LONDON — HSBC Holdings PLC, Europe's largest bank, said Monday it will bail out two troubled funds it manages by transferring about $45 billion of their assets onto its balance sheet.
HSBC said it will also inject $35 billion into the two funds, Cullinan Finance Ltd. and Asscher Finance Ltd., in a move that will clarify responsibility for the funds and prevent liquidation of their assets.
The funds are "structured investment vehicles" or bank-sponsored businesses that sell short-term debt but have been operated off the bank's balance sheet.
The moves are another symptom of a global credit crisis which has forced up the cost of short-term lending.
HSBC shares fell 1.87 percent to close at 811.5 pence ($16.74) in London trading Monday.
Structured investment vehicles, or SIVs, are bank-sponsored businesses that sell short-term debt _ such as unsecured commercial paper _ to investors such as hedge funds. The banks use the proceeds to buy longer-term assets, like mortgage-backed securities.
SIVs normally generate money through fees and the difference between short-term and long-term rates. But in August, demand for short-term assets dried up, creating liquidity problems for SIVs.
The viability of an SIV relies on its ability to continue borrowing money.
Amid this year's flight from risk, lenders in the commercial paper market have frequently balked at letting borrowers "roll over," or extend, their debt. This is what is happening to most of the world's roughly 30 SIVs, which collectively manage about $320 billion.
An SIV that cannot continue borrowing money would need to find cash elsewhere or sell its investments. Since mortgage debt has lost so much value _ some types of mortgage debt are selling at less than 20 cents on the dollar _ this would likely lead to losses for investors in SIVs.
Smaller banks including WestLB and Landesbank Baden-Wuerttemberg have previously agreed to buy the senior debt of SIVs managed by their affiliates to prevent having to sell assets at a loss.
Earlier this month, bankers from Citigroup Inc., JPMorgan Chase & Co. and Bank of America Corp. announced an agreement on a multibillion-dollar fund to buy distressed debt securities.
HSBC, whose SIVs are among the largest in the market, said it would not be participating in that fund.
"As existing investors will continue to bear all economic risk from actual losses up to the full amount of their investment, HSBC expects no material impact to its earnings," the company said in an announcement to the London Stock Exchange.
HSBC said it will offer investors in Cullinan and Asscher the option to exchange their existing income and mezzanine notes for notes issued by one or more new vehicles.
Current senior debt holders of Cullinan and Asscher will be repaid as the debt falls due and will have the opportunity to reinvest in the commercial paper issued by the new vehicles, HSBC said.
On the Net: http://www.hsbc.co.uk