A general view of the headquarters of defunct Austrian lender Hypo Alpe Adria in Klagenfurt. The German Federal Finance Ministry said it welcomes the decision by the Association of German Banks, or BdB, to provide guarantees to DuessHyp to limit contagion from Heta.

Bloomberg/Frankfurt


German regulators are assessing the fallout from the collapse of Heta Asset Resolution after covered-bond issuer Duesseldorfer Hypothekenbank was rescued on Sunday.
The Federal Finance Ministry said it welcomes the decision late Sunday by the Association of German Banks, or BdB, to provide guarantees to DuessHyp to limit contagion from Heta. It’s the second time BdB’s deposit protection fund has come to the German bank’s aid. The group acquired Dusseldorf-based DuessHyp in 2008 after write-downs tied to US subprime assets, before selling it to Lone Star funds in 2010.
Financial regulator “Bafin and the Federal Agency for Financial Market Stabilization were prepared at all times to take crisis measures in accordance with banking regulation law and new bank resolution rules,” the Finance Ministry said in a statement yesterday. “Bafin and the Bundesbank continue to analyse the effects” of the fallout from Heta, it said.
Austria’s decision to pull the plug on the “bad bank” of failed Hypo Alpe-Adria-Bank International is hitting German banks hardest, with DuessHyp becoming the first German institution threatened with collapse as a result of the actions.
It’s among at least nine German institutions to disclose Heta bond-holdings totalling at least €2.3bn ($2.4bn) since the March 1 decision. Fitch Ratings estimates Heta losses will erase about €3bn from the German banking industry’s profit this year.
DuessHyp refinances itself by issuing Pfandbriefe, a type of covered bond sacrosanct in Germany as being devoid of default risk. In its 2013 annual report, the bank said it held €348mn of Heta bonds, which stood against €250mn of core capital.
DuessHyp’s Heta exposure “is closely monitored,” the bank said in its first-half report last year. Its net loss in the period widened to €25.9mn, compared with €19.5mn a year earlier.
“Covered bonds have had huge success in Germany and never had a default,” Andreas Wieland, a local partner at White & Case law firm in Frankfurt. “The German state and the country’s banks will do everything they can to stop that from changing. There is some nervousness in the Pfandbrief market, but there’s certainly no panic.”
Heta’s bondholders have relied on debt guarantees by the Austrian province of Carinthia, which owned the bank until 2007. Those guarantees made the securities eligible as collateral for Pfandbriefe.
Carinthia, which is still on the hook for more than €10bn of Heta’s debt, said last week it probably won’t be able to shoulder the losses on its own and has asked Austria’s federal government for credit and started preparations for a potential insolvency as a result.
Heta marks the first time authorities are winding down a bank under the new European Bank Recovery and Resolution Directive, rules that demand that creditors share losses of failed financial institutions. Austria, Germany and the UK have brought forward to this year the start of the rules allowing bondholder bail-ins. They kick in from next year in the other EU countries.
Fitch Ratings singled out DuessHyp last week, warning that the bank with just €12bn in total assets will probably need to be rescued once again over its Heta holdings.
The last time BdB applied the protection fund was in 2012 for Valovis Bank, after failure to find a buyer for the former bank of retail chain KarstadtQuelle.
Lone Star agreed to sell DuessHyp in August to a group including Attestor Capital and Patrick Bettscheider, a deal that had still been awaiting approval by German regulators. The investor group was asked on Sunday by the BdB to step back from the sale and purchase agreement, according to Robert Grassinger, a partner at Bettscheider’s advisory firm Interritus.
Representatives for Lone Star didn’t immediately respond to a request for comment by Bloomberg News yesterday in Frankfurt.