Iceland’s HFF Bondholders Gird for Restructuring: Nordic Credit

Bondholders in Iceland’s state-backed Housing Finance Fund are waiting for the nation’s biggest mortgage bank to change the terms of their investment as the government looks for ways to keep the lender afloat.

“It wouldn’t surprise me if they tried to push through changes to the terms of HFF bonds this summer,” Kari Arnor Karason, chief executive officer at Stapi Pension Fund, said in a phone interview. Stapi, which holds 77 billion kronur ($630 million) in HFF and government bonds, hasn’t been approached by HFF and says that the lender has a full and unlimited guarantee from the state. “Usually they’ve already made up their minds; the so-called consultations are often just statements.”

HFF, which has about $4.1 billion in bonds outstanding, has struggled to escape insolvency as its inflation-linked home loans lose ground to regular mortgages sold by commercial banks. HFF’s capital adequacy ratio was 3.2 percent at the end of last year, compared with a 5 percent regulatory minimum, the fund said in March. Iceland’s regulator said May 28 it was concerned HFF lacked the necessary capital to protect it against losses.

Bondholder Consent

Iceland will seek the participation of HFF bondholders to bail out the state-owned lender, Welfare Minister Eyglo Hardardottir, whose ministry is responsible for HFF, said in an interview last week.

The yield on HFF’s 3.75 percent bond maturing in 2034 rose four basis points to 2.69 percent, and is up more than 20 basis points since the start of last week, according to prices compiled by Bloomberg.

The government and HFF have said they won’t take any steps to change the terms on the debt without the consent of bondholders. The fund in a statement today said that “nothing has changed,” and reiterated that “terms of HFF bonds will not be changed without bondholders participation and consent.”

A restructuring “has been discussed,” HFF Deputy Chairman Sjofn Ingolfsdottir said in an interview. “But I can’t make any assertions about whether this will be the outcome.”

‘Radical’ Changes

Iceland’s new government, which took office last month, wooed voters with promises of mortgage debt relief and lower taxes. The administration of the Progressive Party and the Independence Party, which ousted a Social Democrat-led coalition, has said it wants “radical” changes to the island’s housing market, pledging to write down household debt by as much as 20 percent and cut reliance on inflation-linked loans.

Tracking consumer prices has proved costly for Iceland’s households after inflation peaked at 19 percent in January 2009. Price growth was 3.3 percent in May, compared with the central bank’s 2.5 percent target.

Iceland’s new banks, created from the domestic assets of the island’s failed lenders, have attracted customers with nominal loans allowing inflation to cut their debt burdens.

According to Karason at Stapi Pension Fund, creditors are bracing for an announcement from HFF and the government sometime in the coming three months.

“The summer is usually a popular time to take actions like these,” he said. “People are on holiday, parliament is suspended and reporters are also vacationing.”

Default Rates

HFF’s default ratio rose to 14.8 percent by the end of April, according to a monthly report from the Reykjavik-based bank. That figure needs to come down if the fund wants to improve its credit rating, according to Moody’s Investors Service.

Iceland, which refused to bail out its three biggest banks in 2008, said in February it would rescue HFF before an outright default. That followed a November pledge to inject 13 billion kronur into the lender.

Since exiting a $4.6 billion International Monetary Fund- led economic program in 2011, Iceland has tapped the dollar bond market twice. The spread between Iceland’s $1 billion bond maturing in 2022 and the benchmark Treasury curve widened to 222 basis points this week from a low of 209 basis points on May 28.

In February, Moody’s changed its outlook on Iceland’s Baa3 credit grade to stable from negative and Fitch Ratings raised the island to BBB from BBB-. Standard and Poor’s rates the country’s debts BBB-, one step above junk, with a stable outlook.

Moody’s, which rates HFF seven steps below investment grade at Caa1 on a stand-alone basis, said the lender needs to restore its ability to generate operating profit and match its capitalization to its risk profile.

An upgrade of the “credit assessment could develop if there is a material improvement in the fund’s asset quality,” Oscar Heemskerk, a senior credit officer at Moody’s, said last week in an e-mail.

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