Die “Bank of America” hat eine ausführliche Studie über die Lage der Hypo Alpe Adria (HAA) un die Auswirkungen auf die Finanzmärkte erstellt. Ganz interessante Lektüre: “The emerging crisis re: how to resolve Austria’s Hypo Alpe Adria (HAA) looks like it’s already one destined for the textbooks.
It has been rumbling around in our ‘bank peripheral vision’ for years as a problem child but now seems to be coming to a head because of what appears to be increased political pressure for a solution that potentially involves the imposition of senior bondholder losses in the mix. As such, we need to look at it to see what read-across, if any, there is to other European banks, as it seems to represent a hardening of attitudes to bank resolution amongst one of Europe’s richest countries.
We do not express an opinion or investment recommendation on the securities of HAA itself. Using conventional bank analysis, we believe that HAA is potentially uninvestable not only because of its evident non-viability and the lack of appetite to save it but also because of the allegations of past misconduct, as widely reported in the press, and what appears to be ongoing incompetence e.g. leasing invoicing ‘irregularities’ in Italy provided against as recently as in 1H13 numbers. The outcome for bondholders will ultimately be based on Austria’s view of its obligations and how it deals with the Carinthia guarantee, in our view. We expect that prices will therefore trade according to the last comment from someone important – highly unpredictable. For example, they were down on Friday following comments from the Austrian FinMin, but up this morning on comments over the weekend from the Head of the Austrian Central Bank. A final decision on what happens could be many months out.
For us, the shock of the current situation is not so much about bail-in being applied in the case of a failed bank – like most credit investors, we are used to this by now. The real surprise of the situation is the sight of the third richest country in Europe by per capita income apparently trying to manoeuvre out of paying what are clearly guaranteed debts (HAA debt is guaranteed by the State of Carinthia). We would consider it an astonishing turn of events if this actually ever came to pass, with wide ranging negative implications for investors in not just Austria but Europe as a whole.
The read across from HAA to other banks is weak, in our view. However, there are a few implications to highlight which may impact spreads.
The most directly impacted bank would seem to be Bayerische Landesbank (BYLAN), former owner of the bank and where there is still some outstanding exposure. BofAML analyst Jeroen Julius talked about this in his note on BYLAN last week here. We remain Underweight-70% the BYLAN 5.75% T2 bonds. There is still an outstanding line of €2.3bn from BYLAN to HAA of which we understand €1.8bn was due at end 2013 – by March (if not sooner) then this will need to move to an impaired classification. HAA is saying that these monies are an equity substitute and are trying to claw back €2.3bn already repaid. Our view is that BYLAN may sacrifice some of the outstanding amount in any settlement but seem unlikely to have to pay back the repaid amount. In the meantime, it seems that they do have a say in some of the levers which Austria may want to use in resolving HAA, so their negotiating stance looks solid.
Other widely traded banks where spreads could come under pressure are Erste Bank and RBI. We will likely see these banks trade as proxies in any negative newsflow which could pressure their spreads – their illiquid CDS is probably already trading some 10-15bps wider in senior and ~13bps wider in sub CDS. These banks should be much more sensitive to negative news from Central and Eastern Europe rather than Austria though, in our view, given their focus on emerging economies.
RBI’s exposure to Austria reflects its domicile and the corporate ties between Austrian companies and the EE corporates where most of RBI’s operations are placed. It does not have direct exposure to the Austrian complex in the way that e.g. BAWAG or Erste Bank have. The RBIAV 6% is probably down a point from its highs in the last week or so. We see the impact on RBI as quite tangential: if Austria takes a tough stance with bondholders, it’s more negative for sentiment on the banks, given that it implies a reduced sovereign exposure – so hardly negative for the sovereign from e.g. higher debt levels, albeit lower contingent liabilities.
About half of Erste Bank’s credit risk exposure is to Austria. It is therefore more of an ‘Austrian’ bank than RBI but that’s not really the problem here, in our view.
We are still very comfortable with RBI at this point, especially given the recent capital increase. However, we recommend reducing risk by switching into lower cash priced bonds versus higher cash price bonds. That means out of e.g. the 6.625% bond with a cash price of about €113 into lower cash priced bonds like the 6% (€106.5) or the 5.163%, though this is a much more illiquid security. We downgrade the 6.625% bonds to Underweight-30%.
The wider implications of what happens in the HAA case include:
If we do move to some kind of forced loss imposition from Austria on these bonds, then it probably isn’t a good moment for bank risk (or indeed European risk). However, as we explain, in this case loss imposition is rather tricky to do, given the existence of the guarantees from Carinthia.
Whatever happens, we see the HAA situation as reflecting a growing impatience with marginal and near-failing banks and that a hard line is likely to be followed in resolving them. It underlines that we have moved to a bail-in regime where investors will contribute to the costs of bank clean-up. This has implications for other very marginal banks e.g. the Cooperative Bank in the UK which we think is struggling. Underweight-70% the 11% T2 bonds of the Coop Bank at £123.
