20240429 Calibre April 2024 Investor Presentation.pdf
Non-cash Funding Solutions
1. Redington
13-15 Mallow Street
London EC1Y 8RD
T. 020 7250 3331
www.redington.co.uk
Non-cash funding solutions
Jeremy Lee – Redington
Nobby Clark – HSBC Pensions Solutions Group
25 November 2010
2. Agenda
1. What’s the alternative?
2. A brief history
3. Recent transactions
4. Issues to consider
5. HSBC case study
6. Looking ahead
7. Questions
3. 3
What’s the alternative?
Contingent assets
• Guarantees
• Security
• Escrow
• Letters of Credit
Business assets
• Direct transfer
Asset-backed
• Priority of
cashflows
• Security over
assets
Cash
4. Common features of recent asset-backed structures
Corporate
Pension scheme
SPV
• Income generating
• Unencumbered
• Tax deduction – via
pension scheme?
1. Corporate places
asset in SPV
• Typically “rent”
• Market rates
2. Income from asset
received by SPV
• Share of profits and interest
in SPV
• Fixed period
• Multiple coverage by “rent”
• Not direct pass through
3. Scheme’s interest pays
income
• Valuation -
ongoing/distress
• Covenant assessment
• Shortfall at end
4. Scheme also has security
over [some] assets in the SPV
Note: This is intended as an overview only. Individual objectives and circumstances will alter the structuring.
4
5. Non-cash funding – a brief history
20102008200620042002
Sponsors fear trapped
surplus
Smarter use of balance
sheet
TPR/PPF brings focus
on contingent assets
Letters of credit
(National Grid)
Corporate
guarantee
Sponsor affordability
tested
Escrow
(Marconi)
Banks develop
products
LP/trust structures
(M&S, Sainsbury’s,
Diageo)
Super-security
(KKR/Boots)
Leveraged
transactions
Accelerated cash
(Somerfield) Business assets
(John Lewis, Uniq?)
Insurance vehicles
MarketdriversPopularsolutions
5
7. 7
Issues to consider
Key issues to consider
Funding deficit reduction
Impact on recovery plan
Greater security
Corporate accounting treatment
Managing future surplus
Asset concentration / Employer-related investments
Support investment strategy
Unrecognised value?
Asset valuation – ongoing/distress
Tax treatment
Trustee education / Complexity
Legal advice
8. M&S: Because there is no Plan B
Date Market value of
property
Annual cash How long for? Final lump sum? NPV of cash
2007 £1.1bn £50m 15 years No £500m
2008 £400m £22m 14 years No £200m
2010 - £36m 15 years
(from 2017)
Up to £350m in
2031
£300m
0
20
40
60
80
100
120
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
£m
Up to £350m
Source: Annual Reports, press releases
8
Date Market value of
property
Annual cash How long for? Final lump sum? NPV of cash
2007 £1.1bn £50m 15 years No £500m
2008 £400m £22m 14 years No £200m
Date Market value of
property
Annual cash How long for? Final lump sum? NPV of cash
2007 £1.1bn £50m 15 years No £500m
Date Market value of
property
Annual cash How long for? Final lump sum? NPV of cash
9. 9
Impact on recovery plans
0 5 10 15 20 25
Average Recovery Plan
Lloyds
ITV
Whitbread
Diageo
GKN
J Sainsbury
Travis Perkins
John Lewis
M&S
Years
Comparing the length of the payment schedules
Source: Annual Reports, press releases, TPR Recovery Plan analysis
Note: Payment schedules are for the asset-backed payments only
11. 11
Reducing the IAS 19 deficit
Company IAS 19 Plan Asset?
M&S Y
Lloyds Y
John Lewis N
GKN Y
Whitbread N
ITV N
J Sainsbury Y
Diageo N/K
Travis Perkins Y
Source: Annual Reports, press releases
Notes: Asset-backed structures only
12. 12
Managing future surpluses
Company Ability to manage surplus
M&S Final payment up to £350m
Lloyds No
John Lewis Final payment between £0.5m and £99.5m
GKN Future surplus can be used to offset service cost
Whitbread Final payment up to £110m
ITV Final payment up to £150m
J Sainsbury Final payment up to £600m
Diageo Final payment up to £430m
Travis Perkins No
Source: Annual Reports, press releases
Notes: Asset-backed structures only
13. 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50%
Uniq?
