HSBC 2010 Annual Report Download - page 141

139
Overview Operating & Financial Review Governance Financial Statements Shareholder Information
HSBC’s exposure to leveraged finance transactions
(Audited)
At 31 December 2010 At 31 December 2009
Funded
exposures53
Unfunded
exposures53
Total
exposures
Funded
exposures53
Unfunded
exposures53
Total
exposures
US$m US$m US$m US$m US$m US$m
Europe ................................................... 3,337 298 3,635 3,790 368 4,158
Rest of Asia-Pacific .............................. 17 22 39 70 22 92
North America ...................................... 1,066 185 1,251 1,713 188 1,901
4,420 505 4,925 5,573 578 6,151
Held within:
– loans and receivables ..................... 4,199 393 4,592 5,569 386 5,955
– fair value through profit or loss .... 221 112 333 4 192 196
For footnotes, see page 174.
We held leveraged finance commitments of
US$5.1bn at 31 December 2010 (2009: US$6.5bn),
of which US$4.6bn (2009: US$5.9bn) was funded.
As described in Note 18 on the Financial
Statements, certain leveraged finance loans were
reclassified from held for trading to loans and
receivables. As a result, these loans are held at
amortised cost subject to impairment and are not
marked to market, and net gains of US$0.1bn (2009:
net gains of US$1.2bn) were not taken to the income
statement in 2010.
At 31 December 2010, our principal exposures
were to companies in two sectors: US$2.8bn to
data processing (2009: US$3.8bn) and US$1.8bn
to communications and infrastructure (2009:
US$1.9bn). During 2010, 99% of the total fair value
movement not recognised was against exposures in
these two sectors (2009: 99%).
Representations and warranties related to
mortgage sales and securitisation activities
(Audited)
We have been involved in various activities related
to the sale and securitisation of residential
mortgages, which are not recognised on our balance
sheet. These activities include:
• the purchase of US$24bn of third party
originated mortgages by HSBC Bank USA and
securitisation of these by HSBC Securities
(USA) Inc. (‘HSI’) between 2005 and 2007;
• HSI acting as underwriter for third party
issuance of private label MBSs with an original
issuance value of US$37bn, most of which were
sub-prime, as well as underwriting US$6bn of
MBSs issued by HSBC Finance; and
• the origination and sale by HSBC Bank USA of
mortgage loans, primarily to government
sponsored entities.
In sales and securitisations of mortgage loans,
various representations and warranties regarding the
loans may be made to purchasers of the mortgage
loans and MBSs. In respect of the purchase and
securitisation of third party originated mortgages and
the underwriting of third party MBSs, the obligation
to repurchase loans in the event of a breach of
loan level representations and warranties resides
predominantly with the organisation that originated
the loan. While certain of these originators are or
may become financially impaired, and therefore,
unable to fulfil their repurchase obligations, we do
not believe we have significant exposure for
repurchases on these loans.
At 31 December 2010, a liability of US$262m
was recognised in respect of various representations
and warranties, relating to the origination and sale by
HSBC Bank USA of mortgage loans, primarily to
government sponsored entities (2009: US$66m).
These relate to, among other things, the ownership of
the loans, the validity of the liens, the loan selection
and origination process, and the compliance to the
origination criteria established by the agencies. In
the event of a breach of our representations and
warranties, HSBC Bank USA may be obliged to
repurchase the loans with identified defects or to
indemnify the buyers. The liability is estimated
based on the level of outstanding repurchase
demands, the level of outstanding requests for loan
files and estimated future demands in respect of
mortgages sold to date which are either two or
more payments delinquent or expected to become
delinquent at an estimated conversion rate.
Repurchase demands of US$115m were outstanding
at 2010 (2009: US$123m).