Some things you may have missed in the voluminous results of HSBC, published on Monday:
- The consolidation of two troubled money market funds with $5.7bn assets onto balance sheet.
- The consolidation of a $900m ABCP conduit onto balance sheet.
- And the effects of consolidating $42bn of SIVs onto balance sheet.
Underneath the rather sanguine headline numbers, HSBC has been having a rough time with its off balance sheet vehicles. It’s a veritable Smörgåsbord of VIEs.To start with the known.
Consolidation of SIVs
The consolidation of HSBC’s two SIVs – the giant Cullinan ($42bn) and smaller Asscher ($8.7bn) – was announced in November last year.
After a slew of liquidity support facilities were extended: repos, CP purchases and asset swaps, the bank determined its holdings in the SIVs to be exposed to a “majority of risks and rewards” and so consolidated.
What then, the impact of all this? HSBC is still desperate to shift Cullinan and Asscher off balance sheet, and the “restructuring” plans it announced last year continue apace.
To the extent that it is now launching two entirely new off-balance sheet vehicles which will buy assets from Cullinan as and when required to fund amortizing debt. The new vehicles have an asset limit of $50bn and will begin issuing new commercial paper and medium term notes shortly, buying up Cullinan assets with the proceeds. Cullinan’s $1.9bn capital note holders have already traded in their SIV shares for equity notes in the new vehicle. Here, anyway, is the stuff the new non-SIV SIV will be buying:
Asscher, meanwhile, should follow suit in due course.
Consolidation of Performance Trust
As well as its SIVs, HSBC runs a number of ABCP conduits: vehicles which are basically the same as a SIV, but with enhanced liquidity support from a sponsor bank and run to more closely suit their bank’s business plan.
HSBC has five ABCP conduits: Regency Assets, Bryant Park Funding, Abington Square Funding, Performance Trust and Solitaire.
Four of those conduits – with $35bn aum – have been consolidated on HSBC’s balance sheet since inception: HSBC determined itself to hold the “majority of the risks and rewards” associated with ownership (and thus, under IFRS, consolidated).
Performance Trust, however, was deconsolidated. Or at least, it was until Q4 2007, when HSBC found itself buying up all the conduit’s unsold commercial paper, and assuming consequently the “majority of risk”.
Which led to a nasty $900m balance sheet hit.
Consolidation of VNAV fund
Larger in size than the SIVs and ABCP conduits combined, is the aggregate size of HSBC’s money market funds, with assets of $109bn. All of which are all supposed to be off balance sheet. HSBC operates three broad types of money market fund:
* US$57 billion (2006: US$41 billion) in Constant Net Asset Value (‘CNAV’) funds, which invest in shorter-dated and highly-rated money market securities with the objective of providing investors with a highly liquid and secure investment;
* US$12 billion (2006: US$15 billion) in French domiciled dynamique (‘dynamic’) funds and Irish ‘enhanced’ funds, together Enhanced Variable Net Asset Value (‘Enhanced VNAV’) funds, which invest in longer-dated money market securities to provide investors with a higher return than traditional money market funds; and
* US$40 billion (2006: US$37 billion) in various other money market funds, Variable Net Asset Value (‘VNAV’) funds including funds domiciled in Brazil, France, India, Mexico and other countries.
The CNAV funds have had to be propped up by HSBC with, to date, letters of indemnity worth $78m to stop them “breaking the buck”. This, because of investments those funds made in SIVs.
In more trouble are the enhanced VNAV funds, however. French investors in these dynamique funds got spooked back in August, when BNP Paribas suspended redemptions in a number of similar vehicles, in turn causing a rash of redemptions on the HSBC funds, and forcing the bank to buy up assets:
In the third quarter of 2007, HSBC acquired underlying assets and shares in two of its dynamic money market funds of €1.2 billion (US$1.8 billion) and €0.6 billion (US$0.9 billion) respectively to fund asset redemptions.
And further redemptions in 2008 have forced one of those funds to be consolidated by HSBC onto balance sheet. It joins another enhanced VNAV which was consolidated in November.
In total, the two funds have $5.7bn between them.
Will others follow?