HSBC, RBS in Financing Double Whammy as Rates Rise (Update1)

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HSBC, RBS in Financing Double Whammy as Rates Rise (Update1)

By Ben Livesey and Shelley Smith

Oct. 8 (Bloomberg) -- HSBC Holdings Plc, Royal Bank of Scotland Group Plc and the biggest U.K. banks face the most debt coming due in at least 10 years as the credit market seizure raises borrowing costs to the highest on record.

The six largest British banks have 54 billion pounds ($95 billion) of debt to refinance by April, triple the amount of the year-ago period, according to data compiled by Bloomberg. HSBC, the U.K.'s biggest bank, and No. 2 RBS each have about 11.5 billion pounds of debt due, while Barclays Plc has 15.9 billion pounds maturing, the data show.

Financing costs are soaring as banks hoard cash after the credit crunch triggered by the U.S. subprime mortgage crisis a year ago. The three-month London interbank offered rate in dollars rose to 4.32 percent from 2.64 percent in March, while the equivalent rate for euros increased to a record 5.38 percent, from 4.74 percent six months ago.

``The banks have no idea how they are going to manage rolling over their debt,'' said Kornelius Purps, a Munich-based bond strategist at UniCredit SpA. ``The central banks will have to intervene.''

Rates rose this week even after Europe's policy makers provided emergency funding and U.S. President George W. Bush approved a $700 billion rescue plan last week.

U.K. Prime Minister Gordon Brown's government is preparing a rescue package that will include capital injections for Britain's banks struggling to fund themselves, said three people with knowledge of the situation. As part of the plan, the government may buy preference shares to take partial control of the banks, the people said.

Credit Crunch Bites

Banks need more capital after the worst U.S. housing slump since the Great Depression and $592 billion in worldwide losses and writedowns caused their stocks to tumble, forced Lehman Brothers Holdings Inc. into bankruptcy and pushed the U.K. government to nationalize Bradford & Bingley Plc.

The U.K. bank debt includes bonds, commercial paper and equity-linked notes and compares with 18 billion pounds repaid in the year-earlier period.

Investors are demanding an average 3.97 percentage points more in yield to buy bank bonds rather than government securities, up from 0.95 percentage point last year, according to indexes compiled by Merrill Lynch & Co. The so-called spread on investment-grade corporate bonds overall averages about 3.32 percentage points.

Lloyds TSB Debt

Rising yields may cost the banks as much as $5.6 billion more in annual interest compared with a year earlier should they refinance all of the debt in the bond market, Merrill data show.

``Bond investors are the guys that will decide the future of these banks and at the moment they're not prepared to roll over their financing,'' said Simon Maughan, a London-based bank analyst at MF Global Securities Ltd. ``If you can't roll over you're in an awful lot of trouble.''

Lloyds TSB Group Plc, the London-based bank that agreed to buy HBOS Plc in a stock swap on Sept. 18, has about 512 million pounds of bonds to refinance by the end of March, Bloomberg data show. HBOS, based in Edinburgh, has 11.9 billion pounds of debt due in the next six months.

Lloyds spokesman Emile Abu-Shakra in London declined to comment, as did a spokesman for HBOS. Lloyds TSB will pay about 10.2 billion pounds in a stock swap for HBOS, based on yesterday's closing share prices.

Standard Chartered Plc, the London-based bank that earns most of its money in Asia, needs to repay about 2.4 billion pounds of debt.

`Normal Business'

``The outstanding 2.4 billion pounds in the context of a 400 billion-pound balance sheet is not material,'' spokesman Arijit De said. ``Standard Chartered is not dependent on wholesale funding markets.''

Barclays has no debt that counts as regulatory capital maturing before the end of March, according to Simon Eaton, a London-based spokesman. ``Any other financing represents our normal course of business,'' he said.

HSBC's maturities aren't a reflection of funding requirements, London-based spokesman Patrick McGuinness said. ``In parts of our business we are managing down the balance sheet, and in others we are seeing strong deposit growth.''

RBS spokeswoman Carolyn McAdam declined to comment.

U.K. Chancellor of the Exchequer Alistair Darling and Bank of England Governor Mervyn King met RBS Chief Executive Officer Fred Goodwin and his counterparts at Barclays and Lloyds TSB on Oct. 6 to discuss an investment of at least 45 billion pounds.

Collateral Scheme

Banks may be eligible for additional guarantees on customer deposits, immediate cash injections and subsequent payments should credit markets deteriorate, according to the people familiar with the talks, who declined to be named because the matter is confidential.

The Bank of England on Oct. 3 announced a wider range of collateral in its three-month money auctions to assist banks. The European Central Bank also said it will allow more banks to participate in its unscheduled cash auctions.

The U.K. central bank will cut its benchmark interest rate a quarter-percentage point to 4.75 percent this week, according to the median estimate of 61 economists surveyed by Bloomberg News.

Federal Reserve Chairman Ben S. Bernanke yesterday signaled a cut in U.S. interest rates to shore up the economy and reduce funding pressure on banks.

``If confidence returns there is less of a liquidity issue and the debt can be rolled over,'' said Neil Smith, an analyst at WestLB AG in Dusseldorf. ``Three months should be enough.''

To contact the reporter on this story: Ben Livesey in London blivesey@bloomberg.net; Shelley Smith in London at ssmith118@bloomberg.net

Last Updated: October 8, 2008 01:14 EDT