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Austria Takes Volksbank Stake, Defying Downgrade Treat

Feb. 27 (Bloomberg) -- Austria bailed out Oesterreichische Volksbanken AG for the third time, taking a minority stake in the lender as the Alpine republic defied warnings that its debt rating may be lowered.

Austria will become the lender’s second-biggest shareholder after injecting 250 million euros ($335 million), the Vienna-based bank said in a statement today. That will probably give it a 40 percent stake, according to two people with knowledge of the plan, who declined to be identified because the talks still are in progress.

A group of 62 regional cooperative lenders will inject at least 230 million euros and remain the majority shareholder in Volksbanken, according to the statement. The regional banks gave the plan unanimous approval at a meeting in the Austrian capital today.

Austria is fighting to keep its top debt grade, which ratings companies say is most threatened by the potential for another round of state aid for the nation’s banks. Volksbanken, the country’s fourth-largest lender, and nationalized Hypo Alpe-Adria-Bank International AG are the institutions that have caused the biggest damage to the nation’s budget.

Volksbanken will cancel as much as 70 percent of its share capital to wipe out accumulated losses. It will replenish the share capital with the 480 million-euro injection from the state and the regional banks. The measure dilutes the other shareholders, which include DZ Bank, Raiffeisen Zentralbank Oesterreich AG and Munich Re.

Previous Bailout

Austria already injected 1 billion euros of state aid into Volksbanken in 2009 via so-called participation capital. These funds will be reduced to 300 million euros because of the share capital cancellation, according to the statement. Austria is also granting the lender a 100 million-euro asset guarantee for an annual fee of 10 percent.

The regional lenders “will ensure the repayment” of the participation capital and the payment of the asset-guarantee fee, Volksbanken said.

The deal comes after the finance ministry over the weekend rejected a previous plan proposed by the regional banks, according to four people with knowledge of those talks among Volksbanken, its owners and the finance ministry.

New Structure

That plan, which would have created a so-called bad bank, would have left other shareholders and the state exposed to unprofitable businesses. The regional lenders also wouldn’t have shared enough losses, said the people, who declined to be identified because the talks were private.

The regional banks owned 61 percent of Volksbanken before to the restructuring, while DZ Bank owned 23 percent, Raiffeisen Zentralbank Oesterreich AG 6 percent and Munich Re 9 percent. Volksbanken didn’t provide a breakdown of the stakes after the capital cut.

Under the new shareholder structure, Volksbanken and the regional lenders will keep developing their plan to create a cross-guarantee pact, according to today’s statement. That means the institution would keep doing support business such as liquidity management for the regional owners, and wind down all activity that isn’t part of that function, corresponding to about half of its assets.

Bank-Tax Increase

Austria was warned by Standard & Poor’s and Moody’s Investors Service this year that its financial-services industry is the main threat to the national credit rating.

The country will increase its banking tax to finance the bailout, finance ministry spokesman Harald Waiglein said by phone from Vienna, adding that the Alpine republic will post a 700 million-euro writedown on the participation capital.

Austria is already saddled with bad assets Volksbanken ran up through 2008 in its municipal-lending unit, Kommunalkredit, which it co-owned with Dexia SA, the Belgian bank being broken up in the wake of losses. Kommunalkredit was part of an expansion during which Volksbanken relied on wholesale funding to boost its balance sheet fivefold from 2000 to 2007.

The government took over Kommunalkredit to avoid a collapse of the wholesale-funded lender after the Lehman Brothers Holdings Inc. bankruptcy. The non-performing assets on the state’s books include credit-default swaps written for about 10 billion euros of debt, including Greek government bonds.

Volksbanken has posted writedowns on Greek government debt and on bad loans in Romania, driving its net loss to 689 million euros in the first nine months of 2011.

The state gained the right to take over Volksbanken after it failed to repay part of that aid and because it hasn’t paid a dividend on it. Finance Minister Maria Fekter had previously said that her desire to exercise that right was “limited.”

To contact the reporters on this story: Boris Groendahl in Vienna at bgroendahl@bloomberg.net; Zoe Schneeweiss in Vienna at zschneeweiss@bloomberg.net

To contact the editor responsible for this story: Frank Connelly at fconnelly@bloomberg.net

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