LONDON — HSBC Holdings PLC Monday said it will bail out two structured investment vehicles, or SIVs, and move their $45 billion in assets onto its balance sheet, as a liquidity crisis to fund these kinds of vehicles deepens and the market value of their assets continues to plummet.
HSBC said it is taking the action to avert the SIVs potentially being forced to liquidate, and that it doesn't expect it to result in material losses or changes to its capital requirements.
SIVs are investment pools that rely on short-term funding to finance longer-dated securities.
The two SIVs — Cullinan Finance Ltd. and Asscher Finance Ltd. — are among about three-dozen similar vehicles that since late July have been hurt by a lack of buyers for the IOUs they issue. SIVs' portfolios, which include bank debt, residential mortgage-backed securities and other asset-backed bonds, have in turn fallen in value because of the liquidity squeeze and in some cases becaue of ratings downgrades on their assets.
HSBC's move to provide funding to Cullinan and Asscher is notable because they are among the largest in the market and could signal that other banks will have to take similar action. Already, some smaller banks, including WestLB and Landesbank Baden-Wuerttemberg, have agreed to buy the senior debt of SIVs managed by their affiliates to prevent having to sell their assets at hefty losses.
An HSBC spokesman said the bailout means the bank will also have no need to participate in a SIV superfund that is being created by Bank of America Corp., Citigroup Inc. and J.P. Morgan Chase & Co. to buy some of SIVs' assets in an attempt to restore investor confidence.
HSBC's solution for Cullinan and Asscher involves transferring their investment portfolios to two new vehicles that will act much like conduits — another type of funding structure commonly used by banks. They will continue to issue commercial paper to fund their investments, and junior debtholders will continue to bear the first losses from any defaults on the assets.
Commercial paper already issued by Cullinan and Asscher will be repaid by HSBC as it comes due.
The main difference in the new structure will be a 100% backup liquidity facility from HSBC that can be drawn if commercial paper can't be raised. The bank could also provide term financing to keep the new vehicles funded.
Analysts said HSBC's move is another example of banks being forced to devote more capital to products that have been hit by souring subprime mortgages and the subsequent credit crunch. One said it wasn't immediately clear if HSBC's capital position could be affected by further falls in the mark-to-market value of the two SIVs' underlying assets.
HSBC said it expects ratings agencies to let the new vehicles operate without market value or net asset value triggers, which in the current structures can prompt a forced wind-down.
In total, the London-based bank said it expects to provide a combination of liquidity facilities and term funding of about $35 billion by August 2008.
"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, the two SIVs managed by HSBC," HSBC's Stuart Gulliver, head of the group's corporate and investment bank, said.
At 1225 GMT, HSBC shares were down 5 pence, or 0.7%, at 822 pence, in a flat London market.
