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Rating Action:

Moody's affirms HSBC Finance Corporation's Baa1 senior unsecured rating

18 Dec 2014

New York, December 18, 2014 -- Moody's Investors Service has affirmed its Baa1 senior unsecured and Prime-2 short-term ratings on HSBC Finance Corporation (HFC), maintaining a stable outlook.

At the same time, Moody's has downgraded the rating on the trust preferred securities issued by HSBC Finance Capital Trust IX to Baa3 (hyb) from Baa2 (hyb), with a stable outlook.

RATINGS RATIONALE

The affirmation of HFC's ratings reflects Moody's expectation that HSBC Holdings plc (HSBC; Aa3/Prime-1, negative) will continue to provide operational and financial support to HFC as it winds down its receivables portfolio and retires maturing debt. The affirmation also takes into account HFC's weak stand-alone credit profile: Although HFC's asset quality performance and profitability have improved and leverage has declined, the firm remains highly reliant on its ultimate parent HSBC for funding and liquidity.

Moody's expectation of continued support by HSBC is unchanged. Since HFC's acquisition of Household International in 2003, HSBC has provided HFC substantial financial support, including capital and liquidity infusions as well as funding support in the form of affiliated borrowings. At the end of third-quarter 2014, borrowings from affiliates were $6.9 billion, constituting 29% of HFC's funding. HSBC continues to publicly state that it will provide all necessary support to HFC as it winds down its receivables portfolio and pays off its public debt over time.

Since the beginning of 2013, HFC has reported positive net income, reflecting improving conditions in the housing industry and declining net credit losses. Net income for the first three quarters of 2014 was $487 million and included $238 in reserve releases, which reflects lower losses owing to a declining receivables balance and recovering home values. With HFC generating profits and retaining capital, leverage is also improving. Moody's tangible common equity as a percentage of tangible managed assets measured 17.2% at end-September 2014, up from 12.9% a year earlier.

Liquidity is a constraint on HFC's standalone credit profile, although its liquidity is improving as the company pays down debt. However, funding support from HFC's parent or affiliates could still be necessary to accommodate timing differences as HFC manages its portfolio collections and maturing liabilities over the next several years. HFC has $7.7 billion of debt maturing in 2015 and another $5.8 billion maturing in 2016; portfolio collections are unlikely to reach these levels, which will require that HFC make up the difference with asset sales or additional borrowings from its parent. Improvements in the housing market have led to increased portfolio sales opportunities, but additional sales could become difficult if the economy weakens.

Moody's downgraded its rating on the trust preferred securities issued by HSBC Finance Capital Trust IX to Baa3 (hyb) from Baa2 (hyb) so that it is similarly rated to HFC's other hybrid securities. These are HFC's Baa3 (hyb)-rated non-cumulative preferred stock and Household Finance Corporation's Baa3 (hyb)-rated cumulative preferred stock (which was assumed by HFC). Moody's stated that at this later stage of HFC's run-off, all of these hybrid securities hold similar credit risk. This view considers HSBC's strong, long standing support of HFC and that an HSBC affiliate is a major investor in HFC's non-cumulative preferred securities, supporting the continuation of those preferred dividends.

The stable outlook for the ratings is consistent with outlook for the HSBC group's intrinsic financial strength.

If HSBC were to provide an explicit guarantee of HFC's obligations, HFC's ratings could be upgraded, which could result in an equalization of the ratings. The ratings could be downgraded if HSBC's ratings are downgraded.

Ratings affected by today's action:

HSBC Finance Corporation:

Long-term issuer rating: affirmed at Baa1

Senior unsecured debt rating: affirmed at Baa1

Senior unsecured Program rating: affirmed at (P)Baa1

Senior subordinate debt rating: affirmed at Baa2

Non-cumulative preferred stock rating: affirmed at Baa3 (hyb)

Short-term ratings: affirmed at Prime-2 & (P) Prime-2

HSBC Finance Capital Trust IX:

Cumulative preferred stock rating: downgraded to Baa3 (hyb) from Baa2 (hyb)

Household Finance Corporation (debt assumed by HFC):

Backed senior unsecured debt rating: affirmed at Baa1

Backed preferred stock rating: affirmed at Baa3 (hyb)

HFC, headquartered in Mettawa, Illinois, is an indirect, wholly owned subsidiary of HSBC Holdings plc.

The principal methodology used in these ratings was Finance Company Global Rating Methodology published in March 2012. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Mark L. Wasden
VP - Senior Credit Officer
Financial Institutions Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Robert Franklyn Young
MD - Financial Institutions
Financial Institutions Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's affirms HSBC Finance Corporation's Baa1 senior unsecured rating
No Related Data.
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