Creditors Scuttle Austrian Bid to Dodge Carinthia Insolvency

  • Creditor group in lock-up agreement won't sell at discount
  • Insolvency of Carinthia negative for Austria, creditors say

Creditors of Heta Asset Resolution AG who say they control more than 5 billion euros ($5.5 billion) of the bad bank’s debt won’t sell at a discount, highlighting the battle Austria faces as it tries to share losses with creditors and prevent a provincial insolvency.

The Austrian state of Carinthia, which has guaranteed 11 billion euros of Heta’s debt and is offering to buy it up for about 3 billion euros less than the face value, is able to fully pay up, the creditors said in a statement on Thursday. If they stick to a December lock-up pact, Carinthia won’t be able to get the two thirds acceptances it needs. The offer period expires March 11.

“Any offer that does not provide for a full repayment of the creditors’ claims is inconsistent with the statutory concept of risk-free gilt-edged investments.,” the creditors -- including Commerzbank AG, Dexia SA’s German unit and Deutsche Pfandbriefbank AG -- said in the statement. “Carinthia is clearly able to pay its Heta guarantee obligations in full.”

Kaerntner Ausgleichszahlungs-Fonds, a special purpose vehicle set up by Carinthia, offered to buy the guaranteed Heta bonds early on Thursday. It’s offering 75 percent of face value plus accrued interest for Heta’s senior debt and 30 percent for junior liabilities. Senior Carinthia-guaranteed debt totaled 10.2 billion euros, according to Heta, while 890 million euros are subordinated.

The creditors upheld their opposition even after Carinthia’s offer documentation revealed a sweetener that will only be paid to those who accept the discounted bond deal. On top of Heta’s expected recovery and a contribution from Carinthia, creditors agreeing to the terms would receive a 588 million euro “voluntary premium,” which was also meant to “reflect market conditions prior to the launch,” according to the document.

Austrian Finance Minister Hans Joerg Schelling on Wednesday urged investors to be “rational” and choose the “excellent” offer over lengthy legal battles. There will be no more negotiations and if the bid fails, Heta and Carinthia could both become insolvent, Schelling said.

As the country has no special rules for a provincial insolvency, officials as well as creditors would enter uncharted legal terrain. As this would result in rising financing costs for Austria, the discussion is “irresponsible,” according to the creditors. They repeated their readiness to negotiate a long-term payment plan for Carinthia.

Heta’s biggest securities, a 2 billion-euro 4.375 percent bond due 2017 and a 1.25 billion-euro 4.25 percent note due 2016, have both risen to around 75 cents on the euro from about 68 cents since the offer was announced early on Wednesday.

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