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HSBC Weighing Multi-Tiered SIV Structure
Asset Backed Alert, Harrison Scott Publications Inc. (September 8, 2006)
HSBC may set up a structured investment vehicle that would appeal to a different crop of subordinate investors than its only existing SIV.
The entity, which could hit the market by April 1, would give the bank a new means of expanding an already growing portfolio of mostly structured-product investments that currently weighs in at $48 billion. Those holdings, consisting mainly of top-shelf asset-backed securities, mortgage bonds and collateralized debt obligations, are overseen by Dominic Swan in London.
HSBC keeps about $8 billion of the investments on its books. The rest are split between its SIV, called Cullinan Finance, and a commercial-paper conduit known as Solitaire Funding.
The new securities-arbitrage vehicle would be similar to Cullinan, with one major exception: Its senior securities would be supported by both single-A-rated capital notes and an unrated first-loss piece, mimicking a structure used by Citigroup's Sedna Finance SIV.
SIVs typically borrow against their capital notes by issuing senior asset-backed commercial paper and medium-term notes. As a rule, the junior classes carry triple-B ratings and serve as their only subordinate layers.
Offering those securities in a mezzanine format would make them behave more like traditional asset-backed bonds that deliver specific returns as long as they don't default. And they would present a lower level of risk that should attract a wider swath of investors, Swan said.
Unlike the holders of traditional capital notes, however, the buyers of those instruments won't get a cut of the issuing vehicle's excess profits. Instead, those returns would go to the most junior investors.
Cullinan now has about $22.5 billion of senior paper and $1.5 billion of capital notes in the hands of investors. Swan expects the vehicle's total portfolio to reach $30 billion by yearend.
Meanwhile, Moody's and S&P are close to approving a new $24 billion funding limit for Solitaire, which only has $3 billion of room left before hitting its current ceiling of $18 billion. HSBC expects the conduit's outstandings to reach $20 billion by yearend.
On the staffing front, Swan wants to hire a portfolio manager to focus on investments in CDOs for Solitaire and HSBC's own book under director Andrew Jackson. HSBC is also looking for analysts to help analyze investments for the SIV, conduit and bank portfolios.