Austria is set to pay 1.23 billion euros ($1.36 billion) to the German state of Bavaria after both parties agreed to settle all pending legal disputes over the collapse of Hypo Alpe-Adria-Bank International AG, whose assets are being wound down in bad bank Heta Asset Resolution AG.
Under the terms of the accord, Austria will pay the sum to its neighbor as soon as the settlement is approved by parliament, regulators and former Heta parent Bayerische Landesbank, Austrian Finance Minister Hans Joerg Schelling told journalists in Vienna late Monday. Bavaria’s Finance Minister Markus Soeder said the agreement is “acceptable to all sides.”
“If we proceed with all the trials, we have two problems,” Schelling said. “High fees for courts and lawyers as well as very big legal risks. Many of the cases are at the very beginning with an uncertain outcome.”
The landmark agreement closes litigation stemming from BayernLB’s two-and-a-half year ownership of Hypo Alpe that ended in acrimony with the sides accusing each other of deception over hidden losses and asset valuations. The lender had to be rescued in 2009 and has cost Austrian taxpayers 5.5 billion euros since then.
Bavaria “is looking forward to returning to a normal relationship with Austria,” Soeder said at a press conference in Munich.
Austria’s payout to Bavaria will at least partially be funded by the wind-down of Heta’s assets, Schelling said. It’s equivalent to 45 percent of the amount that state-owned lender BayernLB was awarded by a Munich court in May, he said. If Heta’s creditors end up receiving a lower payout ratio in the course of the wind-down, Austria has agreed to pay the balance to Bavaria.
Heta, which also has to approve the deal, “welcomes the political initiative” to end the dispute and will initiate a process to review the agreement immediately, the Austrian company said in an e-mailed statement.
Heta, which revealed a 7 billion-euro capital hole on June 18, said at the time that an insolvency may ultimately be the only way to shut down the company.
Hypo Alpe, Austria’s worst bank failure in the 2008 financial crisis, almost collapsed over bad loans in the former Yugoslavia. Austria’s government halted further support in March as regulators imposed a debt moratorium under new European Union rules.
That may force senior bank bond holders to share losses for the first time in the euro area, potentially causing ripples among Heta’s Austrian and German creditors.
Complicating the wind-down, the Austrian province of Carinthia guarantees more than 10 billion euros of Heta’s debt. A working group set up by the federal state and Carinthia is trying to come up with a solution for the guarantees, Schelling said.
The 45 percent payout to Bavaria doesn’t mean that all of Heta’s creditors can count on this ratio, Schelling said. However, “it’s an important sign to the capital market that we managed to get under 50 percent in the settlement and show where the limits are, roughly.”
Since the risk of Bavaria pushing for its claim to be placed ahead of others now appears to have been removed, “it looks like this could be a positive development for the other creditors,” said Otto Dichtl, a credit analyst at Stifel Nicolaus Europe Ltd., by telephone.
Heta was ordered to pay 1.03 billion euros and 1.29 billion Swiss francs ($1.36 billion) plus interest to its former parent by a Munich court in May. Other pending litigation included a
3.5 billion-euro lawsuit in which Austria alleged BayernLB hid what it described as a “catastrophic” situation of Hypo Alpe before the 2009 rescue.
The proposed deal is subject to approval by Austria’s financial regulator FMA as well as the country’s parliament. The FMA welcomed the step. As the authority in charge of Heta’s wind-down, it will have to check whether a final deal is in line with Austria’s bank restructuring law, spokesman Klaus Grubelnik said in an e-mail.
BayernLB is 75 percent-owned by the state of Bavaria. The Association of Bavarian Savings Banks owns the remaining 25 percent, according to its website.