Hypo Alpe-Adria-Bank International AG bondholders face losses after the Austrian government ruled out providing fresh capital for its bad bank and staged a premiere of new European Union rules to wind down failing banks.
After 5.5 billion euros ($6.2 billion) of taxpayer money was injected into Hypo Alpe in the last five years, Chancellor Werner Faymann’s administration decided to stop supporting its bad bank, Heta Asset Resolution AG, after learning it would need another 7.6 billion euros. The shortfall will now be met by forcing losses on creditors using tools created by the EU’s Bank Recovery and Resolution Directive.
“It seems very clear that the Austrian government is now proceeding along the lines of the BRRD philosophy,” Gunnar Hoekmark, the Swedish lawmaker who led work on the bill in the European Parliament, said by telephone. “It’s an extremely important message to the market that this is the way we will deal with things.”
Hypo Alpe was nationalized in 2009 to prevent its collapse under the weight of bad loans in the western Balkans, as shareholders led by Bayerische Landesbank walked away. Its rescue and wind-down have been complicated by a string of court cases and the fact that a large part of its debt is guaranteed by the Carinthia province, a former owner of the bank.
Austria’s Finanzmarktaufsicht regulator put Heta into resolution on Sunday and ordered a debt moratorium in preparation for imposing losses on creditors. Heta’s bonds tumbled to record lows.
“It’s obvious that there is a shortfall due to the bank’s asset review, and the bank’s creditors will have to contribute to fill that shortfall,” Klaus Kumpfmueller, the FMA’s co-head, said Monday on ORF radio.
Heta’s bondholders include funds managed by Pacific Investment Management Co., Deutsche Bank AG and UBS AG, according to data compiled by Bloomberg.
Heta’s 2 billion euros of 4.375 percent notes maturing in January 2017 plunged 18 cents on the euro to 47 cents, according to data compiled by Bloomberg. The company’s 450 million euros of floating-rate notes due March 6 slumped 37 cents to 47 cents on the euro, the data show.
Austria implemented the EU resolution rules with a law that made the bail-in option available this year, ahead of the bloc-wide deadline. Only Germany and the U.K. did the same, Standard & Poor’s said in February. It also inserted a bespoke clause late in the legislative process that specifically allowed it to apply to Heta, the Finance Ministry has said.
‘So Many Uncertainties’
Austria, which was sued by investors after it wiped out Heta’s subordinated debt last year, will probably end up in court over the debt cut, according to Eva Olsson, a bond analyst at Mitsubishi UFJ Securities International Plc.
“The idea is they’re using the new rules to use as little taxpayer money as possible,” Olsson said in a telephone interview. “There are so many uncertainties at present, creditors don’t know how much they’re going to recover. We don’t know how this is all going to work out.”
Under the new regime, the FMA is taking control of the wind-down of Heta, which kept about 18 billion euros of Hypo Alpe’s assets when it was set up last year.
While it works out a resolution plan, it won’t repay Heta’s liabilities until May 2016 to make sure all creditors are treated equally, the FMA said. The first bonds affected are 950 million euros due March 6 and March 20.
Heta’s review showed that its assets need to be written down by 5.1 billion euros to 8.7 billion euros, the FMA said in its decree. Considering Heta’s own funds of 1.1 billion euros, that results in a shortfall of as much as 7.6 billion euros.
“We were very surprised about that dimension,” Kumpfmueller said. “We’ll analyze how there could have been such a deterioration in the space of a few months.”
The liabilities eligible for sharing the burden include 9.8 billion euros in outstanding bonds, supplementary capital and Schuldschein loans, 1.24 billion euros of debt to Pfandbriefbank (Oesterreich) AG, a bank that handles bond issues for Austrian provincial banks, as well as loans from BayernLB, according to the decree published on its website.
“A first back-of-the-envelope calculation would indicate a recovery rate of 70 percent in the best case, but more likely something closer to 30 percent to 50 percent if you take everything into account,” Mitsubishi’s Olsson said.
Putting Heta into resolution means there is no insolvency procedure for now, Kumpfmueller said. An immediate insolvency would have endangered the sale of Hypo Group Alpe Adria AG, the “good” part of the business that’s operating banks in the former Yugoslavia. The sale was agreed on last year, but hasn’t been completed. An insolvency would have also made the sale of Heta’s remaining assets more difficult and led to higher losses for creditors, it said.
Avoiding Heta’s insolvency also means that the Carinthia province’s guarantees for 10.2 billion euros of Heta’s debt aren’t triggered under Austrian law, according to Kumpfmueller. Finance Minister Hans Joerg Schelling reiterated that the government will honor a federal government guarantee for a 1 billion-euro subordinated Heta bond due 2022, should that bond be bailed in. The government is not liable for Carinthia’s guarantees, according to the constitution, Schelling said in an ORF radio interview.
The FMA’s intervention caps a series of dramatic developments in recent weeks that culminated over the weekend and is described in the authority’s decree.
Heta notified the FMA on Feb. 27 at 9:20 p.m. in Vienna that its asset review had led to the additional write-down needs and that it wouldn’t have enough funds to repay liabilities from next year, according to the document.
Shortly after that notification, the FMA notified the Austrian government and asked whether it would recapitalize Heta to make sure the liabilities are repaid. The government delivered its response after an emergency meeting on March 1.
“The republic won’t put a single euro of tax money into Heta anymore,” Schelling said.