EU Said to Agree to HSH Bad Bank Plan in Aid Ruling Next Week

  • Competition chief said to agree to legacy asset transfer
  • Deal would avoid closure of struggling shipping lender

A restructuring of HSH Nordbank AG under state-aid rules is set to be approved by the European Union at the middle of next week, handing a reprieve to the Hamburg shipping lender bailed out after the 2008 financial crisis, according to three people familiar with the matter.

The EU has agreed in principle to a plan that would permit HSH to transfer a package of faulty shipping loans to a bad bank controlled by the northern German states of Hamburg and Schleswig-Holstein, which own 85 percent of the lender, avoiding a complete closure of what was once the world’s biggest financier of vessels, two of the people said. The conditions for the approval have yet to be announced.

The final approval, which will conclude more than two years of negotiations that also involved Germany’s Federal Finance Ministry and the European Central Bank, removes the uncertainty over HSH’s future after its owners fought a fate similar to WestLB AG, the German state-owned bank the EU shut down in 2012. Like its former Dusseldorf, Germany-based rival, HSH buckled under the excessive risk-taking of the pre-crisis period with its strategy to transform itself from a regional lender to companies and savings banks into an investment house.

While the EU and HSH’s state owners have largely agreed on the terms of the restructuring package, an announcement is being delayed to allow representatives of Hamburg and Schleswig-Holstein to formally sign off on the accord during a meeting with the EU competition authority in Brussels next week, two of the people said.

HSH and the states’ finance ministries declined to comment. Lucia Caudet, a European Commission spokeswoman, said discussions are continuing on a technical level with the German authorities. “We cannot prejudge the timing of a decision,” she said by phone on Wednesday.

Hamburg and Schleswig-Holstein sought a restructuring that would keep the lender afloat, arguing that this would be less costly for taxpayers in the longer run than winding down the entire firm. The exact volume of the asset transfer as well as the structure and volume of guarantees provided by Hamburg and Schleswig-Holstein remain unclear.

Hamburg and Schleswig-Holstein supplied 3 billion euros ($3.4 billion) of capital and a 10 billion-euro guarantee in 2009 to save HSH from collapse, while Germany’s bank rescue fund Soffin provided 17 billion euros in additional liquidity guarantees, steps the EU approved in September 2011.

Crisis Worsened

Anticipating an upturn in the shipping industry, the lender lowered the guarantee to 7 billion euros in 2011, in part to save on fees. The reduction proved too hasty as the industry crisis worsened and HSH, two years later, asked its owners to restore the original guarantee, which the EU approved on a preliminary basis in June 2013.

HSH and its government stakeholders in recent months proposed shifting at least two-thirds of the bank’s 15.4 billion euros of non-performing shipping and real estate loans into a bad bank controlled by the two states in a restructuring aimed at freeing the bank to focus on new business, people familiar with the matter said in August.

More than 90 percent of those non-performing assets are covered by the 10 billion-euro state guarantee. Creditors including HSH bondholders are concerned that conditions attached to EU approval may require them to take losses as a result of the bank having to sell the legacy loans to the states at market prices. A sale at book value would spark a fresh state-aid probe as the shipping loans in the package were arranged before the maritime industry entered a slump in 2008 and the book value earmarked in HSH’s balance sheets exceeds market prices.

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