Bondholders fear a haircut on subordinated debt
One of Germany's largest regional Landesbanks, WestLB, announced on Tuesday that it is "engaged in intensive and constructive negotiations" with its largest owners and the German financial market stabilisation fund SoFFin, to rebuild its capital base after heavy structured finance losses.
The proposals are intended to fund a workout entity to ring-fence around EUR85bn in impaired assets on the bank's balance sheet, stemming from its exposure to real estate and structured investment vehicles (SIV).
The troubled bank said its main owners, the Savings Banks and Giro Associations of the Rhineland and Westphalia-Lippe, have entered discussions with SoFFin on the possibility of tapping the security reserve for Landesbanks, but the bank said it has not made any direct approach to the reserve itself. However, it acknowledges that "important legal liability issues have still to be clarified" before the restructuring plan can be put into effect.
"The difficulty appears centred on the extent to which WestLB's current owners will contribute to the restructuring cost," said Hank Calenti, financial institutions credit analyst at RBC Capital Markets in London.
The bank's capital needs are urgent. Mr Calenti said there was speculation in the market that WestLB might have to declare insolvency by November 30 if no restructuring deal was signed, and its perpetual bonds are trading at a heavy discount of around 36 cents per euro. However, five year credit default swap spreads on the bank are still relatively tight, at 92 basis points.
"The price disparity suggests that investors expect a bail-out with possible burden sharing by sub-debt investors," said Mr Calenti.
WestLB originally approached the regional government and its owners in February 2008, to help ring-fence around EUR23bn in at-risk assets, but the problems have accelerated since then. In addition, EU competition commissioner Neelie Kroes ruled in May 2009 that the bank should halve its balance sheet, to avoid the state assistance undermining competition in the market.
