Austria Opens Final Chapter in $12 Billion Heta Debt Dispute

  • Carinthia starts offer to buy bad bank’s senior debt at 90%
  • Parliamentary probe sees guarantees as cause for bank failure

Austria is attempting to turn the final pages on the history of Hypo Alpe-Adria-Bank International AG with a special-purpose-vehicle offer for about 11 billion euros ($12.3 billion) of the defunct lender’s debt.

Kaerntner Ausgleichszahlungs-Fonds, a trust created by the province of Carinthia to settle the arrears, invited bondholders and other creditors of Hypo Alpe’s bad bank, Heta Asset Resolution AG, to tender their debt. The offer was made in Austrian, German and Luxembourg newspaper advertisements on Tuesday. Creditors will receive as much as 90 percent of their claims, if at least two thirds of them accept.

“I’m convinced this is a good offer for all sides and that it will be accepted with the necessary majority,” said Carinthia’s governor Peter Kaiser in a statement. “This would finally liberate Carinthia from the debt guarantees that were like a sword of Damocles’ above its head.” Finance Minister Hans Joerg Schelling also reiterated that he expects the offer to go through this time.

The deal puts an end to more than a year of acrimony between Austria, the Carinthian province and the German banks and insurers who made up the majority of Heta’s investors. Schelling pulled the plug last year after Heta, which had piled up bad loans in the former Yugoslavia, had become a bottomless pit for taxpayer-funded bailouts. 

Bondholders cried foul, pointing to pre-crisis debt guarantees by Cartinhia, the bank’s former owner and home province. But Schelling demanded creditors share the burden, too, arguing that Carinthia’s guarantees had been so oversized that investors couldn’t have expected them to be legitimate. At its peak, the guarantees amounted to more than ten times the province’s annual budget and still remain more than five times as big.

Strained Relationship

The dispute has cast a pall over the Alpine country’s relationship to its northern neighbor: it threatened other Austrian banks’ plans to sell bonds in Germany, led German banks to bail out Duesseldorfer Hypothekenbank AG and prompted doubts about 1.1 trillion euros of state-guaranteed debt in Europe’s monetary union. In Austria, the debacle threatened to result in its first provincial insolvency.

The compromise published Tuesday by KAF was reached in May following the failure of a lower offer to attract sufficient investors. Senior creditors will now receive as much as 90 percent of their claims if they chose to be repaid with a zero-coupon bond issued by KAF and guaranteed by the federal government. Junior creditors will get 45 percent, according to the advertisements.

The duration of the zero bond will be calculated upon its issuance, so that its net present value will be 90 cents on the euro, according to the offer document. Using interest rate data from the end of August, the bond would come due in almost exactly 18 years.

If two thirds of Heta’s total outstanding debt and 25 percent of the junior debt accept the deal, it becomes binding. KAF committed to buy back the zero bonds for 180 days from Dec. 1, offering creditors the possibility of quick cash in return for their securities.

Red Lines

The deal forces both sides to walk back from red lines they had drawn in negotiations. Creditors effectively granted debt relief to Carinthia, a taboo in previous talks, when they said the region was unwilling rather than unable to pay -- especially since Austria’s federal government could have afforded the support. The southern Austrian province is contributing 1.2 billion euros under the revised deal.

“The province went to the limit of its economic and legal capacities,” Carinthia’s finance secretary Gaby Schaunig said in the statement. “It’s bitter that we have to pay such a high price for past sins.”

Finance Minister Schelling, on the other hand, was forced to improve his initial sweetener with tax money -- in the form of a bespoke zero-coupon bond -- even after he’d promised to spend no more on Heta after he walked away from the bank last year.

However, the deal contains face-saving devices for both sides. Due to the zero-coupon bond structure, investors can also say they get repaid at par -- even though that’s a few years off. Schelling can argue that the additional funds don’t go into Heta -- but to Carinthia’s rescue.

“This is a done deal,” said Frederick Gentis of Wallich & Matthes, an Amsterdam-based securities firm that specialises in illiquid and off-the-run investments. “I expect a few hedge funds to hold out but this is a good deal for everyone involved. It saves years of litigation and effectively means receiving par back which is what the creditors wanted.”

KAF will borrow the funds needed to make the payments from the federal government. To repay that debt, it will use Carinthia’s contribution as well as funds generated through the sale of Heta’s remaining assets, which the offer document puts at 6.4 billion euros. Austria’s federal government will cover any shortfall.

The closing of the debt deal coincides with the final rounds of a parliamentary investigation into the failure of Heta and its predecessor, Hypo Alpe. The draft report by the judge who oversaw the lawmakers’ probe concludes that the guarantees, which made winding-down Heta so difficult, were also the primary reason behind the lender’s failure because they encouraged bank management to take excessive risks in the pursuit of growth.

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