HSBC plans risk transfer linked to 2 billion euros of corporate loans

[LONDON] HSBC is gauging investor demand for a significant risk transfer (SRT), tied to a portfolio of about two billion euros (S$3 billion) of investment-grade corporate loans.

The size of the SRT is equivalent to about 10 per cent of the reference portfolio, said sources, who asked not to be identified because the matter is private.

A representative for HSBC declined to comment. Final terms of the potential deal are subject to discussions with investors, the sources added. 

Banks use SRTs as a way to insure loans against default, typically obtaining protection for between 5 and 15 per cent of the loan value.

The transactions, which are often structured as credit-linked notes, enable lenders to boost their solvency ratios and reduce their reliance on less shareholder-friendly options, such as issuing new equity or cutting dividends.

They also increase their leeway for new lending, acquisitions or shareholder payouts.

HSBC is working on a potential SRT while finalising a US$14 billion takeover of Hang Seng Bank, the bank’s biggest acquisition in more than a decade.

The purchase would reduce the lender’s common equity Tier 1 ratio, a key metric of financial strength, by 125 basis points. The bank paused share buybacks for three quarters as part of the plan to rebuild its capital. 

The SRT market is set to double in size over the next five years, as banks in Europe and the US increase the use of the instruments, indicated estimates from investment management firm Man Group.

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Toronto-Dominion Bank, Erste Group Bank and BNP Paribas are among banks that are in discussions or have recently completed SRT transactions. BLOOMBERG