.4 billion in the quarter to cover U.S. defaults, $1.4 billion more than it forecast in July, and said the securities unit has limited collateralized debt obligations backed by home loans….

“HSBC believes there is not likely to be a near-term resolution of the funding problems faced by the SIV sector,” the bank said.