HSBC Finance Corp - FORM 8-K - EX-99.1 - EXHIBIT 99.1 - May 27, 2016

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HSBC Finance Corporation

EXHIBIT 99.1



HSBC FINANCE CORPORATION
UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL INFORMATION


The following unaudited pro forma condensed consolidated financial information and explanatory notes (the "Pro Forma Financial Information") present the historical condensed consolidated balance sheet for HSBC Finance Corporation (“HSBC Finance”) at March 31, 2016 and the historical consolidated statements of income (loss) for HSBC Finance for the year ended December 31, 2015 and for the three months ended March 31, 2016 along with the unaudited pro forma condensed consolidated balance sheet for HSBC Finance at March 31, 2016 and the unaudited pro forma consolidated statements of income (loss) for HSBC Finance for the year ended December 31, 2015 and for the three months ended March 31, 2016. The Pro Forma Financial Information gives effect to the pro forma adjustments relating to the following transactions (collectively, the "Receivable Sale Transactions") and includes all adjustments directly attributable to the Receivable Sale Transactions that are factually supportable:
Ÿ
The May 25, 2016 sale of a pool of real estate secured receivables with an unpaid principal balance of approximately $3.3 billion (aggregate carrying value of $2.9 billion) at the time of sale (the "May 2016 Receivable Sale"). Aggregate cash consideration received totaled approximately $3.2 billion resulting in an after-tax gain of approximately $168 million, net of transaction costs, which will be recorded in the second quarter of 2016.
Ÿ
The April 6, 2016 sale of a pool of real estate secured receivables with an unpaid principal balance of approximately $1.4 billion (aggregate carrying value of $1.3 billion) at the time of sale (the "Prior Disposition"). Aggregate cash consideration received totaled approximately $1.4 billion which resulted in an after-tax gain of approximately $98 million, net of transaction costs, that was recorded in the second quarter of 2016.
Consistent with the requirements of Article 11 of Regulation S-X, the pro forma consolidated statement of income (loss) has been presented on a continuing operations basis.
The unaudited pro forma condensed consolidated balance sheet at March 31, 2016 assumes the Receivable Sale Transactions occurred on March 31, 2016. As a result, the actual pro forma impact to our condensed consolidated balance sheet will differ based upon the balances of the assets and liabilities outstanding and the cash proceeds received at the time the Receivable Sale Transactions were completed. The unaudited pro forma consolidated statement of income (loss) for the year ended December 31, 2015 and for the three months ended March 31, 2016 were prepared assuming the Receivable Sale Transactions took place on January 1, 2015.
The Pro Forma Financial Information is presented for illustrative purposes only and does not necessarily indicate what the results of operations or financial position would have been had the pro forma adjustments occurred on the dates referred to above or purport to be indicative of the future results of operations or financial position of HSBC Finance.


1
HSBC Finance Corporation

HSBC Finance Corporation
Pro Forma Condensed Consolidated Balance Sheet
At March 31, 2016
(Unaudited)

 
Historical HSBC Finance Corporation
 
May 2016 Receivable Sale Adjustments(1)
 
Prior Disposition Adjustments(1)
 
HSBC Finance Corporation Pro Forma
 
 (in millions)
Assets
 
 
 
 
 
 
 
 
 
Cash
$
106

 
$
3,451

A
 
$
1,440

A
 
$
4,997

Securities purchased under agreements to resell
779

 
—

 
 
—

 
 
779

Receivables, net
8,433

 
—

 
 
—

 
 
8,433

Receivables held for sale
8,185

 
(3,166
)
B
 
(1,273
)
B
 
3,746

Deferred income taxes, net
2,959

 
(101
)
C
 
(59
)
C
 
2,799

Other assets
1,218

 
—

 
 
—

 
 
1,218

Total assets
$
21,680

 
$
184

 
 
$
108

 
 
$
21,972

 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
Debt:
 
 
 
 
 
 
 
 
 
  Due to affiliates
$
5,774

 
$
—

 
 
$
—

 
 
$
5,774

  Long-term debt
7,502

 
—

 
 
—

 
 
7,502

Total debt
13,276

 
—

 
 
—

 
 
13,276

Other liabilities
1,866

 
16

D
 
10

D
 
1,892

Total liabilities
15,142

 
16

 

10

 
 
15,168

 
 
 
 
 
 
 
 
 
 
Shareholders' equity
 
 
 
 
 
 
 
 
 
Redeemable preferred stock
1,575

 
—

 
 
—

 
 
1,575

Common shareholder's equity:
 
 
 
 
 
 
 
 
 
  Common stock
—

 
—

 
 
—

 
 
—

  Additional paid-in-capital
23,215

 
—

 
 
—

 
 
23,215

  Accumulated deficit
(18,273
)
 
168

E
 
98

E
 
(18,007
)
  Accumulated other comprehensive loss
21

 
—

 
 
—

 
 
21

Total common shareholder's equity
4,963

 
168

 
 
98

 
 
5,229

Total shareholders' equity
6,538

 
168

 
 
98

 
 
6,804

Total liabilities and shareholders' equity
$
21,680

 
$
184

 
 
$
108

 
 
$
21,972

 
(1) 
See Note 1, "Summary of Transaction," for additional information regarding the adjustments.




