The cost of protecting HSBC’s debt against default leapt on Friday after analysts warned that Europe’s biggest bank may be forced to consolidate two off-balance-sheet vehicles worth billions of dollars and bear the losses from their investments.
Sandy Chen, analyst at Panmure Gordon, cited the potential downgrades of debt issued by the two HSBC-run structured investment vehicles in a note that reiterated its sell recommendation on the bank’s shares.
SIVs use cheap short-term debt to fund longer term investments in high-yielding securities. They have been at the centre of the liquidity squeeze in financial markets and many could be forced into distressed sales of billions of dollars worth of debt investments due to their inability to raise new funding.
HSBC estimated its maximum exposure to loss in relation to its SIVs was $19.5bn at December 2006, according to Panmure, but that figure is likely to have risen since then.
Adding to the negative newsflow, HSBC also said on Thursday that it had stopped selling and trading mortgage-backed securities in the United States, as part of 120 job cuts in its investment bank unit.
Five-year credit default swaps on HSBC widened sharply, with CDS on senior debt 6 basis points wider at 39bp and on subordinated debt about 14bp wider at 68bp, according to one trader. This means it now costs €68,000 annually to insure €10m of HSBC’s subordinated debt against default over five years.
In the broader market, major indices of credit default swaps continued their widening trend. The iTraxx Europe Crossover, a closely watched measure of risk appetite, widened by about 8bp to 375bp during morning trade, taking the index more than 100bp higher on the month.
Credit stategists said the continuing sell-off of the dollar and Ben Bernanke’s less-than-optimistic prognosis for the US economy were also driving CDS spreads wider.
The iTraxx Europe index of 125 investment-grade names widened to about 51.5bp, against a close of 49bp on Wednesday.
“Overall, the pressure remains on,” said Geraud Charpin, an analyst at UBS. “We’ve had a very volatile market for several months — it wears people down.”