Schelling Makes Last-Ditch Heta Offer to German Bondholders

  • Bad bank debt tender offer sweetened with special security
  • Carinthia's offer to Heta's bondholders expires March 11

Austrian Finance Minister Hans Joerg Schelling ventured into the lion’s den to make his final sales pitch to German creditors of bad bank Heta Asset Resolution AG.

Speaking in Frankfurt on Tuesday evening, Schelling made a last-ditch offer to an audience representing the biggest group of Heta’s creditors: accept a discounted offer for Heta’s bonds before March 11, and offset part of your loss by buying a special government bond at a below-market price.

Hans Joerg Schelling

Photographer: Akos Stiller/Bloomberg

“It improves the chance that the offer will be accepted,” said Otto Dichtl, an analyst at Stifel Nicolaus Europe Ltd. “The question for the other side is if they can let go of their entrenched public position. Considering the circumstances it is not a bad offer.”

Heta, a former state bank loaded with bad loans in the Balkans, has turned into a nightmare for Austrian taxpayers since its emergency nationalization six years ago. Three of Schelling’s predecessors failed to come to grips with it before he tried to turn the tables and share some of the losses with Heta’s creditors. When he halted further capital injections, he triggered a debt moratorium that has been in place since March 1, 2015.

The Austrian province of Carinthia is offering to buy 10.8 billion euros ($11.7 billion) of Heta’s bonds to neutralize guarantees it gave for its former state bank. It’s bidding 75 percent of face value for senior debt and 30 percent for juniors. The deal needs acceptance by two-thirds of creditors to succeed. Bondholder groups claiming to represent 5.5 billion euros of debt have said they reject the offer.

Schelling offered investors who tender their bonds to become eligible to buy 18-year zero-coupon notes issued by the Austrian Treasury at 75 percent of face value with the cash they receive in the buyout. A zero-coupon bond is a debt security that doesn’t pay interest but is traded at a discount, generating profit at maturity when the bond is redeemed for 100 percent.

‘Safe Asset’

The bond’s return is equivalent to a yield of 1.61 percent, according to the Finance Ministry. That compares with the Treasury’s bond maturing in 2034, which is currently bid to yield 1.124 percent, according to prices compiled by Bloomberg. 

A zero-coupon note maturing in 18 years priced for that yield would be worth about 82 cents on the euro today, or about 9 percent more than what investors could buy it for, according to calculations by Bloomberg News.

“The idea is that we pay out cash and those funds can be invested in a long-term safe asset,” Schelling said. “What you get is an Austrian bond with federal backing.”

To be sure, some of Heta’s creditors, led by German creditors such as Dexia SA’s German wind-down unit Dexia Kommunalbank AG and bad bank FMS Wertmanagement AoeR, have fiercely opposed Carinthia’s offer and may find it difficult to climb down. German banks and insurers are owed about 7 billion euros by Heta, according to the Bundesbank.

Deutsche Pfandbriefbank AG, one of the biggest known creditors with a 395 million-euro holding and a member of the holdout group, said it would review Schelling’s proposal. “The new offer is an admission that the Republic of Austria wants to take responsibility,” Andreas Arndt, Depfa’s co-CEO, told journalists in Munich.

‘Debt Extension’

“The sweetener is not as sweet if you look at the debt extension and upside after 18 years,” said Frederick Gentis of Wallich & Matthes, a fixed-income trader specializing in German and Austrian deficiency guarantees. “Some smaller investors might take this, but the two large creditor groups will not be impressed.”

A spokeswoman for the creditor groups had no immediate comment.

Schelling told his audience in Frankfurt that they shouldn’t expect a better deal if they don’t take up Carinthia’s offer by Friday next week.

“When March 11 passes, the offer is dead and there won’t be another,” he said. “There’s a short window for a solution, and if we don’t find one, it won’t get better.”

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