Austria Just Announced A 54% Haircut Of Senior Creditors In First "Bail In" Under New European Rules

Tyler Durden's picture

Just over a year ago, a black swan landed in the middle of Europe, when in what was then dubbed a "Spectacular Development" In Austria, the "bad bank" of failed Hypo Alpe Adria - the Heta Asset Resolution AG - itself went from good to bad, with its creditors forced into an involuntary "bail-in" following the "discovery" of a $8.5 billion capital hole in its balance sheet primarily related to ongoing deterioration in central and eastern European economies.

Austria had previously nationalized Heta’s predecessor Hypo Alpe-Adria-Bank International six years ago after it nearly collapsed under the bad loans it ran up when it grew rapidly in the former Yugoslavia. Having burnt through €5.5 euros of taxpayers’ money to prop up Hypo Alpe, Finance Minister Hans Joerg Schelling ended support in March 2015, triggering the FMA’s takeover.

This was the first official proposed "Bail-In" of creditors, one that took place before similar ad hoc balance sheet restructuring would take place in Greece and Portugal in the coming months. Or rather, it wasn't a fully executed "Bail-In" for the reason that creditors fought it tooth and nail.

And then today, following a decision by the Austrian Banking Regulator, the Finanzmarktaufsicht or Financial Market Authority, Austria officially became the first European country to use a new law under the framework imposed by Bank the European Recovery and Resolution Directive to share losses of a failed bank with senior creditors as it slashed the value of debt owed by Heta Asset Resolution AG.

The highlights from the announcement:

Today, the Austrian Financial Market Authority (FMA) in its function as the resolution authority pursuant to the Bank Recovery and Resolution Act (BaSAG - Bundesgesetz über die Sanierung und Abwicklung von Banken) has issued the key features for the further steps for the resolution of HETA ASSET RESOLUTION AG. The most significant measures are:

  • a 100% bail-in for all subordinated liabilities,
  • a 53.98% bail-in, resulting in a 46.02% quota, for all eligible preferential liabilities,
  • the cancellation of all interest payments from 01.03.2015, when HETA was placed into resolution pursuant to BaSAG,
  • as well as a harmonisation of the maturities of all eligible liabilities to 31.12.2023.

According to the current resolution plan for HETA, the wind-down process should be concluded by 2020, although the repayment of all claims as well as the legally binding conclusion of all currently outstanding legal disputes will realistically only be concluded by the end of 2023. Only at that point will it be possible to finally distribute the assets and to liquidate the company.

As part of the announcement, Austria has cut Heta’s senior liabilities by 54 percent and extended the maturities of all eligible debt to Dec. 31, 2023 to help cover an 8 billion-euro ($9.1 billion) hole in Heta’s balance sheet. It also wiped out any residual equity and the junior liabilities as well as any supplementary capital. The Finanzmarktaufsicht took control of Heta last year in the first application of European Union rules designed to end taxpayer-funded bank rescues.

"While the application of the new European recovery and resolution framework for banks is uncharted territory in both legal and practical terms, we are on target with the resolution of Heta," the FMA’s co-chiefs, Helmut Ettl and Klaus Kumpfmueller, said in the statement. "Orderly resolution is more advantageous than insolvency proceedings."

As Bloomberg writes, dealing with failing banks remains a thorny issue in the EU more than seven years after the collapse of Lehman Brothers Holdings Inc. Rescues in Portugal, Greece and Italy carried out before new rules came into force in those countries prompted protests over unequal or arbitrary creditor treatment. The EU’s untested Bank Recovery and Resolution Directive, now in force across the 28-nation bloc, provides rules and tools, including the so-called bail in, to make sure creditors share the burden.

Creditors were not happy, and Heta became a battleground of what the first BRRD implementation would look like. "At the heart of the issue is 11 billion euros of Heta’s debt that’s guaranteed by the province of Carinthia, which owned Heta’s predecessor until 2007. Those guarantees blunt the intent of the new rules because they mean the losses imposed on bondholders become a claim on Carinthia, which says it can’t pay them. Sunday’s haircut means the province faces claims of about 6.4 billion euros, the FMA said."

Carinthia’s attempt to neutralize the guarantees by buying up the bonds at a discount was rejected by bondholders led by Commerzbank AG and Pacific Investment Management Co. last month. The creditors, who say that Austria should pay up if Carinthia can’t, also sued in a German court, arguing the BRRD’s rules don’t apply to Heta.

