Austria Tells Heta Bondholders to Be Rational and Accept Losses

  • Creditors face losses on 11 billion euros of state bank debt
  • Bond offer higher than expected, Austria says won't sweeten it

Austria told creditors of bad bank Heta Asset Resolution AG they should be “rational” and accept the “excellent offer” to take about 3.2 billion euros ($3.5 billion) of losses rather than gamble on the insolvency of the southern Carinthia province. Creditors were unimpressed.

Kaerntner Ausgleichszahlungs-Fonds, a special purpose vehicle set up by Carinthia, will offer to buy about 11 billion euros of Heta bonds guaranteed by the province in an deal starting Thursday, it said in a statement. The public trust is bidding 75 percent of the face value plus interest accrued until March 1, 2015, to senior bondholders, and 30 percent to holders of subordinated debt. The offer ends March 11.

“Seventy-five percent is a reasonable bid that the market wasn’t anticipating but was hoping for,” said Frederick Gentis of Wallich & Matthes, a fixed-income trader specialized in German and Austrian deficiency guarantees. While this is a positive signal from the Austrian government, “the way they communicated along the way might have angered creditors too much for them to accept this,” he said.

Austria paved the way for the bond offer last year, almost six years after it nationalized Heta’s predecessor, failed Carinthian state lender Hypo Alpe-Adria-Bank International AG. Having burnt through 5.5 billion euros of taxpayers’ money to prop up Hypo Alpe, Finance Minister Hans Joerg Schelling denied more support in March 2015, leaving Carinthia with the specter of having to meet guarantees equal to about five times its annual revenue. 

Veto Block

Investor feedback in the hours since the “spectacular” offer was announced was “positive,” Schelling told journalists in Vienna on Wednesday. There’ll be no more negotiations and if the bid fails, Heta and Carinthia could both become insolvent, he said.

“The market is becoming rational now,” Schelling said. “Everyone will have to weigh whether it’s better to litigate if it comes to an insolvency, or whether it’s better for everyone involved to accept the offer and finish the Heta matter after years of dispute.”

Austria needs two thirds of creditors to tender their bonds for the offer to go through, according to the law on which the bid is based. If it reaches the quorum, the rest will be effectively forced to take the same losses. A group of creditors including Commerzbank AG, Dexia SA’s German unit and Deutsche Pfandbriefbank AG, which claims to hold enough to form a blocking minority, has said it won’t accept anything but a full payout.

The creditor group declined to comment on Wednesday, saying it had yet to see the full offer. Other creditors were less reserved.

“Carinthia, together with the federal government, is able to pay the liabilities over time,” said Philipp Waldstein, managing director of Munich Re’s asset manager MEAG. “In the interest of our clients, we reject the offer to buy for 75 percent and demand a contractual repayment at 100 percent.”

Considering the opposition by the creditors, most of which are German and Austrian banks and insurers, acceptance by a qualified majority “seems unlikely," Berenberg analysts led by Philipp Jaeger wrote in a note to clients.

Biggest Securities

Of the 11.1 billion euros of Heta’s Carinthia-guaranteed liabilities, 10.2 billion euros rank senior and 890 million euros are subordinated, according to an investor presentation. Heta’s two biggest securities are a 2 billion-euro 4.375 percent bond due 2017 and a 1.25 billion-euro 4.25 percent note due 2016, which are both quoted at around 68 cents on the euro.

Under the law regulating the deal, the offer consists of two elements: 1.2 billion euros are contributed by Carinthia, an amount that the provincial government says is all they could come up with to serve the guarantees.

The remainder, about 6.7 billion euros according to Bloomberg calculations, is effectively a down payment on the future result of selling and winding down Heta’s assets. Creditors who accept the offer also benefit from an earn-out clause should Heta’s resolution yield more than expected.

“We’re convinced that Plan A will succeed,” Carinthia’s governor, Peter Kaiser, said in Vienna when asked if he had an alternative plan in case of failure. “We, the federal government and the province of Carinthia, have done everything we can.”

Carinthia hasn’t shown creditors that this is really the case, said Urs Faehndrich, chief executive officer of Gold Partners AG, a Swiss asset manager that owns about 200 million euros of the bonds.

“What they did was unprecedented in the developed world: they just came up with a number they think is acceptable and then said: ‘Take it or leave it,’” he said. “When the offer fails, they will be forced for the first time to sit down and talk to the creditors.”

Carinthia’s SPV handling the offer, also known as KAF, will publish the offer documentation on its website on Thursday, it said. Citigroup Inc. and JPMorgan Chase & Co. are managing the transaction.

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