Austrian province of Carinthia becomes a BRRD test case

Austria, famous for its rivers and mountain scenery, is likely to also go down in history as the country setting precedents in EU banking regulation. Financial difficulties at its Hypo Alpe Adria bank, which came to light during the global financial crisis, required financial assistance from the Austrian government and taxpayers. But with the EU’s adoption of a single rulebook for the resolution of large banks and investment firms through the Bank Recovery and Resolution Directive (BRRD), the ramifications of the difficulties now make the remnant of the bank a blueprint for resolution and restructurings.

Hypo Alpe Adria, headquartered in Austria’s most southerly province of Carinthia and formerly majority owned by Germany’s BayernLB, was nationalised in December 2009 when faced with high non-performing exposures, especially in its central and eastern European (CEE) subsidiaries and low capitalisation.

Fast-forward to 2014 and the resolution of the group had still to be concluded. Having sold the domestic branches to Indian entrepreneur Sanjeev Kanoria’s Austrian Anadi Bank in 2013, the government decided to split off bad bank Heta Asset Resolution, while the healthy CEE sections ended up at Hypo Group Alpe Adria, purchased by private equity firm Advent International and the European Bank for Reconstruction and Development.

Heta’s wind-down and resolution have since made headlines, mainly for the lack of agreement between holders of bonds in the old Hypo Alpe Adria, now Heta, and its owners and guarantors, the Austrian state and Carinthia. Yet there has been some movement, largely due to the BRRD.

Liquidation target

As the costs turned out to be higher than expected, as outlined within the EU-agreed resolution plan, Austria’s Financial Market Authority (FMA) – Heta’s resolution authority as of the BRRD – imposed a moratorium on interest payments in 2015. More significantly, in April the FMA announced details of a resolution of Heta. These include measures such as a 100% bail-in for all subordinated liabilities, a 53.98% bail-in for all eligible preferential liabilities, the cancellation of all interest payments from March 1, 2015, when Heta was placed into resolution pursuant to BRRD, as well as a harmonisation of the maturities of all eligible liabilities to December 31, 2023.

“The wind-down is in progress. It should be carried out until 2020 and Heta should be liquidated by 2023,” says Helmut Ettl, a member of the executive board at the FMA. “We expect the bail-in to be sufficient to cover the costs of the wind-down so that at the end we get zero or even a profit, which we can distribute.”

He adds that the Heta resolution is unique in that Carinthia is the guarantor for Heta’s securities, which means that the final word between creditors and guarantors has likely not been had just yet.

“Heta is the first case in Europe where we are executing a resolution according to the BRRD,” says Mr Ettl. “What we can see now is that this EU directive is being tested in the judicial system from all sides.”

A guaranteed return?

While the resolution process has been imposed by the FMA in accordance with EU regulation, it remains to be seen whether or not creditors can seek reimbursement of their losses from the province of Carinthia as Heta’s guarantor.

“This is a question that is outside the resolution responsibility of the FMA and outside of the sphere of Heta,” says Mr Ettl. “This is between creditors and guarantors, although the outcome is an inherently political question for Austria.”

The province, with the support of the Republic of Austria, tabled a restructuring proposal offering bondholders 75% of the value of their bonds plus interest – an offer that was increased to 83%, but which was rejected by Heta creditors.

According to credit rating agency Fitch, the sovereign guarantee of the Heta bonds includes losses such as a write-down and conversion into equity “due to regulatory or other developments including statutory loss-absorption”, which should see the sovereign “ensure continued and punctual payment of the originally guaranteed amounts”.

The Austrian government has taken over interest payments in accordance with its original terms since the moratorium imposed by the FMA began in March 2015, and Fitch believes the government “has very little incentive not to honour its guarantee as doing so would severely and durably damage its own standing in the capital markets”.