The Carinthia guarantee is a throwback to a very different banking world – when banks enjoyed implicit and explicit institutional support. Those days are over. Such support often allowed excessive expansion on the back of cheap funding – we can point to the continued need for adjustment in the Landesbank sector for evidence of that.
One final point: in our view there would be a negative read-across to the German Landesbanken more generally if a way was found around the deficiency guarantee in this case. The Landesbanken heavily rely on State guarantees. For example, HSH Nordbank has a €10bn guarantee (that helps its capital position) form Hamburg and Schleswig- Holstein.
Funny HAA HAA or funny peculiar?
A special case?
We think there is a good argument for saying that HAA is a special case amongst European banks. One can read its downfall and subsequent full nationalization as a familiar juxtaposition of overexpansion (in the former Yugoslavia) without sufficient risk controls being in place as a result of too cheap funding, owing to its funding guarantee from the Austrian State of Carinthia (currently rated A2 by Moody’s). Yet the narrative is worsened by allegations of serious past misconduct involving money laundering, fraud and possibly murder. See for example The Economist, Sept 9th 2010 or the New York Times, October 20th 2010.
Whilst mismanagement may well have been a feature of some European banks before the crisis; we would hesitate to attribute this level of alleged misconduct, however, to even many of the most stressed European banks. The nature of the allegations, in our view, serves to underline Austrian public antipathy for taxpayers having to pay for the continuing losses at the bank. It also differentiates it sharply from other European, and of course Austrian, banks. HAA’s situation and alleged misconduct is simply too severe to have systemic implications for other Austrian banks, in our view.
Could there be a haircut? Wait!
Bloomberg reports that two thirds of the Austrian public is against the use of further public monies being used to prop up the bank. With such a powerful consensus against such a move and elections next year, it’s not surprising that recently the rhetoric has turned firmly towards finding solutions for HAA that involve imposing losses somewhere – anywhere – other than at the door of the Austrian taxpayer. Hence, the comments from the Finance Minister Spindelegger on Feb 21 that Austria was looking at ways to get bondholders to contribute.
So far, so straightforward: the only problem is that the bulk of HAA senior bonds enjoy a deficiency guarantee from the State of Carinthia. This complicates the burden sharing. We note, by the way, that the EC ruling on State Aid for HAA made no mention of senior bondholder losses at all. Is it really possible to get around the deficiency guarantee and impose losses?
Our understanding is that the deficiency guarantee is not quite like other guarantees. It’s this ‘gap’ that allowed Moody’s to downgrade HAA to Baa2 from A1 on Feb 14. It means that a creditor must have attempted in vain to satisfy his or her claims against (in this case) HAA first before he can use the guarantee, though not if bankruptcy proceedings were already started. Non-payment alone may not be sufficient to invoke the guarantee, absent due process. Even so, it still looks to us that it’s just a matter of time before creditors could ask Carinthia to satisfy their claims. It seems doubtful that the State could afford to perform on the guarantee however with the €12.3bn or more of bonds being many multiples of Carinthia’s income, according to Moody’s. It seems hardly credible that we could be looking at bankruptcy of a Federal State of one of the richest countries in Europe.
Hence, the dilemma. This really would be a new departure for a European country – we’ve had bondholder haircuts before, but not on instruments guaranteed by a governmental entity like Carinthia.
What’s the size of the hole at HAA?
The European Commission in its decision on State Aid (dated 3rd Sept 2013) puts the capital need at €5.4bn in its stressed, or worst case, scenario. Similarly, the liquidity needs are put at €3.3bn in the stressed scenario, assuming that the above capital is provided in cash, meaning that the total outlay could be as high as €8.7bn, in addition to the billions that have already been committed by the current and former shareholders. HAA’s total assets as of June 2013 were ‘only’ €31.3bn, remember, and of this, €3.5bn was already earmarked as for disposal – giving a pro forma number of €27.8bn. To put this in further context, existing capital resources at HAA (equity plus sub debt) are €3bn, and provisions existing already are €3.5bn. Loans net of provisions are ~€17bn.
The now former Chairman of the Bank, Mr. Liebscher, has previously commented that HAA could require up to €4bn of further capital (‘only €400mn a year over 10 years’). Capital needs could vary considerably if assets were transferred out of the regulatory capital environment e.g. to an asset management company, since these require much less capital. We note too that Weiner has reported that the loss for the year at HAA may have grown to €1.8bn (from the €0.8bn at half year 2013) – we think it’s likely that is already reflected in the EC’s numbers though we’re not completely sure.
