LONDON, Nov 26 (Reuters) HSBC Holdings Plc, Europe's biggest bank, on Monday stepped in to support its two structured investment vehicles (SIVs) -- Cullinan and Asscher -- by providing them backing of up to billion.
HSBC, one of the biggest players in the SIV market, will consolidate Cullinan and Asscher, which are funded into 2008, onto its balance sheet and set up new debt issuing vehicles. The bank said earnings would not be affected as end investors would still bear the risk of losses.
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, mostly highly rated structured finance securities.
Some vehicles -- such as Cheyne Finance and IKB's Rhinebridge -- have been forced into receivership, with investors facing losses.
U.S. banks led by Citigroup, Bank of America and JP Morgan have proposed a fund that could buy assets from struggling SIVs, but the plan has yet to get off the ground.
''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.
HSBC shares were down 0.5 percent at 823 pence by 1131 GMT, underperforning a rallying 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.
Analysts at Moody's Investors Service had said banks might step in to support the SIVs they sponsor to avoid any damage to their reputations, and have warned the current SIV model may no longer be valid.
Standard&Poor's said last week the SIV sector is in ''wind-down'', with over 0 billion of assets sold by the end of October.
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.
HSBC said in a statement it would provide a combination of liquidity facilities and term funding which it expected to total billion by August 2008.
HSBC 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 ratings agencies to allow the new vehicles to operate without triggers linked to the market value of the securities held, thanks to the backing it is providing.
REUTERS BJR HS1823