(Jan 14): HSBC Holdings plc is gauging investor demand for a significant risk transfer (SRT) tied to a portfolio of about EUR2 billion (US$2.3 billion or $3.0 billion) of investment-grade corporate loans.
The size of the SRT is equivalent to about 10% of the reference portfolio, according to people familiar with the matter, who asked not to be identified because the matter is private.
A representative of HSBC declined to comment. Final terms of the potential deal are subject to discussions with investors, the people said.
Banks use SRT as a way to insure loans against default, typically obtaining protection for between 5% and 15% of the loan value. The transactions, which are often structured as credit-linked notes, allow lenders to boost their solvency ratios and reduce their reliance on less shareholder-friendly options like 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 Ltd, 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 buy-backs 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, according to Man Group estimates. Toronto-Dominion Bank, Erste Group Bank AG and BNP Paribas SA are among banks that are in discussions or have recently completed SRT transactions.
See also: OCBC maintains top position in Bloomberg’s Bookrunner League Table for SGD bonds
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