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.
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Next leg of subprime meltdown will be swaps connected to credit cards:
Date: Monday, July 23 2007
NEW YORK — Fitch expects to rate HSBC Credit Card Master Note Trust (USA) I, series 2007-1 Notes as follows:
–$677,550,000 1mL + TBD class A ‘AAA’;
–$72,450,000 1mL + TBD class B ‘A’.
Also see: Bank of Americas MBNA Credit Card Trusts, IMHO being used for Northern!
Seems rather positive.
They’re using their balance sheet directly to provide liquidity but are leaving the credit risk with junior investors.
Isn’t this good news in terms of restructuring possibilities elsewhere?
Re: Seems rather positive.
They’re using their balance sheet directly to provide liquidity but are leaving the credit risk with junior investors.
Isn’t this good news in terms of restructuring possibilities elsewhere?
Go ask Bank Of England or think in terms of the SIV Bailout……guess its good if you can dump bad bets at the casino onto taxpayers!
Anon of 1:54 PM,
It may turn out that the whole SIV problem is primarliy a Citigroup problem. Some smaller SIVs have been liquidating, and they haven’t been large enough to trigger the fire sale scenario that has caused so much worry. And if a bank has reasons not to liquidate (they may legitimately think the assets would go for prices below fundamental value, and prefer to ride it out, selling opportunistically), much better for them to act like adults and be responsible for the situation they created.
There was speculation early on that the SIVs rescue entity would not make sense for the stronger banks. HSBC’s move bears that out. Having more banks follow their example would signal confidence in their financial position.
Re: It may turn out that the whole SIV problem is primarliy a Citigroup problem.
Tell that to Bank Of England and Etrade, which is down 81%; SIVs are just one type of off balance sheet entity using synthetic swaps to enhance bets, which are like viruses that almost every financial entity caught, i.e, subprime flu may have started with citi or Goldmans, or Wells, or Ban of America…but obviously the flu is spreading to the tune of $500 Billion to date, and counting! The daily connections are like watching a SARS-like virus spread and infect safe havens. To assume its all over and just a Citi problem is being naive! All the models are broken and the chips are falling fast.
Anon of 4:19 PM,
I meant in terms of the need/value of the SIV rescue plan and events contributing to the credit crisis. E*Trade’s unravelling is not a systemic event; the company is far too small a credit market player. It has gotten more coverage than the size of its exposure warrants because it is a well recognized brand. And it now looks likely to be acquired. The shareholders may take a bath, but this is not going to precipitate a crisis in the credit markets.
I am not quite certain what you mean as regards the Bank of England. Mervyn King is still trying to talk a tough moral hazard line, despite being pressured by the FSA and Treasury into bailing out Northern Rock (it was a joint operation).
The Financial Times in particular argued that Northern Rock should not have been bailed out; its failure was too small to constitute a systemic event. However, the press surrounding it triggered a run which was caused in large measure by defects in the UKs’ deposit insurance regime (observers noted in fact that the design of the insurance program, which is only partial and slow to pay, was almost guaranteed to cause a run). Those shortcomings have since been remedied. Had the new regime been in place earlier, Northern Rock would very likely have been permitted to go under.
Having Citigroup or another large financial institution go on the ropes, or having a large volume of SIV assets hit the market is quite another matter. And Citi is stressed on so many fronts that it is apparently unable to resolve its SIVs on its own, which were it not so beleagured, should be well within its capacity.
HSBC is a hopeful but far from conclusive sign that the big players may decide to work out this mess themselves, rather than rely on convoluted, resource draining solutions to problems that far from the biggest facing the financial markets. As the Financial Times’ Lex column noted:
Still, while the SIV sector is under fire, the potential hit to money market funds does look like one contagion story too far. First, the exposure is small: Bank of America research estimates about 5 per cent of the assets under management of prime money market mutual funds are invested in SIVs. Second, asset managers are able to take action to ward off panic. The fact that some are taking proactive measures now actually reduces the need for a rescue plan, along the lines of a super SIV, currently being worked up by a number of banks. Third, they are benefiting from good industry trends right now, as shown by strong asset inflows.
Yes, SIVs are cause for concern, but ironically, the SIV rescue plan has made the problem seem larger than it really is. There is now a bit over $300 billion in SIVs remaining. 70% NAVs translate into a little over 2% loss in principal. This is in a market were investors are paid not to risk principal, so they now won’t touch the stuff.
However, this translates into $6-$7 billion in losses, Even if the losses are understated by 200%, we are talking $18-$21 billion in losses versus $250 to $500 billion for subprime, $100 to $150 billion for commercial real estate, and God only knows how much for CDOs, but $200 billion is probably only a starting point.
Jan Hatzius, chief economist at Goldman Sachs in New York, wrote an ominous report dated Thursday, saying the subprime-induced deterioration of global credit markets will force financial institutions to cut lending by $2 trillion, in effect bringing the risk of a “substantial recession” in the U.S. Hatzius said a back-of-the-envelope calculation of U.S. home foreclosure related losses could be as high as $400 billion for financial companies. Furthermore, the fallout may be amplified tenfold due to leverage, thus the $2 trillion figure based on a “conservative estimate” of losses of $200B. “The likely mortgage credit losses pose a significantly bigger macroeconomic risk than generally recognized. It is easy to see how such a shock could produce a substantial recession [or] a long period of very sluggish growth,” said Hatzius. The $2 trillion lending reduction is said to be equal to 7% of total U.S. household, corporate and government debt. Financial companies have already written down over $50B of subprime-related losses. At a banking conference on Thursday, Wells Fargo CEO John Stumpf commented, “We have not seen a nationwide decline in housing like this since the Great Depression.” (Full story). Stumpf predicted more losses in 2008, but thinks the recovery will be sharp once the bottom is reached. Hatzius said the risk of recession is highest if the lending reduction happens over one year, but he still expects “very sluggish growth” in the event of a two to four year reduction
$ 2 trillion in reduced credit (relative to what?) has to be one of more useless numbers lobbed forth in the general analysis of this problem.
There are a number of factors that could lessen the lending shock, Hatzius noted. Regulators could encourage financial institutions to keep lending, even in times of stress. Some players could raise additional capital by selling stakes in themselves.
But the overall outlook is bleak, as pressure on lending is likely to raise the risk of “significant weakness” in economic activity, the note said