Heta Fallout Reaches DuessHyp as Fitch Sees Capital Gap Looming

Duesseldorfer Hypothekenbank AG, a German issuer of covered bonds known as Pfandbriefe, may need additional capital to survive losses caused by Austria’s Heta Asset Resolution AG.

DuessHyp, based in the western German city of Dusseldorf, is facing losses after Austrian regulator FMA imposed a debt moratorium on Heta’s senior bonds ahead of a bail-in expected next year, Berenberg Bank analysts led by Philipp Jaeger said in a note to clients Wednesday. Fitch Ratings said late Tuesday that the bank won’t be able to survive unless it receives support from Germany’s deposit insurance fund.

“We believe that DHB now displays an exceptionally high level of fundamental credit risk and failure of the bank is inevitable unless it receives capital support,” Fitch analysts led by Patrick Rioual said in the statement. Fitch expects “that support will be available ultimately from the German government, most likely via the voluntary deposit protection fund of the country’s private sector banks.”

DuessHyp, rescued by funds controlled by the German Banking Association in 2008 after writedowns tied to the U.S. subprime market, refinances itself by issuing Pfandbriefe, a type of covered bond sacrosanct in Germany as being devoid of default risk. Fitch expects Germany to reduce sovereign support for banks, including through the voluntary protection program, after implementing the European Bank Recovery and Resolution Directive, or BRRD, into national law and early adoption of the bail-in tool.

Heta Bonds

In its 2013 annual report, the bank said it held 348 million euros ($368 million) of Heta bonds, which stood against 250 million euros of core capital. A spokeswoman for the bank declined to comment.

Austria’s decision to wind down Heta, the “bad bank” of failed Hypo Alpe-Adria-Bank International AG, is sending ripples through the financial system as the first institute to be wound down under the BRRD directive. Moody’s last week cut Heta’s home region Carinthia by four levels and may lower the ratings of other state-owned Austrian banks.

Deutsche Pfandbriefbank AG, NRW.Bank, Munich Re and Dexia SA’s German unit have also disclosed Heta holdings.

With total assets of 11.9 billion euros as of Dec. 31, 2013, the latest available annual report, DuessHyp was purchased in 2010 by Lone Star Funds. The U.S. investment firm in August 2014 agreed to sell it to a group of international buyers led by Attestor Capital and Patrick Bettscheider, a deal that is still pending regulatory approval, according to Fitch. Lone Star didn’t immediately respond to e-mailed questions about its relationship to DuessHyp.

The lender’s 200 million Swiss francs of 2.625 percent covered bonds maturing on April 23 were quoted at 100.11 cents on the franc to yield 1.58 percent, data compiled by Bloomberg show.

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