Nov. 26 (Bloomberg) -- HSBC Holdings Plc, Europe's largest bank, will bail out its two structured investment vehicles by taking on $45 billion of their assets to avoid a fire sale.

Investors in Cullinan Finance Ltd. and Asscher Finance Ltd. will be allowed to exchange their holdings in the SIVs for debt issued by a new company backed by loans from HSBC, the London- based bank said in a statement today. HSBC said it doesn't expect any ``material impact'' on its earnings or capital strength because junior bondholders in the SIVs still bear most of the credit risk.

The rescue by HSBC, the second-largest bank manager of the funds, signals it is unlikely to use the $80 billion ``SuperSIV'' being put together by Bank of America Corp., Citigroup Inc. and JPMorgan Chase & Co. SIVs, which borrow short term debt to fund investments in high-yield securities, lost as much as 30 percent of their net asset value because of the subprime contagion that Deutsche Bank AG analysts estimate may cause $400 billion in credit-market losses.

The SuperSIV is ``is all good and well, but it's not big enough,'' said Tom Jenkins, a credit analyst at Royal Bank of Scotland Group Plc in London. ``If you have a large SIV, you're going to need to find another solution.''

SIV Defaults

SIVs set up by Dusseldorf-based lender IKB Deutsche Industriebank AG and London-based Cheyne Capital Management Ltd. defaulted last month after investors stopped buying asset-backed commercial paper. Moody's Investors Service has threatened to cut its ratings on some of the funds run by Citigroup, the largest manager of SIVs, HSBC and WestLB AG in Dusseldorf.

The market for asset-backed commercial paper shrank 29 percent over three months to $836 billion, according to the Federal Reserve in Washington.

HSBC may have to set aside a further $12 billion for bad debts because of customer defaults at its U.S. subprime lender Household International Inc., analysts led by Roy Ramos at Goldman Sachs Group Inc. in Hong Kong wrote in a note dated Nov. 24. Goldman lowered its rating to ``sell'' from ``neutral.''

SIVs are designed to get cheaper financing by borrowing in the short-term commercial paper market. They invest the money in higher-yielding assets and paying the returns to holders of their longer-dated capital notes, which rank after commercial paper for repayment and are first in line for losses.

Forced Sales

HSBC's SIVs have more than $34 billion of senior debt, according to Moody's, second only to Citigroup. The companies have enough funding to last beyond the end of the year, the bank said.

HSBC is planning to save capital note holders from the risk of losses caused by the companies being forced to sell assets at a discount to repay commercial paper.

The bondholders are being offered investments in new companies to replace their SIV debt. The new companies will borrow through term notes or by issuing commercial paper with liquidity provided by HSBC. The new structure is intended to remove the risk of becoming forced to sell holdings.

The investors will still run the risk of losses from defaults, HSBC said.

HSBC plans to make a formal exchange offer to investors in the SIVs' capital notes later this year or early 2008. It expects to complete the restructuring by August 2008.

Shrinking NAV

SIVs buy longer-dated debt including bank bonds, mortgage- backed securities and collateralized debt obligations. Investors are shunning SIVs because the holdings are difficult to value now that trading has collapsed in some mortgage debt markets. That's stoking concern SIVs will sell assets at distressed prices, adding to turmoil in credit markets.

Cullinan's net asset value, the amount left over after selling all its assets and repaying debt, fell to 69 percent of its capital, Moody's said Nov. 7. Asscher's net asset value has declined to 71 percent, Moody's said.

``HSBC's actions will set a benchmark and restore a degree of confidence to the SIV sector, while providing a specific solution to address the challenges faced by investors in Cullinan and Asscher,'' Stuart Gulliver, HSBC's chief executive officer of corporate and investment banking in London, said in the statement. ``HSBC believes there is not likely to be a near-term resolution of the funding problems faced by the SIV sector,'' the bank said.

Shares Fall

HSBC fell 1.9 percent to 811.5 pence. The bank has declined 13 percent this year, valuing the company at 96 billion pounds ($200 billion).

Credit-default swaps on HSBC's debt fell 4 basis points to 49 basis points, according to Deutsche Bank AG. The contracts, used to speculate on a company's ability to repay debt, decline as perceptions of credit quality improve.

HSBC is the second bank to restructure its SIVs. WestLB provided a credit facility to Kestrel Funding Plc, a SIV it manages, that allows the company to repay all its commercial paper as it matures.

Citigroup said it provided $7.6 billion for its SIVs by buying commercial paper, as of Oct. 31. Citigroup fell $1.84, or 5.8 percent, to $29.86 at 3:32 p.m. in New York.

``HBSC has less pressure on its capital than Citi,'' said Christian Stracke, head of fixed income at CreditSights Inc. in London. Citigroup is ``tied up with lots of other problems'' and may be unable to use its balance sheet in the same way, he said.

Cullinan and Asscher's assets have an average rating of Aa1 by Moody's Investors Service and AA+ by Standard & Poor's, the second-highest ranking. They include asset-backed securities and bank debt.

The bank will provide the new company with funding and loan facilities of as much as $35 billion.

Subprime Losses

HSBC said Nov. 14 that emerging-market lending and a $1.3 billion accounting gain lifted third-quarter profit, offsetting losses on U.S. subprime mortgages. The bank set aside $3.4 billion in the quarter to cover U.S. defaults, $1.4 billion more than it forecast in July, and said the securities unit has limited collateralized debt obligations backed by home loans.

SIV holdings have declined $75 billion since July, and net asset values have fallen to 70 percent from 100 percent in July, according to data compiled by Fitch Ratings.

Bank of America, Citigroup and JPMorgan, the three largest U.S. banks, want the SuperSIV fund in place by the end of 2007 to stabilize trading in the credit markets.

The fund, backed by U.S. Treasury Secretary Henry Paulson, would buy assets from SIVs, whose $300 billion of holdings include corporate and mortgage debt in danger of default. BlackRock Inc., the biggest publicly traded U.S. money manager, probably will manage the fund, said a person with knowledge of the plan.

Former Federal Reserve Chairman Alan Greenspan is among those who say the SuperSIV may do more harm than good by delaying the need for investors and SIVs to absorb subprime losses.

JPMorgan spokeswoman Alexandra Buxton in London, Citigroup spokesman in London Adam Castellani, and Scott Silvestri, a spokesman at Bank of America in Charlotte, North Carolina, declined to comment.

To contact the reporter on this story: Sebastian Boyd in London on sboyd9@bloomberg.net; Neil Unmack in London at nunmack@bloomberg.net

Last Updated: November 26, 2007 15:37 EST