French Lender Sold Austrian ‘Bad Bank’ Heta’s Bonds

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One of the biggest creditors of Heta Asset Resolution AG, the Austrian “bad bank” wound down by regulators, sold its 260 million-euro ($292 million) holding last week as market prices stayed above writedown levels.

Credit Foncier de France SA, a mortgage lender owned by Paris-based Groupe BPCE, sold its entire Heta bond holding, the company said by e-mail on Tuesday. Credit Foncier, which wrote down the assets by about 50 percent in its first-quarter results, said it expects to write back part of the provisions after the disposal. It declined to give the price at which it sold, or to identify the buyers.

Austria on March 1 stopped supporting Heta, the vehicle that’s winding down failed nationalized lender Hypo Alpe-Adria-Bank International AG. Regulators took control of the process and ordered a debt moratorium while they figure out what losses they will impose on creditors. Heta is the first case testing new European Union laws designed to protect taxpayers from shouldering the cost of failing banks.

While the European Central Bank has advised lenders to write down their Heta bonds by at least 50 percent, market prices for the most liquid Heta securities remained above that level. Heta’s 2 billion-euro 4.375 percent bond due 2017 and its 1.25 billion-euro 4.25 percent bond due 2016 were both bid for at 65 cents on Tuesday, little changed from Monday.

Hedge Funds

BPCE in the first quarter took 142 million euros of provisions on the Heta assets, including “interests and incidental amounts,” it said May 6.

Forcing bondholders to share some of Heta’s losses is complicated by the fact that the Austrian province of Carinthia, a former owner of the Hypo Alpe, has guaranteed more than 10 billion euros of the bonds. As that amount is more than four times Carinthia’s annual budget, the province has warned it won’t be able to honor the guarantees.

Austrian Finance Minister Hans Joerg Schelling has refused to backstop Carinthia’s guarantees unless the province restructures its debt with creditors. The ministry and Carinthia last week set up a working group to consider scenarios for how to deal with the guarantees.

While the main legacy investors in Heta’s bonds are German state-owned banks, mortgage banks and insurers, hedge funds have started to pile into the debt. Distressed debt specialists Palmerston Capital Management and Knighthead Capital Management have been trading in the assets, three people with knowledge of the matter said in April.

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