Tesco
Philips
Interserve
HSBC
John Lewis
Costain
M&S
GKN
J Sainsbury
Whitbread
Diageo
Travis Perkins
ITV
John Lewis
Lloyds
Value of structure as proportion of total scheme assets
13
Asset concentration
Asset-backed structures
Business assets
Source: Annual Reports, press releases
Notes: For Tesco, we have assumed 50% of the MV of properties placed into the JV, although it is not clear what the value is
Uniq is subject to review by The Pensions Regulator
14. 14
Issues to consider
Key issues to consider
Funding deficit reduction
Impact on recovery plan
Greater security
Corporate accounting treatment
Managing future surplus
Asset concentration / Employer-related investments
Support investment strategy
Unrecognised value?
Asset valuation – ongoing/distress
Tax treatment
Trustee education / Complexity
Legal advice
Key issues to consider
Funding deficit reduction
Impact on recovery plan
Greater security
Corporate accounting treatment
Managing future surplus
Asset concentration / Employer-related investments
Support investment strategy
Unrecognised value?
Asset valuation – ongoing/distress
Tax treatment
Trustee education / Complexity
Legal advice
15. 15
Global Banking and Markets
Alternatives to Cash Funding HSBC Case Study
Nobby Clark – November 2010
16. 16
HSBC Bank (UK) Pension Scheme
HSBC’s track record in managing risk
HSBC has been actively engaged with its defined benefit pension schemes on risk management since 2004
As a regulated financial, we were able to make a direct comparison between the risks being run within the HSBC Bank
(UK) Pension Scheme and within HSBC Global Markets
– Pension Scheme was running approx 3 times as much risk as the Trading Books
– Trading books had 400 traders with position limits / stop loss limits and management oversight and intervention
– Historically, Pension Scheme Trustees met quarterly and the interface with the Sponsor was primarily handled by HR
Senior management decided that, although capital treatment and disclosure may vary between Pension Scheme and
Bank it did not want to take risk in the Pension Scheme that it wouldn’t take directly on balance sheet
A strategy was developed and approved by HSBC senior management and the Trustee
The strategy was based on Group ALM Policy and involved interest rate and inflation swaps and reducing the
Schemes exposure to equities
Although exposures were thought of as direct exposures the strategy recognised the role of Trustees and their
advisers (see HSBC Annual Report)
HSBC recognised and accepted that increased contributions would be required if the strategy was implemented
HSBC risk management actions pre-dated the Basel 2 capital framework which required increased capital to be held
against pension risk
Whilst the key driver was managing economic risk the changing capital framework was expected to reward sound risk
management
17. 17
Financial Sector Considerations - Capital
Current FSA Requirements
Pillar 1 - Funding
– A firm must deduct and IAS19 surplus from Pillar 1 capital resources, as the surplus is not available to absorb losses
– A firm must deduct either the IAS19 deficit or the Deficit Reduction Amount (DRA)
– The DRA equals the next 5 years of contributions. HSBC has generally elected the DRA for stability reasons
Pillar 2 – Risk of Increased funding
– The FSA provides Banks with guidance that it will review Bank internal calculations vs the potential increased funding requirement
at a 99.5% 1 year VaR level
Possible changes to FSA regulations
– The DRA “filter” is expected to be removed. This will increase the volatility of the capital required to support a DB Pension
Scheme. For some schemes the quantum may increase too
Observations
The pension capital regime differs from banking and trading book capital regimes
It is quite reasonable that it should differ – we have yet to see a pension scheme that manages its balance sheet
exactly like a bank does
Other supervisors differ in the filters that they allow for Pillar 1 capital, and in whether they require risk capital to be
held
Basel 3 does not require pension risk capital to be held
18. 18
Financial Sector Considerations - Liquidity
The importance of liquidity to financial institutions – particularly banks / near banks / shadow banks – was
highlighted early on in the financial crisis
Characteristics that expose them to liquidity risks include:
– Their central role in the economy, particularly if deposit-taking
– Their high levels of leverage
– Their role in providing maturity transformation
