EU Orders HSH Nordbank to Be Sold in 8 Billion-Euro Overhaul

  • Hamburg shipping lender to transfer faulty loans to bad bank
  • State owners get nod for 10 billion-euro guarantee as fees cut

HSH Nordbank AG’s state owners were ordered to sell the Hamburg shipping lender by 2019 at the latest following a deal with the European Union to split it in two and unshackle it from more than 8 billion euros ($9.1 billion) in faulty loans.

The company, which is 85 percent-owned by the northern German states of Hamburg and Schleswig-Holstein, will be divided into a holding unit and an operating subsidiary, which is to be sold no later than 24 months after binding EU approval expected by the middle of 2016, HSH, its owners and the European Commission said in separate statements on Monday. The EU agreed in principle to HSH transferring or selling the loans in the restructuring that will keep the bank afloat, while ruling that it should be wound down if the sales process fails.

The informal approval of HSH’s restructuring proposal comes after more than two years of negotiations that also involved Germany’s Federal Finance Ministry and the European Central Bank and removes the uncertainty over the bank’s immediate future after its owners fought a fate similar to WestLB AG, the German state-owned bank the EU shut down in 2012. Like its former Dusseldorf, Germany-based rival, HSH buckled under the excessive risk-taking of the pre-financial-crisis period with its strategy to transform itself from a regional lender to companies and savings banks into an investment house.

Under the terms of Monday’s agreement, the operating unit will hold all assets and liabilities of HSH as well as have access to the 10 billion-euro guarantee provided by the regional states, which the EU also approved. The two-year deadline to sell the unit may be extended by six months if the process is delayed for reasons outside the control of the bank or the states.

No Dividend

HSH will be prohibited from paying a dividend for the duration of the sale process, except for payments to the holding bank. It will also be prohibited from making payments on existing hybrid capital instruments.

With all liabilities shifting to the operating bank, the ruling is positive for bondholders as they will be creditors to a going concern bank, Otto Dichtl, a credit analyst at Stifel Nicolaus Europe Ltd. in London, said by phone. “It looks like that is true all the way down to the hybrid securities, including subordinated debt and hybrid debt,” Dichtl said.

Potential buyers of the operating unit may be other state-owned banks, private banks or private equity investors, he said.

“This is a positive step which creates the chance for the sale of an important part of the bank and can pave the way for a privatized, viable business to emerge from the sales process,” EU Competition Commissioner Margrethe Vestager said in the statement after a meeting with leaders of the states of Hamburg and Schleswig-Holstein in Brussels.

According to the ruling, HSH must shift about 6.2 billion euros in non-performing loans at market prices to a bad bank controlled by the states. The EU also ordered it to sell another 2 billion euros on the market.

The asset transfer will shrink HSH’s bad loans by more than half. These stood at 15.4 billion euros at the end of June, making up 23 percent of its total credit book, according to an August company presentation.

Losses resulting from the transfer may be covered by the 10 billion-euro state-guarantee that was also approved in principle by the EU, according to the statements. Once parked in the bad bank, the distressed assets may be sold on to investors with an appetite for risk such as hedge funds and private equity firms.

Stay Afloat

Hamburg and Schleswig-Holstein sought a restructuring that would keep the lender afloat, arguing that this would be less costly for taxpayers in the longer run than winding down the entire firm.

The state-owners supplied 3 billion euros of capital and a 10 billion-euro guarantee in 2009 to avert a collapse of HSH, while Germany’s bank rescue fund Soffin provided 17 billion euros in additional liquidity guarantees, steps the EU approved in September 2011.

Anticipating an upturn in the shipping industry, the lender lowered the guarantee to 7 billion euros in 2011, in part to save on fees. The reduction proved too hasty as the industry crisis worsened and HSH, two years later, asked its owners to restore the original guarantee, which the EU approved on a preliminary basis in June 2013.

The fees for the state guarantee will drop to 100 million euros a year from about 400 million euros, according to HSH. The holding will assume all other obligations under the guarantee, it said.

Lending Binge

One of five remaining German state-owned banks known as Landesbanken, HSH used its government backing to go on a lending binge that backfired when subprime contagion spread and recession hit. That legacy has thwarted the bank’s attempts to turn its fortunes around as the maritime industry goes through an extended slump and fees to maintain state guarantees erode its earnings even as it halved total assets to 108 billion euros and cut the number of employees to about 2,500 from more than 5,000.

Other German lenders that also had their state aid examined under EU competition rules include Hypo Real Estate Holding AG, Bayerische Landesbank and WestLB, which in June 2012 changed its name to Portigon Financial Services and became a portfolio manager for a bad bank set up to wind down its assets. Its corporate loan portfolio was transferred to Landesbank Hessen-Thueringen Girozentrale, while all other units were wound down.

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