Carinthia Approves Heta Tender as Creditors Repeat Refusal

  • Province throws EU800m home loans into funding collateral pool
  • Creditors say insolvency threat so damaging it isn't credible

The Austrian province of Carinthia, creaking under debt guarantees for its state bank pledged in the 2000s, approved on Thursday a plan to borrow 1.2 billion euros ($1.3 billion) to help pay off creditors.

The assembly in the southern province voted in Klagenfurt in favor of the government’s proposal to borrow the funds from the federal treasury, the parliament’s speaker announced after the vote, which was broadcast via Internet. The money would be used for a discounted tender offer for 11 billion euros of bonds issued by Heta Asset Resolution AG, the “bad bank” of Carinthia’s failed former state bank.

Carinthia will use home support loans granted by the province to pledge 800 million euros as collateral, according to the approved plan. Like other Austrian provinces, Carinthia offers its citizen subsidized loans to buy homes or apartments, which some provinces have sold to investors. Its stock of home loans was 1.6 billion euros at the end of 2014, according to the province’s audit court.

Heta’s biggest creditor group, which holds 2.5 billion euros of Heta bonds, reiterated that it refuses the offer and insists on full repayment of the debt by Heta and Carinthia. The “Ad Hoc Group,” which includes Commerzbank AG, Pacific Investment Management Co., FMS Wertmanagement AoeR and several distressed debt funds, said it’s only ready to discuss an extension that would make repayment over an extended schedule feasible for Carinthia.

Heta is managing the remnants of Carinthia’s Hypo Alpe-Adria-Bank International AG, one of the most damaging Austrian bank failures after the 2008 financial crisis. Austria was forced to spend billions of euros to prop up Hypo Alpe after it had to nationalize the bank in 2009, angering voters and undermining the country’s credit rating.

Austrian Finance Minister Hans Joerg Schelling repeatedly said that the federal government won’t pay Carinthia’s debt if the Heta guarantees come due. That lack of support could result in the province’s insolvency, for which there is no legal framework in Austria. The creditors said the insolvency would increase the borrowing costs for Austria, its provinces and the banking sector to the tune of 1.66 billion euros per year.

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