Regulation

HSBC, Wendy’s, Reliant Lead the Writedowns

As impairment reports proliferate, the bank, the fast-food chain, and the energy company get the week started.
Stephen TaubMarch 2, 2009

Within HSBC Holdings PLC’s filing this morning, detailing the scaling back of its U.S. consumer business, the British banking giant also reported that it took a $10.6-billion goodwill impairment charge for its Personal Financial Services business. And while the largest such writedown, it was one of at least three reported on Monday.

Wendy’s/Arby’s Inc. wrote off  $460.1 million, and Reliant Energy $305 million.

HSBC said that its writedown reflected “the significant deterioration in U.S. employment and economic outlook in the fourth quarter of 2008.” Specifically, the charge stems from its earlier acquisitions of one-time consumer finance giants HFC (Household Finance) and Beneficial. It disucssed the writedown in an earnings report that described an 18-percent decline in pretax profit, excluding the charge.

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HSBC claimed in a press release that it saw the disruption in subprime lending as early as 2006, and sharply scaled back in 2007, while competitors continued to grow. It also said it devoted considerable resources to helping its customers. “Virtually no one then foresaw the subsequent scale of the deterioration in the U.S. economy and financial markets,” it added. “It is now clear that models of direct personal lending that depend on wholesale markets for funding are no longer viable.”

As a result, with the exception of credit cards, HSBC will write no further consumer finance business through the HFC and Beneficial brands in the U.S., it said, adding that it will close the majority of the network. “HSBC has a reputation for telling it as it is,” it said. “With the benefit of hindsight, this is an acquisition we wish we had not undertaken.”

The $460.2-million charge taken by Wendy’s/Arby’s Group for its fourth quarter related to its Arby’s company-owned store operations business unit. CFO Steve Hare of the parent, cited the deteriorating economy and adverse stock market conditions, combined with recent negative trends in operating performance at Arby’s. Triarc, which had owned the Arby’s fast-food outlets, bought Wendy’s International Inc. for more than $2 billion in September, renaming the company Wendy’s/Arby’s.

In Reliant Energy’s report it cited lower expected cash flows due to the adverse business climate, along with significantly lower expected exchange transaction values stemming from credit-market disruptions, which would make it difficult for transactions to occur. It also noted increases the prices of those transactions, and significantly lower valuations for our peer companies.

“In addition, when we compared the aggregate of our fair value estimates of both reporting units to our market capitalization, including a control premium, we determined that the market participants’ views of our fair value had also declined significantly,” it added.