BRRD bares its teeth

Austria yesterday became the first country to exercise full powers conferred by the BRRD. The Financial Market Authority (FMA) as the resolution authority under the Bank Recovery and Resolution Act (BaSAG – Bundesgesetz über die Sanierung und Abwicklung von Banken) applied the following resolution measures to HETA:

• 100% bail-in of all subordinated liabilities
• 98% of all eligible preferential liabilities
• Cancellation of all coupon payments from the 1 March 2015 date that HETA entered resolution
• The maturities of all eligible liabilities changed to 31 December 2023

In haircut terms, the above is close to a scalping- residual equity, junior liabilities and any supplementary capital are reduced to zero while senior bondholders lose 54%. The FMA based its decision on an outside opinion estimating that traditional insolvency would return 34.8% in a best case, comparing unfavourably with the 46.02% under resolution.

HETA Asset Resolution AG is the “bad bank” formed to facilitate the wind-down of Hypo Alpe Adria (HAA), the mortgage lender nationalised in 2009 following allegations of corruption and incompetence. HETA itself took a step beyond mere “bad” with the June 2015 discovery of a EUR 7bn. “black hole” in its capital structure. HAA is particularly noteworthy for enjoying EUR 9.85bn of debt guarantees from its home state of Carinthia. The guarantee total vastly outweighs Corinthia’s EUR 2.3bn. budget, the federal government has indicated that it will provide Corinthia liquidity if it is able to come to a binding agreement with bondholders. Despite the severity of the haircut and the long resolution timeline, the FMA’s decision may perversely prove helpful for bondholders insofar as it crystallises the loss they may claim under state guarantees. Negotiations and possible court action will be closely watched for indications of a possible ripple effect across other regional state-guaranteed banks in both Austria and Germany[1].

Regional guarantees aside, HETA will be remembered as the test-case for the BRRD regime. Austrian law requires a three-month window in which investors may challenge the FMA’s decision to wind up the bank, this will expire on 10 July 2016. It may however, prove to be less instructive than its initial status implies; while some aggrieved bondholders have threatened to sue the FMA itself, with attention focused on negotiations with the State guarantor, the resolution decision may escape substantive legal challenge.

[1] While common to both countries, the form of guarantee typically differs. In Austria the consequential loss is guaranteed and so is paid at the end of the resolution process. In Germany the full amount of the bond is covered and payout is triggered by the relevant bank’s failure.

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