Austria, Heta Creditors Turn Page in $12 Billion Face-Off

  • Court rooms may become main stage in dispute over Heta
  • Discounted offer for bad bank's debt expired Friday afternoon

Judges, lawyers and regulators will play the leading roles in the next act of Heta Asset Resolution AG’s winding-up after the bad bank’s biggest creditor group said it didn’t accept a tender offer for 10.8 billion euros ($12 billion) of bonds.

The debt offer launched by Austria’s Carinthia province to neutralize guarantees it gave for Heta’s liabilities ran out on Friday. Creditors that held 5 billion euros of bonds and had teamed up against it didn’t tender their bonds, a spokeswoman for the group said by phone. Deutsche Bank AG’s asset management unit also didn’t take the deal. The final result is due Monday.

“I tried to find an out-of-court solution with creditors with a very good offer, and if that’s not accepted, it won’t get better,” Finance Minister Hans Joerg Schelling said in Vienna Thursday night. “Then the question will be, who’s in court with whom, and for how long.”

Heta, a former state bank loaded with bad loans in the Balkans, has turned into a burden for Austrian taxpayers since its emergency nationalization six years ago. Schelling tried to turn the tables and share some of the losses with Heta’s creditors after three of his predecessors failed to come to grips with the lender. 

When he halted further capital injections, he triggered Europe’s first bank failure to be treated under new bail-in rules. A debt moratorium has been in place since March 1, 2015.

Austria’s financial watchdog, which is in charge of Heta’s wind down, has until the end of May to force losses on the company’s debt. Under Austria’s bank resolution rules, the regulator can also extend the liabilities to match them to the timeline of Heta’s wind-down.

Schelling has warned that this kind of bail-in will lead to greater losses for creditors than Carinthia’s offer. The southern province bid 75 percent of face value for senior debt and 30 percent for junior debt. Officials have said there will be no second bid.

After the FMA announces the haircut, bondholders could turn to Carinthia and ask to be reimbursed for their losses. The province, with an annual budget of about 2.4 billion euros, has said it can’t afford to honor the guarantees. Faced with billions of euros of claims, Carinthia could trigger the first provincial insolvency in Austria.

“We only have the possibility of a bad outcome, a very bad outcome and a catastrophic one,” Gottfried Haber, a professor at the Donau University in Krems, Austria said in an interview with ORF radio. “If the offer succeeds, at least there is legal certainty for the big group that accepted it. But even in this case, some creditors are going to go down the legal route.”

Uncharted Terrain

As a Carinthian insolvency would be uncharted terrain for everyone involved, many details of such a scenario are subject to interpretation and may be contested in court. Several panels in Frankfurt are already weighing whether the debt moratorium, under which Heta stopped servicing its debt, is in line with European bank resolution rules. The first ruling is expected on March 18.

Meanwhile, the Austrian Constitutional Court is expected to decide this year whether the country’s bank resolution law can be applied to Heta at all.

Expert opinions commissioned by each side, one by Carinthia and one by creditors, give a glimpse into the arguments that may be made in courts. The main question is which of Carinthia’s assets creditors would have access to. A stake in utility Kelag and a 500 million-euro fund, resulting from the sale of a majority stake in Heta’s predecessor, are the most sought-after prizes.

The two law professors mandated by Carinthia argue that most of the province’s estate is regulated by laws and thus covered by a constitutional requirement for Carinthia to remain functional. Creditors would get less than 100 million euros in their scenario.

Heta’s creditors hired Heinz Mayer, one of Austria’s most prominent professors of constitutional law, for their own expert opinion. Mayer stipulates Carinthia could have to sell the subsidized home loans it makes to Carinthian residents, real estate, its car fleet, the Kelag stake as well as liquidate the 500 million-euro fund to satisfy creditors.

Even the historical building of Carinthia’s parliament, which approved the outsize guarantees for Heta’s predecessor Hypo Alpe-Adria-Bank International AG in the early 2000s, is up for grabs, Mayer argues.

Judges will have to decide who’s right.

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