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Moody’s downgraded HSBC Holdings’ senior bond ratings to A3 from A2. They also downgraded the Baseline Credit Assessment (BCA) to a3 from a2, subordinated debt rating to Baa1 from A3, the non-cumulative preferred stock rating of Perps issued by HSBC Capital Funding (Dollar 1) L.P. and guaranteed by HSBCH to Baa3(hyb) from Baa2(hyb). Meanwhile they affirmed the Baa3(hyb) preferred stock non-cumulative rating of HSBCH’s ‘high-trigger’ Additional Tier 1 (AT1) notes.

The BCA (Term of the Day, explained below) downgrade is on account of challenges HSBC will face in restoring profitability on a sustainable basis to levels vs. main peers in the next 12-18 months. Post the 2008 financial crisis, HSBC was more resilient than many other global banks but took fewer measures to reposition its business model in the following 10 years despite material increases in the cost of doing business, Moody’s said. Profitability has dipped due to high dependence on interest income, limited contribution of capital markets and a non-commensurate decrease in costs. The subordinated debt downgrade by a notch is a function of the BCA downgrade. The downgrade in non-cumulative preferred stock Perps by HSBC Capital Funding (Dollar 1) L.P. is due to the high loss-given-failure for subordinated instruments. Moody’s said they continue to incorporate two additional negative notches for preference share instruments, reflecting coupon features. But, the affirmation of the AT1s is due to the fact that HSBC has a substantial headroom above their conversion trigger.

HSBC’s dollar bonds were flat – its 4.25% 2025s were at 111.5, yielding 1.4% and its 6.375% Perps at 109.95, yielding 3.15%.

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