Moody's Lowers HSBC Finance Rating

Moody's Investors Service lowered the long term senior debt ratings of HSBC Finance Corporation ("HFC") to A3 from Aa3. The company's Prime 1 short term rating was affirmed. The rating outlook is stable. The rating action follows the announcement by

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Moody’s Investors Service lowered the long-term senior debt ratings of HSBC Finance Corporation (“HFC”) to A3 from Aa3. The company’s Prime-1 short-term rating was affirmed. The rating outlook is stable.

The rating action follows the announcement by HFC’s ultimate parent, Aa2-rated HSBC Holdings plc (“HSBC” or “Group”) that it will wind down, with the exception of the credit card and retail services business, HFC’s branch-based finance operations and receivables portfolio. HFC will cease all branch-based mortgage and non-real estate loan originations and will close substantially all of its 800 branches. In conjunction with the wind-down, HFC will take a $230 million pretax restructuring charge, and expects to achieve approximately $600 million of annualized cost savings.

HSBC appears to have concluded that the HFC business model, which is reliant on market-based funding and a focus on the cash-out mortgage refinance business, is effectively impaired, has limited synergies or exportability across the Group, and is unlikely to have a risk/return profile in line with HSBC expectations for the foreseeable future. Excluding credit spread related gains on its debt and goodwill impairment, HFC posted a pretax loss of $6.7 billion for 2008. HFC has posted pretax losses for six straight quarters (adjusted for one-time items and the credit spread benefit.)

Moody’s said that the downgrade of HFC’s long-term rating to A3 reflects the weakened and now non-strategic position of the finance company within the Group. Though HFC is no longer a strategic asset, HSBC has publicly stated that it will provide all necessary support to HFC so that the finance company can wind down its receivables portfolio and pay off its $111 billion of public debt in a measured way over time. Moody’s believes that in addition to HSBC’s ample capacity to provide continued support to HFC, the global banking firm has the willingness, incentives, and institutional commitment to do so. Since acquiring the former Household International in 2003, HSBC has provided substantial operational and financial support to the finance company, including $950 million of capital in 2007 and $3.5 billion in 2008.

The rating agency emphasized that HFC’s ratings receive significant lift relative to the company’s intrinsic credit strength, which has come under increasing pressure over the past year and a half as the mortgage and credit crisis resulted in substantial credit losses.

“Excluding the benefit of strong parental support, HFC’s intrinsic credit strength has fallen well into the non-investment grade category,” says Blaine Frantz, a Moody’s senior vice president.

Moody’s said that the affirmation of HFC’s Prime-1 short-term rating reflects the substantial strength of HSBC parental support in the near term.

“Given the non-strategic position of HFC within the Group, there is an increased level of risk for creditors over the longer term,” says Frantz. “Although the A3 rating and stable outlook reflect this increased risk, any weakening of parental support would result in a large downward rating transition given HFC’s weak intrinsic credit strength.”

Moody’s also says that any decline in HSBC’s rating, depending upon the degree, could also result in a downgrade of HFC’s debt ratings. This is because Moody’s believes that if HSBC’s ability to support HFC were weakened (as reflected by a decline in its ratings) then this could have a disproportionately greater impact on HSBC’s willingness to support the non-strategic HFC. Therefore, Moody’s said that HFC’s ratings are subject to this greater transition risk. Additionally, given that the HFC ratings are largely derived from HSBC, the outlook on HFC will likely mirror that of HSBC.

The last rating action on HSBC Finance was on 29 November 2007, when the company’s rating outlook was changed to stable from positive.

The principal methodology used in rating HSBC Finance Corporation is “Analyzing the Credit Risks of Finance Companies,” which can be found at www.moodys.com in the Credit Policy & Methodologies directory, in the Ratings Methodologies subdirectory. Other methodologies and factors that may have been considered in the process of rating these issuers can also be found in the Credit Policy & Methodologies directory.

D.C.

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