HSBC 2011 Annual Report Download - page 196

HSBC HOLDINGS PLC
Report of the Directors: Operating and Financial Review (continued)
Risk > Appendix – Risk policies and practices > Credit risk
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– extension of the maturity date or dates at a stated interest rate lower than the current market rate for new
debt with similar risk;
– reduction (absolute or contingent) of the face amount or maturity amount of the debt; and
– reduction (absolute or contingent) of accrued interest.
Modifications of loans and advances which do not affect payment arrangements, such as restructuring of collateral or
security arrangements, or waiver of rights under covenants within documentation, are not regarded as sufficient to
indicate impairment. By themselves, such changes do not necessarily indicate credit distress affecting payment
capacity. Typically, covenants are in place to give the bank rights of repricing or acceleration but they are frequently
set at levels where payment capacity has yet to be affected. They provide rights of action at earlier stages of credit
deterioration.
In assessing whether payment-related forbearance is a satisfactory and sustainable strategy, the customer’s entire
exposure and facilities will be reviewed and their ability to meet the terms of both the revised obligation and other
credit facilities not amended in the renegotiation, is assessed. Should this assessment identify that a renegotiation will
not deal with a customer’s payment capacity issues satisfactorily, other special management options may be applied.
This process may identify the need to provide assistance to a customer specifically to restructure their business
operations and activities so as to restore satisfactory payment capacity.
Modifications may be made on a temporary basis when time is needed for the customer to make arrangements for
payment, when deterioration in payment capacity is expected to be acute but short lived, or when more time is
needed to accommodate discussions regarding a more permanent accommodation with other bankers, for example in
syndicated facilities where multilateral negotiation commonly features.
If a restructuring proceeds and the customer demonstrates satisfactory performance over a period of time, the case
may be returned to a non-impaired grade (CRR1-8) provided no other indicators of impairment remain. Such a case
cannot be returned to a non-impaired grade when a specific impairment reserve remains against any of the customer’s
credit facilities. The period of performance will vary depending on the frequency of payments to be made by the
customer under the amended agreement, and the extent to which the customer’s financial position is considered to
have improved.
Nature of HSBC’s securitisation and other structured exposures
(Audited)
Mortgage-backed securities (‘MBS’s) are securities that represent interests in groups of mortgages and provide
investors with the right to receive cash from future mortgage payments (interest and/or principal). An MBS which
references mortgages with different risk profiles, is classified according to the highest risk class.
Collateralised debt obligations (‘CDO’s) are securities backed by a pool of bonds, loans or other assets such as asset-
backed securities (‘ABS’s). CDOs may include exposure to sub-prime or Alt-A mortgage assets where these are part
of the underlying assets or reference assets. As there is often uncertainty surrounding the precise nature of the
underlying collateral supporting CDOs, all CDOs supported by residential mortgage-related assets are classified as
sub-prime. Our holdings of ABSs and CDOs and direct lending positions, and the categories of mortgage collateral
and lending activity, are described overleaf.
Our exposure to non-residential mortgage-related ABSs and direct lending includes securities with collateral relating
to:
• commercial property mortgages;
• leveraged finance loans;
• student loans; and
• other assets, such as securities with other receivable-related collateral.