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Securitised Credit

Securitised credit offers substantial opportunities reflecting misunderstood or mispriced risk.

Our philosophy

Securitised credit can be a beneficial addition to a portfolio for four main reasons:

  • Yield pick-up – can offer a yield premium compared to traditional fixed income instruments
  • Floating rate exposure – investors can benefit from rising rates. With current rates at historical lows, securitised credit, which is largely floating rate, is well-positioned to potentially outperform traditional fixed income instruments
  • Credit enhancement and alignment of interests – many newer issues (post financial crisis) have structural features that can enhance investor protection (such as tighter covenants and greater overcollateralisation)
  • Diversification – securitised credit has low correlation to other fixed income asset classes and can increase portfolio diversification

Our process

We invest in all securitised credit sectors, across all rating categories and do so “globally” from one platform in London. Our global scale and investment tools support:

  • The ability to determine relative value and assess risk across markets
  • A seamless capacity to invest where we are finding best opportunities
  • Access to significant trading flows where we can use our relationships and size to negotiate attractive prices for clients

HSBC strengths

  • An established and experienced team of 15 dedicated specialists, forms one of the largest structured credit teams in the industry
  • Significant market access to a wide range of structured credit opportunities which is not easily replicated in the structured credit space
  • Our global reach differentiates us from many competitors that focus purely on US and/or European ABS

What are some of the risks?

The investment characteristics of securitised credit differ from traditional debt securities. The major difference is that the principal is often paid in stages and may be fully repaid at any time because of the terms of the underlying loans. This variability in timing of cash flows makes estimates of future asset yield and weighted average life uncertain. There may also be specific risks involved when investing in securitised credit, including pre-payment risk, subordinated risk, capital value risk, economic risk, re-financing risk and liquidity risk.

Key risks

The value of investments and any income from them can go down as well as up and investors may not get back the amount originally invested.
Interest rate risk. As interest rates rise debt securities will fall in value. The value of debt is inversely proportional to interest rate movements.
Credit risk. Issuers of debt securities may fail to meet their regular interest and/or capital repayment obligation. All credit instruments therefore have the potential for default. Higher yielding securities are more likely to default.
Exchange rate risk. Investing in assets denominated in a currency other than that of the investor’s own currency perspective exposes the value of the investment to exchange rate fluctuations.
Asset backed securities (ABS) risk. ABS are typically constructed from pools of assets (eg mortgages) that individually have an option for early settlement or extension, and have potential for default. Cash flow terms of the ABS may change and significantly impact both the value and liquidity of the contract.
Derivative risk. The value of derivative contracts is dependent upon the performance of an underlying asset. A small movement in the value of the underlying can cause a large movement in the value of the derivative. Unlike exchange traded derivatives, over-the-counter (OTC) derivatives have credit risk associated with the counterparty or institution facilitating the trade.
High yield risk. Higher yielding debt securities characteristically bear greater credit risk than investment grade and/or government securities.
Liquidity risk. Liquidity is a measure of how easily an investment can be converted to cash without a loss of capital and/or income in the process. The value of assets may be significantly impacted by liquidity risk during adverse markets conditions.
Operational risk. The main risks are related to systems and process failures. Investment processes are overseen by independent risk functions which are subject to independent audit and supervised by regulators.

Risk Warning
The value of investments and any income from them can go down as well as up and investors may not get back the amount originally invested. The value of the underlying assets is strongly affected by interest rate fluctuations and by changes in the credit ratings of the underlying issuer of the assets.