Heta Creditors Dismiss Austrian Bail-In as Doomed to Failure

  • `Ad Hoc' group says new Heta law violates creditor rights
  • Austria seeks buyback to defuse EU11b Carinthia guarantees

The biggest creditor group of Austrian “bad bank” Heta Asset Resolution AG poured cold water over the government’s plan to force bondholders to share losses, saying it violates creditors’ rights and won’t hold up in court.

Bondholders owning about a quarter of the 11 billion-euro ($12.5 billion) Heta debt that’s guaranteed by the province of Carinthia accused Austria of shirking its responsibilities in an e-mailed statement on Wednesday. A law due to be discussed in Austria’s parliament on Thursday will be fought in Austrian and European courts, the “Ad Hoc group” said.

“One of the world’s richest countries equipped with prime ratings by the rating agencies should not try to escape the fulfillment of its obligations toward creditors if it clearly has the ability to pay,” the group said in the statement. “We categorically reject Austria’s attempts to eliminate creditor rights via legislation.”

Heta is managing the remnants of Hypo Alpe-Adria-Bank International AG, one of the most damaging Austrian bank failures after the 2008 financial crisis. It has contributed to Austria losing two AAA credit ratings and is threatening Carinthia with insolvency as the former Hypo Alpe owner’s debt guarantees exceed four years of tax revenue.

Austrian Finance Minister Hans Joerg Schelling proposed a bill under which a special purpose vehicle can make a public offer to buy up Heta’s bonds at a discount if creditors waive their rights under Carinthia’s guarantee. That discount will be imposed on all debt holders if at least two-thirds of the creditors accept the deal, according to the draft law.

‘Artificially Low’

“We’re working on a buyback model for Carinthia, and this buyback will make sure we get Carinthia out of the guarantees and prevent damage to the financial market,” Schelling told the Austrian parliament in Vienna on Wednesday.

Heta’s most liquid securities, a 2 billion-euro 4.375 percent bond due 2017 and a 1.25 billion-euro 4.25 percent note due 2016, both trade at around 64 cents on the euro, prices compiled by Bloomberg show.

While the draft law doesn’t specify the price that will be offered for the bonds, it says that it will be based on the expected recovery rate for Heta’s assets, plus a contribution determined by Carinthia’s “economic capacity.” The creditors said they don’t trust the numbers presented to them.

“There remains the impression in the market that these numbers are artificially presented as low,” the group said in the statement. “This impression is reinforced in that the creditors are not provided an opportunity for a review.”

‘Doomed to Fail’

Creditors aren’t getting access to detailed information about Heta’s or Carinthia’s assets to help them make up their mind about their creditworthiness, the group’s main lawyer, Leo Plank of Kirkland & Ellis International LLP’s Munich office, said in a telephone interview. Invitations to negotiate with Austria, Carinthia and Heta haven’t been answered since an informal meeting in July, he said.

“The federal government still proceeds without any involvement of the creditors,” Plank said. “The creditors will fight this plan of action by all available means. Hence the tender offer is doomed to failure.”

The “Ad Hoc group” represents creditors holding about 2.5 billion euros of Heta’s senior bonds guaranteed by Carinthia. Among them are Commerzbank AG, FMS Wertmanagement AoeR and Pacific Investment Management Co.

A spokeswoman for Heta that it will provide more information to its creditors later this month, as the company announced in August. A spokeswoman of Carinthia’s finance secretary Gaby Schaunig declined to comment.

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