HSBC Holdings, Europe's biggest bank, has stepped in to support its two structured investment vehicles -- Cullinan and Asscher -- with funding of up to $35 billion to prevent forced sales of assets.
HSBC, one of the biggest players in the structured investment vehicle (SIV) market, will consolidate $45 billion of assets and related funding from Cullinan and Asscher onto its $2.1 trillion balance sheet and set up new debt-issuing vehicles, it said on Monday.
The move is the first concrete proposal by a bank to overhaul SIVs -- structures that have been slammed in the credit turmoil by a lack of access to funding and a sharp decline in the value of the assets they hold which are mostly highly rated structured finance securities.
Their woes have led to fears of fire sales of many billions of dollars worth of securities, further hitting prices and sentiment.
"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," Stuart Gulliver, chief executive of HSBC's Corporate, Investment Banking and Markets division, said in a statement.
U.S. banks led by Citigroup, Bank of America and JP Morgan have proposed a fund that could buy assets from struggling SIVs, but that plan has yet to get off the ground.
"HSBC believes there is not likely to be a near-term resolution of the funding problems faced by the SIV sector," the bank warned, however.
HSBC shares were down 1.6 percent at 813.5 pence, underperforming the broader UK stock market. The cost of insuring the bank's debt fell by 2 basis points to 51.5 basis points, in line with the broader market, according to Deutsche Bank prices.
"HSBC is moving to make things alright for its investors. But they appear to be saying the SIV market is stuffed," said one analyst who declined to be named.
Standard & Poor's said its AA- rating on HSBC was unaffected, and that while $35 billion of funding was a "substantial sum," the bank had the capacity to absorb the SIV obligations.
The bank said its earnings would not be affected by the move as end investors would still bear the risk of losses. Cullinan and Asscher are already funded into 2008.
Term Funding, Financing
SIVs issue a mixture of short-term debt and longer-term funding and invest the proceeds in long-term securities, mostly bank debt and asset-backed securities.
Some vehicles -- such as Cheyne Finance and IKB's Rhinebridge -- have been forced into receivership, with investors facing losses, after they tripped triggers that are linked to the market value of their assets.
Moody's Investors Service threatened on Nov. 7 to downgrade the ratings on subordinated debt issued by Asscher and Cullinan, along with 14 other SIVs.
HSBC said in a statement it would provide a combination of liquidity facilities and term funding which it expected to total $35 billion by August 2008. It said this would prevent the funding problems from forcing the sale of the two vehicles' assets, which remain highly rated.
Holders of existing income and mezzanine notes will be offered the chance to exchange them for notes from new vehicles backed by the liquidity facilities and term funding. Senior debt holders will be repaid as debt falls due and will have the opportunity to reinvest in commercial paper issued by the new vehicles.
HSBC said it expected the new vehicles would not have to contain triggers linked to the market value of the securities held, thanks to the backing it is providing, thus removing the risk of forced sales caused by price declines.