“Liquidity regulation and supervision should be recognised as of equal importance to capital regulation”*
Global regulation is now falling into place for internationally active banks, driven by the Basel Committee:
Liquidity Coverage Ratio
– 2011 Observation, 2015 Implementation
– LCR = Value of unencumbered high quality liquid assets / cumulative cash outflow over 30 day stress period
Net Stable Funding Ratio
– 2012 Observation, 2018 Implementation
– NSFR = Available stable funding (liabilities >1Y or stable deposits) / Required stable funding
– Requires stable funding for all but the most liquid assets
– Proposals for the precise mechanism and initial calibration expected by end 2010
Pension assets do not count towards liquidity ratios
* The Turner Review, March 2009
20. 20
HSBC Bank (UK) Pension Scheme
Asset transfer summary
Process
Sponsor and Trustee agreed a conventional cash recovery plan in February 2010
The long track record of productive engagement on risk management created an environment where both parties were
prepared to commit resource to a difficult transaction that could improve both of their positions
The Bank identified assets from around the Group balance sheet that it wished to be part of the transfer
The Bank and Trustee analysed the portfolio carefully to establish suitability, market and intrinsic value
The transfer was agreed and closed in June 2010
Trustee benefits
The Trustee gained immediate increased security for members
The assets are plan assets which cannot be construed as employer-related
The Trustee benefits from the illiquidity premium that is priced into the assets, and from the Sponsor covenant
Sponsor / Bank benefits
Retained beneficial interest in illiquid assets that the Bank did not want to sell to the market
Expected asset performance should reduce the deficit faster
Pillar 1 capital improvement – offset by increase in Pillar 2 Pension Risk Capital requirement
21. 21
Disclaimer
This document is issued by HSBC Bank plc (“HSBC”). HSBC is authorised and regulated by the Financial Services Authority (“FSA”) and is a
member of the HSBC Group of companies (“HSBC Group”).
HSBC has based this document on information obtained from sources it believes to be reliable but which have not been independently verified.
Any charts and graphs included are from publicly available sources or proprietary data. Except in the case of fraudulent misrepresentation, no
liability is accepted whatsoever for any direct, indirect or consequential loss arising from the use of this document. HSBC is under no obligation to
keep current the information in this document. You are solely responsible for making your own independent appraisal of and investigations into
the products, investments and transactions referred to in this document and you should not rely on any information in this document as
constituting investment advice. Neither HSBC nor any of its affiliates are responsible for providing you with legal, tax or other specialist advice
and you should make your own arrangements in respect of this accordingly. The issuance of and details contained in this document, which is not
for public circulation, does not constitute an offer or solicitation for, or advice that you should enter into, the purchase or sale of any security,
commodity or other investment product or investment agreement, or any other contract, agreement or structure whatsoever. This document is
intended for the use of clients who are professional clients or eligible counterparties under the rules of the FSA only and is not intended for retail
clients. This document is intended to be distributed in its entirety. Reproduction of this document, in whole or in part, or disclosure of any of its
contents, without prior consent of HSBC or any associate, is prohibited. Unless governing law permits otherwise, you must contact a HSBC Group
member in your home jurisdiction if you wish to use HSBC Group services in effecting a transaction in any investment mentioned in this
document. Nothing herein excludes or restricts any duty or liability of HSBC to a customer under the Financial Services and Markets Act 2000 or
the rules of the FSA.
This presentation is a “financial promotion” within the scope of the rules of the FSA.
HSBC Bank plc
Authorised and regulated by the Financial Services Authority
Registered in England No. 14259
Registered Office: 8 Canada Square, London, E14 5HQ, United Kingdom
Member HSBC Group
DISCPRES011107