See Notes to the Unaudited Pro Forma Condensed Consolidated Financial Information.

2
HSBC Finance Corporation

HSBC Finance Corporation
Pro Forma Consolidated Statement of Income (Loss)
Year Ended December 31, 2015
(Unaudited)

 
Historical HSBC Finance Corporation
 
May 2016 Receivable Sale Adjustments(1)
 
Prior Disposition Adjustments(1)
 
HSBC Finance Corporation Pro Forma
 
 
Interest income
$
1,598

 
$
(257
)
F
 
$
(108
)
F
 
$
1,233

Interest expense
895

 
—

 
 
—

 
 
895

Net interest income
703

 
(257
)
 
 
(108
)
 
 
338

Provision for credit losses
250

 
(57
)
G
 
(19
)
G
 
174

Net interest loss after provision for credit losses
453

 
(200
)
 
 
(89
)
 
 
164

Other revenues:
 
 

 
 
 
 
 

Derivative related income (expense)
(97
)
 
—

 
 
—

 
 
(97
)
Gain on debt designated at fair value and related derivatives
213

 
—

 
 
—

 
 
213

Servicing and other fees from HSBC affiliates
20

 
—

 
 
—

 
 
20

Lower of amortized cost or fair value adjustment on receivables held for sale
(130
)
 
(34
)
H
 
(15
)
H
 
(179
)
Other income (loss)
85

 
—

 
 
—

 
 
85

Total other revenues
91

 
(34
)
 
 
(15
)
 
 
42

Operating expenses:
 
 
 
 
 
 
 
 
 
Salaries and employee benefits
196

 
(24
)
I
 
(10
)
I
 
162

Occupancy and equipment expenses, net
30

 
—

 
 
—

 
 
30

Real estate owned expenses
19

 
—

 
 
—

 
 
19

Other expenses
940

 
(12
)
J
 
(5
)
J
 
923

Support services from HSBC affiliates
224

 
—

 
 
—

 
 
224

Total operating expenses
1,409

 
(36
)
 
 
(15
)
 
 
1,358

Loss from continuing operations before income tax
(865
)
 
(198
)
 
 
(89
)
 
 
(1,152
)
Income tax benefit
(471
)
 
(74
)
K
 
(33
)
K
 
(578
)
Loss from continuing operations
$
(394
)
 
$
(124
)
 
 
$
(56
)
 
 
$
(574
)
 
(1) 
See Note 1, "Summary of Transaction," for additional information regarding the adjustments.





See Notes to the Unaudited Pro Forma Condensed Consolidated Financial Information.

3
HSBC Finance Corporation

HSBC Finance Corporation
Pro Forma Consolidated Statement of Income (Loss)
Three Months Ended March 31, 2016
(Unaudited)

 
Historical HSBC Finance Corporation
 
May 2016 Receivable Sale Adjustments(1)
 
Prior Disposition Adjustments(1)
 
HSBC Finance Corporation Pro Forma
 
 
Interest income
$
342

 
$
(63
)
F
 
$
(26
)
F
 
$
253

Interest expense
160

 
—

 
 
—

 
 
160

Net interest income
182

 
(63
)
 
 
(26
)
 
 
93

Provision for credit losses
37

 
—

G
 
—

G
 
37

Net interest loss after provision for credit losses
145

 
(63
)
 
 
(26
)
 
 
56

Other revenues:
 
 

 
 
 
 
 

Derivative related income (expense)
(115
)
 
—

 
 
—

 
 
(115
)
Gain on debt designated at fair value and related derivatives
24

 
—

 
 
—

 
 
24

Servicing and other fees from HSBC affiliates
4

 
—

 
 
—

 
 
4

Lower of amortized cost or fair value adjustment on receivables held for sale
(55
)
 
—

H
 
—

H
 
(55
)
Other income (loss)
9

 
—

 
 
—

 
 
9

Total other revenues
(133
)
 
—

 
 
—

 
 
(133
)
Operating expenses:
 
 
 
 
 
 
 
 
 
Salaries and employee benefits
38

 
(6
)
I
 
(2
)
I
 
30

Occupancy and equipment expenses, net
6

 
—

 
 
—

 
 
6

Real estate owned expenses
3

 
—

 
 
—

 
 
3

Other expenses
49

 
(3
)
J
 
(1
)
J
 
45

Support services from HSBC affiliates
42

 
—

 
 
—

 
 
42

Total operating expenses
138

 
(9
)
 
 
(3
)
 
 
126

Loss from continuing operations before income tax
(126
)
 
(54
)
 
 
(23
)
 
 
(203
)
Income tax benefit
(56
)
 
(20
)
K
 
(9
)
K
 
(85
)
Loss from continuing operations
$
(70
)
 
$
(34
)
 
 
$
(14
)
 
 
$
(118
)
 
(1) 
See Note 1, "Summary of Transaction," for additional information regarding the adjustments.





