HSBC 2004 Annual Report Download - page 267

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HSBC is not obliged to support any losses that may be suffered by the FRN holders and does not intend to provide
such support.
HSBC has taken up US$58 million (2003: US$73 million) of subordinated FRNs that are repayable after payments in
respect of senior FRNs. HSBC has made subordinated loans of US$37 million (2003: US$46 million) to Clover
Funding that are repayable after all other payments. Interest is payable on the subordinated FRNs and subordinated
loans conditional upon Clover Funding having funds available.
Clover Securitisation Limited’ s entire share capital is held by Clover Holdings Limited. Clover Funding’ s entire
share capital is held by Clover Holdings Limited. Clover Holdings Limited’ s entire share capital is held by trustees
under the terms of a trust for charitable purposes.
HSBC recognised net income of US$8 million (2003: US$7 million) which comprised US$114 million (2003:
US$108 million) of interest receivable by Clover Funding less US$106 million (2003: US$101 million) of interest on
FRNs and other third party expenses payable by Clover Funding.
HFC Bank Limited Securitisations
HSBC, through its wholly-owned subsidiary company, HFC Bank, has securitised certain amounts of its personal
loan portfolios. The transactions were effected through equitable assignment of those loans to receivables trusts,
beneficial interests in which were purchased by several special purpose companies.
To fund the acquisition of these beneficial interests, the special purpose companies have issued asset backed notes,
discounted notes, and subordinated loans, or have received funds on-lent by other companies that have issued such
securities and loans for this purpose. Certain of the notes issued were credit enhanced by a third party to provide the
required ratings at the time of issue. The securitisation documentation sets out the acknowledgement by the special
purpose companies that they will seek to repay their financing only to the extent that repayment is funded by the
proceeds generated by the securitised personal loans, and that they will not seek recourse in any other form from
HFC Bank.
As at 31 December 2004 non-returnable proceeds of US$149 million (2003: US$409 million) received by HFC Bank
from the receivables trusts have been deducted from ‘Loans and advances to customers’ . Certain of the special
purpose companies have entered into swap agreements with HFC Bank (via a third party swap provider) under which
the special purpose companies pay the fixed rate of interest on the personal loans and receive a floating interest rate.
The proceeds generated from the loans are used in priority to meet the claims of the note holders and other lenders,
and amounts payable in respect of the interest rate swap arrangements after the payment of trustee and administration
expenses. HFC Bank is entitled to any residual income from the personal loans after the claims of the note-holders,
other lenders and swap counterparties are met.
Under the terms of the securitisation agreements, during the initial periods of the securitisations, HFC Bank was able
to substitute securitised loans that were prepaid or expired with further loans that met the same criteria as those
originally securitised. In 2004, the special purpose companies acquired no qualifying personal loans from HFC Bank
under these arrangements (2003, in the period since the acquisition of HFC Bank by HSBC: US$94 million). The
initial periods have now expired, and further substitutions are no longer possible.
There is no provision whatsoever, either in the financing arrangements or otherwise, whereby HFC Bank has a right
or obligation either to keep the loans and advances on repayment of the finance or to repurchase them at any time
other than in certain circumstances where HFC Bank is in breach of warranty.
HFC Bank is not obliged to support any losses that may be suffered by the note-holders and does not intend to
provide such support.
The entire share capital of the special purpose companies is indirectly held by trustees under the terms of a trust for
charitable purposes.
In 2004, HFC Bank recognised net income of US$9 million (2003, in the period since the acquisition of HFC Bank
by HSBC: US$33 million) from these personal loan securitisations.