Depfa Bank Bonds Fall Most Since 2011 as Germany Scraps Sale

Bonds sold by the Depfa Bank subsidiary of bailed-out lender Hypo Real Estate AG fell by the most in almost three years after Germany’s government scrapped plans to sell the unit and opted to wind it down instead.

Depfa’s 5 percent perpetual Tier 1 securities, with 500 million euros ($686 million) outstanding, fell 21 percent since the May 13 decision to keep the bank, the biggest monthly drop since September 2011. The Dublin-based unit’s 400 million euros of 6.5 percent Tier 1 bonds fell 16 percent while a 300 million-euro issue of similar securities slid more than 20 percent. The bonds are trading at close to 50 cents in the euro.

The German government abandoned the Depfa sale plans after months considering bids from potential buyers. The decision to wind down the lender creates the risk of Germany imposing losses on holders of the securities and extending a ban on coupons, according to Barclays Plc analysts Christy Hajiloizou and Yulia di Mambro.

“The main risks facing creditors now are the risk of burden-sharing as well as an indefinite coupon ban,” the analysts wrote in a note to clients on May 14. “It’s difficult to see clear upside from current levels and further volatility is likely.”

Hypo Real Estate agreed to sell Depfa, a provider of public-sector finance, by the end of the year under a plan approved by the European Union in 2011. The EU review was triggered after Germany injected 10 billion euros into Hypo Real Estate in a rescue program.

Walter Allwicher, a spokesman for Depfa, declined to comment on the bonds.

Future Losses

As part of Hypo Real Estate’s restructuring plan, EU officials banned Depfa from making coupon payments on the Tier 1 instruments, Hajiloizou and di Mambro said in their note. The ban would have expired in the event of a sale, they said.

The securities, which were sold between 2003 and 2007, would rank lower than senior debt in a liquidation.

“Banks in unwinding typically post losses and this is also true for Depfa, which has been structurally loss-making for some time,” said Katharina Barten, an analyst with Moody’s Investors Service in Frankfurt. “Future losses imply that investors in junior subordinated instruments, including in Depfa’s trust preferred securities, are most exposed to absorb losses over time.”

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