See Notes to the Unaudited Pro Forma Condensed Consolidated Financial Information.



4
HSBC Finance Corporation

HSBC FINANCE CORPORATION
NOTES TO UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL INFORMATION

1.    Summary of Transaction
 
The unaudited pro forma condensed consolidated balance sheet at March 31, 2016 assumes the Receivable Sale Transactions occurred on March 31, 2016. As a result, the actual pro forma impact to our condensed consolidated balance sheet will differ based upon the balances of the assets and liabilities outstanding and the cash proceeds received at the time the Receivable Sale Transactions were completed. The unaudited pro forma consolidated statement of income (loss) for the year ended December 31, 2015 and for the three months ended March 31, 2016 were prepared assuming the Receivable Sale Transactions took place on January 1, 2015.
The following pro forma adjustments have been reflected in the Pro Forma Financial Information. All adjustments are based on current assumptions which are subject to change. The pro forma consolidated income statement adjustments do not include the anticipated gains to be recognized on the Receivable Sale Transactions as they are considered nonrecurring items. Consistent with the requirements of Article 11 of Regulation S-X, nonrecurring items are excluded in pro forma income consolidated statements.
Pro Forma Condensed Consolidated Balance Sheet Adjustments
A Represents cash proceeds received as a result of the Receivable Sale Transactions.
B
Represents the removal of receivables held for sale which are included in the Receivable Sale Transactions.
C
Represents the change in the deferred tax asset balance as a result of the pro forma adjustments related to the Receivable Sale Transactions.
D
Represents estimated transaction costs for the Receivable Sale Transactions.
E
Represents the estimated after-tax gain on the Receivable Sale Transactions based on asset values at March 31, 2016 and an estimated purchase price as of March 31, 2016 at the statutory income tax rate of 37.44 percent.
Pro Forma Consolidated Income Statement Adjustments
F
Represents the removal of interest income associated with the receivables which are included in the Receivable Sale Transactions.
G
The pro forma adjustment for the provision for credit losses for the year ended December 31, 2015 reflects the following:
Year Ended December 31, 2015
May 2016 Receivable Sale Adjustments
 
Prior Disposition Adjustments
 
(in millions)
Removal of provision for credit losses released on receivables prior to the transfer to held for sale which were included in the Receivable Sale Transactions
$
8

 
$
7

Removal of provision for credit losses associated with the initial lower of amortized cost or fair value adjustment for receivables included in the Receivable Sale Transactions at the time they were transferred to held for sale
(65
)
 
(26
)
Provision for credit losses pro forma adjustment
$
(57
)
 
$
(19
)

5
HSBC Finance Corporation

For the three months ended March 31, 2016, a pro forma adjustment for the provision for credit losses was not required as the receivables sold in the Receivable Sale Transactions were included in receivables held for sale for the entire period and carried at the lower of amortized cost or fair value.
H
The pro forma adjustment for the lower of amortized cost or fair value adjustment reflects the following:
Year Ended December 31, 2015
May 2016 Receivable Sale Adjustments
 
Prior Disposition Adjustments
 
(in millions)
Removal of lower of amortized cost or fair value adjustment on receivables which were included in the Receivable Sale Transactions
$
3

 
$
1

Additional lower of amortized cost or fair value adjustment associated with receivables in the held for sale portfolio that were not included in the Receivable Sale Transactions. Removing the sold receivables from the portfolio results in a higher lower of amortized cost or fair value adjustment on the remaining receivables as a result of the change in mix in the receivables held for sale portfolio.
(37
)
 
(16
)
Lower of amortized cost or fair value pro forma adjustments
$
(34
)
 
$
(15
)
For the three months ended March 31, 2016, a pro forma adjustment for the lower of amortized cost or fair value adjustment was not required as the fair value of the receivables sold in the Receivable Sale Transactions were evaluated separately in the determination of fair value of total receivables held for sale at March 31, 2016.
I
Represents the removal of salaries and employee benefits associated with the receivables included in the Receivable Sale Transactions.
J
Represents the removal of other expenses associated with the receivables included in the Receivable Sale Transactions.
K
Represents the net effect of the pro forma adjustments at the statutory income tax rate of 37.44 percent.

2.    Use of Proceeds
 
Based on asset values at March 31, 2016, total consideration received as a result of the May 2016 Receivable Sale would have been approximately $3.5 billion. We intend to invest the proceeds of the Receivable Sale Transactions in short-term investments to be used in future periods to redeem preferred stock, pay down long-term debt as it matures and for general corporate purposes.
Based on asset values at March 31, 2016, total consideration received as a result of the Prior Disposition would have been approximately $1.4 billion which was invested in short-term investments to be used in future periods to pay down long-term debt as it matures and for general corporate purposes.


6

HSBC Finance Corp Reports