Analysts have warned that spreads on HSBC SFH covered bonds could converge with the wider levels of MMB SCF’s, after the announcement on Friday of the potential sale of HSBC’s French retail banking activities to My Money Group, which is controlled by US private equity firm Cerberus.

HSBC Continental Europe (HBCE) on Friday signed a memorandum of understanding on the sale with Promontoria MMB SAS (My Money Group), My Money Group subsidiary Banque des Caraïbes SA – the purchaser – and My Money Bank (MMB), all of which are controlled directly or indirectly by funds and accounts managed or advised by Cerberus Capital Management.

Included in the potential sale are HBCE’s French retail banking business, the Crédit Commercial de France (CCF) brand, and, subject to certain conditions, HBCE subsidiary HSBC SFH (France) (HSFH) and HBCE’s 3% ownership interest in Crédit Logement.

Key to the closing of the transaction is the management of the net asset position of the businesses being sold, according to documents published by the parties to the transaction, with various steps anticipated to do this.

“This includes HBCE taking steps for HSFH (or a similar vehicle) to issue covered bonds (up to €2.0bn of which may be self-financed by HBCE),” said HSBC SFH.

However, should this option not be conducted, alternative arrangements are outlined that would see the retail banking business and CFF brand sold, but not HSBC SFH or the Crédit Logement stake.

“If the parties were to proceed to closing without the condition to transfer HSFH being satisfied, there would be deferred transfers to the purchaser of certain home loans that would otherwise fall within the scope of the potential transaction, and HBCE will continue to comply with its obligations under the covered bonds programme,” said HSBC SFH.

Should the other options to manage the net asset position in line with targets not succeed, any sale could be cancelled. All parts of the sale are also subject to regulatory approvals and any sale is expected to close in the first half of 2023.

HSBC SFH has three benchmarks totalling €3.25bn outstanding, while the My Money Group’s existing covered bond issuer, MMB SCF, has three benchmarks outstanding, the most recent a €500m 10 year deal sold in October 2020.

Maureen Schuller, head of financials sector strategy at ING, noted that My Money Bank is rated BBB-, evolving, at S&P, while the comparable ratings for HBCE are Aa3(cr) and A+ from Moody’s and S&P, respectively. The resulting four notches of TPI leeway and five unused notches of uplift HSBC SFH covered bonds currently enjoy for their triple-A ratings contrasts with MMB SCF covered bonds, whose AAA rating has no cushion against a downgrade of My Money Bank.

“After the transfer, My Money Bank would probably become the new supporting bank of HSBC SFH,” said Schuller. “This could be spread negative to the covered bonds of HSBC SFH.”

ING: HSBC SFH covered spreads may converge towards MMB SCF in case of a transfer

Source: Markit iBoxx, ING

Joost Beaumont, senior fixed income strategist at ABN Amro, agreed that the potential sale poses some widening risks for HSBC SFH covered bonds, and that the opposite holds for MMB SCF’s benchmarks – “if they would meet in the middle”.

“In any case,” he added, “the merger is likely to support My Money Bank’s covered bond issuance.”