HSBC 2012 Annual Report Download - page 192

HSBC HOLDINGS PLC
Report of the Directors: Operating and Financial Review (continued)
Risk > Credit risk > Securitisation exposures / Leveraged finance transactions / Representations and warranties
190
Market prices are generally not readily available
for CDSs, so they are valued on the basis of market
prices of the referenced securities.
As described on page 56, during 2012 we
amended our methodology for the calculation of
credit valuation adjustments and debit valuation
adjustments to reflect evolving market practice.
As a result, our monoline credit and debit valuation
adjustment calculations utilise a methodology based
on CDS spreads with no adjustments being made
based on the credit rating of the monoline.
Credit valuation adjustments for monolines
For monolines, the standard credit valuation adjustment
methodology (as described on page 56) applies, with
the exception that the future exposure profile is deemed to be
constant (equal to the current market value) over the weighted
average life of the referenced security.
HSBC’s exposure to debt securities which benefit
from guarantees provided by monolines
Within both the trading and available-for-sale
portfolios, we hold bonds that are ‘wrapped’ with
a credit enhancement from a monoline. As the
bonds are traded explicitly with the benefit of this
enhancement, any deterioration in the credit profile
of the monoline is reflected in market prices and,
therefore, in the carrying amount of these securities
at 31 December 2012. For wrapped bonds held in
our trading portfolio, the mark-to-market movement
is reflected through the income statement. For
wrapped bonds held in the available-for-sale
portfolio, the mark-to-market movement is reflected
in equity unless there is objective evidence of
impairment, in which case the impairment loss is
reflected in the income statement. No wrapped bonds
were included in the reclassification of financial
assets described in Note 17 on the Financial
Statements.
Leveraged finance transactions
(Audited)
Leveraged finance transactions include sub-
investment grade acquisition or event-driven
financing. The following table shows our exposure
to leveraged finance transactions arising from
primary transactions. Our additional exposure to
leveraged finance loans through holdings of ABSs
from our trading and investment activities is shown
in the table on page 187.
We held leveraged finance commitments of
US$2.8bn at 31 December 2012 (2011: US$3.7bn),
of which US$2.6bn (2011: US$3.3bn) was funded.
At 31 December 2012, our principal exposures
were to companies in two sectors: US$0.7bn to
data processing (2011: US$1.3bn) and US$1.8bn
to communications and infrastructure (2011:
US$1.9bn).
HSBC’s exposure to leveraged finance transactions
(Audited)
Exposures at 31 December 2012 Exposures at 31 December 2011
Funded35 Unfunded36 Total Funded35 Unfunded36 Total
US$m US$m US$m US$m US$m US$m
Europe .................................................. 2,108 162 2,270 2,795 253 3,048
North America ..................................... 414 92 506 445 126 571
2,522 254 2,776 3,240 379 3,619
Held within:
– loans and receivables .................... 2,522 252 2,774 3,120 328 3,448
– fair value through profit or loss ... – 2 2 120 51 171
For footnotes, see page 249.