Austria May Dodge Provincial Default as Heta Deal Reached

  • Non-binding deal implies 10% haircut on state-guaranteed debt
  • German bad bank FMS shuns deal, Frankfurt court ruling looms

Austria and a group of Heta Asset Resolution AG creditors agreed to a 10 percent reduction on 11 billion euros ($12.4 billion) of state-guaranteed debt in a preliminary deal to prevent the country’s first provincial insolvency.

The accord, signed by Finance Minister Hans Joerg Schelling and holders of about half the outstanding securities, including Commerzbank AG and Pacific Investment Management Co., is a first step toward a binding deal, the creditor group said Wednesday. German court cases brought by holdouts could still upset the agreement, which also needs European Union approval.

“The process to resolve the Heta problem starts today,” said Friedrich Munsberg, the head of Dexia SA’s German unit and representative of the creditors, speaking alongside Schelling in Vienna. “We are facing significant losses, which will have to be borne by our clients, shareholders, and to some extent by German taxpayers.”

The creditors, mostly German banks and insurers, would effectively be granting debt relief to the province of Carinthia, a taboo in previous negotiations as they said the region was unwilling to pay rather than unable to do so, especially since Austria’s federal government could easily afford support. Creditors including the German insurance association had been blocking any compromise over Heta, saying it would set a bad precedent for 1.1 trillion euros of state-guaranteed debt in the euro area.

“It was a painful process,” said Munsberg, who in February ruled out even a 1 percent debt haircut. “We agreed to the compromise because we would have had to pursue onerous, expensive, multi-year court cases with an uncertain result.”

Heta turned into a source of acrimony and a burden on Austrian taxpayers after its emergency nationalization six years ago. Schelling has tried to share losses with Heta’s creditors after three of his predecessors failed to come to grips with the failed lender. After Schelling halted further capital injections, he triggered the first bank failure to be dealt with under the EU’s new bail-in rules.

Under the agreement, Carinthia will launch a public offer for the debt in September, using a structure similar to an attempt that failed earlier this year. Creditors will be offered 75 percent of face value in cash for Heta’s senior securities, and 30 percent for junior debt.

Carinthian SPV

They can then choose to receive that payout in form of a zero coupon bond issued by a Carinthian special purpose vehicle, which will have a duration of 13.5 years and a federal guarantee. Junior creditors will be able to exchange half of their claims for the zero-coupon bond, or alternatively the full amount into a 54-year zero-coupon bond, according to the term sheet.

The net present value of this offer, based on Wednesday’s yields for Austrian government debt, is about 90 percent of face value for senior bonds, and about 45 percent for junior debt, Berenberg Bank analysts led by Philipp Jaeger said in a note to clients.

The Austrian finance ministry said in a statement that 72 creditors, representing about 5 billion euros of Heta’s debt, signed up to the non-binding preliminary agreement. The offer will only go ahead if creditors representing at least two-thirds of the debt sign “irrevocable undertakings” to join.

Legal Certainty

“The out-of-court settlement is a good solution for everyone involved, and hopefully it ends this affair for good,” Schelling told reporters in Vienna. “The advantage is that we have legal certainty.”

The most prominent holdout to the deal is FMS Wertmanagement AoeR, the German bad bank of the failed Hypo Real Estate Holding AG. FMS has sued Heta in Frankfurt, and the next court session on June 9 may result in a verdict. The Austrian regulator FMA, which is overseeing Heta’s wind-down, has warned that a ruling forcing it to repay FMS could force Heta into a disorderly insolvency.

Those who have already agreed to settle represent 49 percent of Heta’s senior debt and 12 percent of the junior debt, the finance ministry said.

For those banks who heeded the European Central Bank’s advice and wrote down their Heta bonds to 50 percent of face value or more, the deal may boost this year’s results with a one-time gain. Dexia Kommunalbank AG said in a statement that it may book a gain of as much as 140 million euros on the deal. Deutsche Pfandbriefbank AG said it will have a 132 million-euro one-time gain, boosting its stock by as much as 5.3 percent in Frankfurt today.

Heta’s most liquid securities, a 2 billion-euro 4.375 percent bond due 2017 and a 1.25 billion-euro 4.25 percent bond due this year, jumped to about 90 cents on the euro, according to prices compiled by Bloomberg.

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