Austria’s Heta Drama Ends With 99% of Bondholders Accepting Deal

  • Bondholders take offer with 10% discount; late buyers profit
  • Damage for taxpayers limited thanks to low sovereign rates

For bondholders, Austria’s worst postwar bank failure is almost over.

Creditors owning 98.7 percent of the 11 billion euros ($12.3 billion) of debt issued by bad bank Heta Asset Resolution AG accepted a discounted offer from the Carinthia province, the bank’s former owner, the vehicle managing the tender said on Monday. The deal prevented an unprecedented provincial insolvency in a core euro-area country.

“We’ve finally dealt with the trouble a previous government got us into with its reckless borrowing,” the Carinthia province’s governor, Peter Kaiser, said on Austrian public radio station Oe1. “This was a joint effort of the federal and provincial governments, and I’ll be very glad when we’ve put this behind us.”

Austria last year started the effort to draw a line under years of taxpayer-funded bailouts of Heta and its predecessor, Hypo Alpe-Adria-Bank International AG, which crumbled under bad loans in the former Yugoslavia. Finance Minister Hans Joerg Schelling, who is funding the deal via the Austrian Treasury, sweetened an earlier tender offer to ensure acceptance.

Under the terms of the deal, creditors can choose to receive zero-coupon bonds in exchange for their Heta debt. Senior bonds, which make up the vast majority of the offer, can be swapped for a security with a net present value of 90 cents on the euro. Junior creditors have the choice between a zero-coupon bond or a Schuldschein loan, both worth around 45 percent of face value.

Debt Moratorium

European regulators forced banks including Commerzbank AG and Deutsche Pfandbriefbank AG to write down the bonds by 50 percent when Heta was put under a debt moratorium in 2015. Those banks will be able to book windfall gains this year, according to Moody’s Investors Service.

“The resulting one-off gains and elimination of uncertainty about these illiquid assets’ values are credit positive for the exposed banks,” Moody’s said.

The deal is even more profitable for the hedge fund investors who bought Heta at distressed prices in 2015. Heta’s most liquid senior bonds had dropped to as little as 47 percent of face value in February 2015 and traded in the 50s and 60s for much of 2015. Distressed debt specialists who owned Heta bonds included Bybrook Capital, Canyon Capital Advisors, Cyrus Capital Partners, Farallon Capital Europe, Knighthead Capital Management, and Redwood Capital Management.

Debt Guarantees

The offer became necessary after Carinthia, with an annual budget of less than 3 billion euros, said it wouldn’t honor the debt guarantees it had issued for Heta’s predecessor, Hypo Alpe. The province will now contribute 1.2 billion euros to fund the deal.

On top of that, the federal government will invest about 8 billion euros in the transaction. Those funds are effectively turned into a claim on Heta’s wind-down proceeds, the money the bad bank manages to raise with the sale of non-performing loans, real estate and other assets such as cars and yachts. Heta’s current plan foresees 7.7 billion euros of residual cash in 2020.

Austria’s federal government has so far pumped 5.5 billion euros into the bad bank, and pre-paid 1.2 billion euros to the German state of Bavaria, whose Bayerische Landesbank, a former owner of Hypo Alpe was the bank’s single-biggest creditor.

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