HSBC is to bail out two of its structured investment vehicles (SIVs), Cullinan and Asscher, blaming "the inability of most SIVs to fully roll over their senior funding in the form of commercial paper or medium-term notes" and "a continued decline in the market value of assets".
The bank will take the SIVs' assets, which it estimates total $45 billion, onto its own balance sheet. Notes issued by the two SIVs will be exchanged for notes issued by new vehicles, funded either by commercial paper backed by a liquidity facility or by term financing - in both cases provided by HSBC.
Although the SIVs' assets are still strong, with no downgrades and an average rating of Aa1/AA+, the bank said "there is not likely to be a near-term resolution of the funding problems faced by the SIV sector".
HSBC said it expects the new vehicles to operate without market value or net asset value triggers, removing the risk of a forced cash-out. The bank will have to provide around $35 billion of liquidity and term funding, but available liquidity resources are sufficient for this not to affect the bank's balance sheet, HSBC said.
The changeover offer is due by early 2008.
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