HSBC Sets Bailout Plan for Assets of 2 Funds

Published: November 27, 2007
LONDON, Nov. 26 — Europe’s largest bank, HSBC Holdings, said Monday that it would bail out its two structured investment vehicles, or SIVs, by taking $45 billion in assets onto its balance sheet.
The move was an attempt to repair investor confidence and create a long-term solution for assets that have become difficult to value or sell since problems with subprime mortgages in the United States sent jitters through the global credit markets.
Another British bank, Northern Rock, also moved to repair damage caused by the tight credit markets by picking the Virgin Group as its preferred buyer.
HSBC said Monday in a statement that investors in the two SIVs — Cullinan Finance and Asscher Finance — would be able to swap their holdings for debt issued by a new company backed by HSBC loans. The bank said that it did not expect the move to have a material impact on its earnings or capital strength.
Three institutions — Bank of America, Citigroup and JPMorgan Chase — are working to set up a $75 billion fund to stabilize the SIVs, which use short-term financing to buy higher-yielding and longer-term debt and are among the biggest buyers of pools of mortgages and other complex asset-backed securities.
The bailout means HSBC will not participate in the larger SIV fund, a bank spokesman said. Instead, HSBC expects its action to “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, HSBC’s chief executive of corporate and investment banking, said in the statement.
The step may prompt other banks to seek similar solutions, some analysts said.
While HSBC may have found a way to bolster investor confidence in its SIVs, some bank executives are still concerned about additional write-downs, especially after HSBC said earlier this month that losses in the housing market were spreading to credit card and other consumer loans, forcing it to set aside $3.4 billion, more than it had forecast four months earlier.
HSBC may have to set aside an additional $12 billion for bad debts, Roy Ramos and other Goldman Sachs analysts wrote in a note, lowering their recommendation for the stock to sell, from neutral. Shares of HSBC fell about 16 pence, to £8.12 in London trading Monday. They have dropped 13 percent this year.
Shares in Northern Rock, in the meantime, rose 33 percent, to £1.15 after the troubled mortgage lender — looking for a buyer to help repay more than $41 billion in emergency loans from the Bank of England — said it planned to speed up takeover discussions with Virgin while continuing to explore other options.
Virgin’s bidding group, which includes the billionaire investor Wilbur L. Ross, proposed to immediately repay £11 billion of loans as part of “a clear path toward repayment in full” and to bring Northern Rock under the Virgin brand by combining it with Virgin Money.
Virgin would also inject £1.3 billion into Northern Rock, half of which it aims to finance by offering new shares to existing shareholders at 25 pence each. The implied value of Virgin Money is £250 million, bringing the total investment from Virgin, which would own 55 percent of Northern Rock, to £1.55 billion, or $3.2 billion, Northern Rock said.
The chairman of Northern Rock, Bryan Sanderson, said in a statement that he was “pleased that a solution that firmly restores the company’s prospects has been identified.”
Northern Rock had to ask for emergency assistance when turmoil in the credit markets caused the bank’s access to financing to dry up, causing panic among its depositors and a run on the bank.
A solution for Northern Rock would come as a relief for the British government, which has been criticized for being slow to react to the credit squeeze.
Pressure on Chancellor Alistair Darling to find a solution mounted as the possible burden on British taxpayers became clear and the emergency loans exceeded the country’s transport budget. The situation has already dented the Labor government’s reputation for economic competence and a failure to find a buyer may force it to either nationalize Northern Rock or put it into administration.