The €5.4bn of capital needs calculated by the EC could be higher or lower therefore but let’s use it as a basis for thinking about outcomes. Are there any offsets? Certainly,
HAA believes so. It is claiming that €4.6bn of funds extended to the bank in 2008 by BayernLB is an equity substitution under Austrian Law. €2.3bn of this is still outstanding (it’s not being serviced by HAA) but HAA has applied to the Munich Regional Court for a return of amounts that they’ve already paid back. Our core case is that BayernLB will lose some of this money (if only to settle the case) but we have no real idea how much they and HAA would settle at, of course, or if they will settle at all.
How (much) could bondholders pay?
Is it conceivable that the senior bondholders could be expected to contribute a sizeable chunk of the €5.4bn? As of end-June 2013, issued bonds at HAA totaled €11.1bn (we exclude Pfandbriefe); we don’t have data for any redemptions in 2H13. We do however know that there is a very substantial redemption of senior debt on March 17th of €750m (the HAA 3.75% bond). Again, the interim financials showed a cash balance of €2.6bn at the bank which on its own should comfortably cover the repayment. We are more skeptical about HAA’s liquidity, given the continued deterioration of its financial position implied by the reported further €1bn loss in 2H13. Perhaps it is this that is focusing the attention of Austrian policymakers on bondholders.
Repaying this bond would be a substantial cash outflow from the bank and bondholders would be getting par – these bonds are currently quoted at a mid-cash price of ~€96 but the bid/offer is something like 5 points, underlining the huge uncertainty. But it would also probably be taken as a pointer towards future treatment of bonds and so, if repaid, would likely positively impact prices.
The €5.4bn additional capital need would imply a forced senior bondholder haircut of anything from 20% upwards in our view depending on what is considered the pool of bailin-able liabilities, though admittedly we find it quite hard to believe this will be the actual outcome at this point. This number could be kept down not least by any settlement with BayernLB – and we can’t really imagine that Austria will make a zero contribution here. Even the €5.4bn total capital needs number calculated by the EC is ‘only’ about 2% of Austrian GDP.
We also struggle to see how those positing bondholder losses get around the guarantee from Carinthia and all that implies. It’s this, we think, that is the really interesting part for European bank bondholders. We have seen headlines suggesting that the Republic of Austria would substitute itself as guarantor for the bonds, subject to bondholders agreeing to a substantial haircut. When the bonds were at par, that looked really unlikely, but with e.g. the 2016 and 2017 bonds having traded down so dramatically in the last few days (currently quoted with a cash price at around €85-86), perhaps the conditions are beginning to evolve for this type of liability management.
Ultimately, we think it’s unlikely that Carinthia could pay back bondholders and remain solvent itself – as Moody’s highlights in its downgrade of the State on Feb 14 2014, the debt outstanding is some six times Carinthia’s 2013 budgeted operating revenue. Recall that HAA is 100% owned by the Republic of Austria – it seems unlikely that the shareholder would enforce the insolvency of a regional State without acting itself.
We also wonder if there is some leeway in terms of the timing difference implied by the final payment under the deficiency guarantee – how prompt might this be? Months? Years? Longer? If it could be demonstrated that bondholders would have to wait many years before getting any of their principal back, then perhaps there is the basis for an offer that gives investors liquidity today, albeit at a discounted price.
What could induce bondholders to agree to any changes?
We suspect that this is currently under consideration – there likely is little limit to the scenarios that could be conceived, but it all depends on the view the Republic takes of itself in the markets and its concerns about any likely fallout from its actions. Freezing the liabilities of the bank and the guarantee? Rescission of the guarantee? Anything is possible but perhaps some of these worst scenarios are not the most probable. However, what is clear is that the outcome for bondholders, as we have seen before in these haircut scenarios, is highly unpredictable and politicized.
In spite of the Austrian Finance Minister’s comments to the contrary, we are of the view that most HAA bonds are still with the original, investment grade, investor base. We believe that the rotation into ‘trader’ or ‘hot money’ hands is probably only still at the beginning – only recently have we heard that blocks of bonds have been coming out, rather than the trading of very small amounts. This could change rapidly in the coming weeks if Austria decides to step up the bondholder loss rhetoric of course but at this point, it would be ordinary money managers, we think, who would be absorbing most of the losses, not hot money or speculators.
As an added twist, we note that HAA bonds issued under the August 2006 Prospectus are under German Law (rather than Austrian). Again, this points in the direction of either repayment of the bonds under the guarantee, or a negotiated settlement with bondholders, rather than the imposition of an arrangement by the Austrian Government, since legally they may not have the flexibility to do much else.
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In conclusion all we have to add is that it would indeed be supremely ironic if the “strong” foreign law bond indenture would be tested, and breached, not by Greek bonds, as so many expected in late 2011 and early 2012, but by one of the last contries in Europe which is still AAA-rated. We would find it less ironic if the next leg of the global financial crisis was once again unleashed by an Austrian bank: after all history does rhyme… (via “Zerohedge“)