Hypo Alpe Law Jeopardizes Ratings at Austrian Banks: Euro Credit

Jun 11, 2014 8:40 am ET

(For more on European debt, click here. To receive an alert for this column, click SALT EUCREDIT.)

June 11 (Bloomberg) -- Austria is pushing forward with a plan to bypass a state guarantee and impose losses on investors in a bank that cost taxpayers billions to bail out and now may cost other lenders their credit ratings.

Finance Minister Michael Spindelegger is due to present legislation today that’s designed to include holders of 900 million euros ($1.2 billion) of subordinated bonds in helping cover losses at Hypo Alpe-Adria-Bank International AG. The act will effectively renege on a guarantee given by the Austrian state of Carinthia. Seven Austrian banks may have their ratings cut because it undermines the government’s commitment to backstopping lenders, Standard & Poor’s said yesterday.

“We still don’t understand why you would open such a can of worms for just 900 million euros,” said Philipp Jaeger, a bond analyst at Berenberg Bank based in Frankfurt. “Our concern isn’t even primarily Hypo Alpe, it’s the possible collateral damage for other guaranteed debt.”

Spindelegger in March ruled out insolvency for Hypo Alpe, sparing holders of about 11 billion euros of senior bonds from losses. Heeding the advice of Austria’s financial elite in the face of public anger over rescuing the bank, he promised instead to tap other sources for sharing the cost of shutting down Hypo Alpe, including junior securities and former owners.

‘Bad Bank’

Hypo Alpe has cost Austrian taxpayers 5.5 billion euros since its emergency rescue in 2009, and more than 3 billion euros are expected to be needed still to fund its wind-down, according to the Finance Ministry.

The new legislation’s main purpose is to split the bank into a “bad bank” with roughly 18 billion euros of assets to wind down, and a “good bank” consisting of Hypo Alpe’s banks in former Yugoslavia, which are currently being sold.

The second part of the law will impose the losses on junior bonds. The Finance Ministry reiterated that senior bonds remain sacrosanct, and a 1 billion-euro subordinated bond sold in 2012 with a federal guarantee won’t be touched either. Spindelegger and his officials haven’t elaborated on the legal details.

Trading in Hypo Alpe’s junior bonds is relatively thin. A subordinated 230 million-euro bond due 2017 is being bid for at 59 cents on the euro, according to Bloomberg evaluated prices.


The senior bonds have rallied since Spindelegger’s pledge to spare them. The 2 billion-euro 4.375 percent bond due 2017 traded at a bid yield of 3.813 percent yesterday, according to Bloomberg composite prices, after widening to as much as 11.82 percent in February.

S&P yesterday put the debt rating of Austria’s three biggest banks and of several state-owned lenders under review for a possible downgrade because of Austria’s “extraordinary” move. Moody’s Investors Service last month downgraded Hypo Alpe’s guaranteed bonds, including the senior securities, to junk, saying Austria’s plans devalued its guarantees.

“This extraordinary development, which was not our base- case expectation, may trigger a lowering of our ratings on Austrian banks,” S&P said in the statement. “The proposed law indicates increasing uncertainty of potential extraordinary state support for the banking sector in times of stress.”

Imposing losses on bondholders, or “bailing in” in the industry jargon, is an important part of new bank rules designed to avoid a repeat of taxpayer-funded bailouts.

Complicated Legacy

“We are now, step by step, going to a situation of bail- in,” Eurogroup Chairman Jeroen Dijsselbloem told reporters in Vienna yesterday. “Investors in banks, both shareholders and bondholders, will not only go away with the profits, but also, if necessary, with the losses.”

While he didn’t comment further on Hypo Alpe, two factors complicate the case. First, it’s a legacy issue for which the new rules aren’t applicable. More importantly, both the senior and the junior bonds were issued under a guarantee by its then owner, the province of Carinthia. Reneging on that guarantee is independent of the seniority of the underlying security.

“Loss participation of the subordinated guaranteed debt holders would only be possible through strong interference into the property rights of the respective debt holders,” Barclays Plc analysts Fritz Engelhard and Jussi Harju said in a note.

That de-facto expropriation could cast doubt over as much as 69 billion euros in debt guaranteed by other Austrian provinces, mostly for legacy bank debt to Hypo Alpe’s counterparts in other regions, the Barclays analysts said.

A jump in the yield of Hypo Alpe’s senior bonds following the Moody’s downgrade showed that investors are very sensitive to the situation, according to Eva Olsson, an analyst at Mitsubishi UFJ Securities in London.

“The market doesn’t view the Austrian politicians as particularly credible and that’s the underlying issue here,” Olsson said in a telephone interview. “The market moves on this because they have the feeling there’s very little to hold on to among the Austrian politicians.”

--With assistance from Alexander Weber in Vienna and Charles Daly in Stockholm.