The announcement ushers in the next, and even more contentuous phase of creditor negotiations: after initially ruling out a second offer, Austrian officials this week smoothed the way for new negotiations to avoid years of litigation. Gaby Schaunig, Carinthia’s finance secretary, said she will review a recent creditor proposal and that “any out-of-court solution is better than the legal route."

According to Bloomberg, some of the creditors are planning to make an offer to Austria that would result in a payout of 92 cents on the euro, a person familiar with the bid said Saturday. It’s unclear how many creditors support the offer. On Tuesday, representatives for both sides will also meet in London for talks, according to a report in Der Standard. Many creditors have rejected any haircut as an option over concerns how such an example could impact their investments in comparably impaired financial companies. Others are more willing to negotiate.

Some creditors had already challenged the FMA’s decision to apply European bank resolution rules to Heta. Answering the objections, the FMA said the wind-down remains “fully binding,” adding that creditors are now free to appeal to Austria’s federal administrative court:

Challenges may be submitted to the FMA against the emergency administrative decision of 10.4.2016, which sets out the significant resolution actions under BaSAG, within three months. If applicable, the FMA will initiate ordinary administrative proceedings, will recognise and examine the submitted challenges and will then issue an administrative decision in relation to the challenge procedure.

Changes, if any, to today's decision will likely take years to pass through the Austrian court system. In the meantime, the precedent has been set and we expect many more banks to follow suit in "bailing in" their senior debt creditors, and ultimately - if there is not enough value to satisfy claims - depositors.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
KesselRunin12Parsecs's picture
KesselRunin12Parsecs (not verified) Apr 10, 2016 1:01 PM

Coming to AmeriKa (before you can say 'Mazoltov')

Looney's picture

Didn’t the Great Depression start with a small Austrian bank going tits up?

It is not about rhyming – history does repeat itself! I think?  ;-)

Looney

HectorCamachoTrump's picture
HectorCamachoTrump (not verified) Looney Apr 10, 2016 1:04 PM

Oy vey Hitler got on fine without gold.

http://www.webofdebt.com/articles/bankrupt-germany.php

knukles's picture

Well of course the sr. creditors take a haircut.  That's normal, folks.
Anything other than a state guaranteed deposit (Anything other than that is potentially toast) is like any other company. 
The debtors take it on the chin along the lines from the bottom of the capital structure up the balance sheet hierarchy.
                                                Imagine the "haircut" for the unsecureds.  Hah!
          For the life of me I do not understand why this paradigm is so perplexing to anybody.  It's the way it's supposed to be done.

KesselRunin12Parsecs's picture
KesselRunin12Parsecs (not verified) knukles Apr 10, 2016 1:18 PM

As soon as they create a COMEX out of REVERSE LEVERAGED PAPER BANKRUPTCIES, I'll be a gazillionaire!

scatterbrains's picture

Will I be able to buy the wiped out common stock from you and recieve.. I mean pay a negative dividend for the pleasure of holding them? Hope so.

KesselRunin12Parsecs's picture
KesselRunin12Parsecs (not verified) scatterbrains Apr 10, 2016 2:34 PM

Not until I open a central bank in your home country, counterfeit the money to purchase it with, dilute the currency, top it all off with a tasty gefilte fish dinner, & wash it down with a bottle of Manichewitz...

robertsgt40's picture

I wonder how many of those investors wish they'd bought phyz gold/silver?

JRobby's picture

WOOOOOPS!

That's going to leav a mark. Like a crater.

NidStyles's picture

Because it dawned on me in a post below, I think I will share it with the upper crust crowd as well:

 

Pfft who cares, if they Plebes get upset we'll just bring in vibrants for then to be distracted by and so that they are kept busy arguing over what we will call diversity.

 

When the SHTF we will just waltz out the backdoor leaving a million plus angry vibrants on their doorsteps with a collapsing welfare state leaving the "refugees" homeless and hungry in the middle of winter.

 

This shit is planned out already. The invasion is their escape plan.

tc06rtw's picture

 “German insurers, which hold about
820 million euros of Heta debt, reiterated
on April 10 that they insist on a full payback
and said they are only prepared to discuss
an extension of maturities.”

   
   
 I wonder if they’re the same Germans
working on the Greek debt reduction?
   
  
(Gee, I never realized I was one of the Upper Crust Crowd!)

All Risk No Reward's picture

So no announcements of depositor "hair cuts" this round?

actionjacksonbrownie's picture

But physical Gold and Silver don't pay dividends. Oh wait...

Mr. Universe's picture

Real Central Bankers drink Lafite-Rothschild or Mouton-Rothschild.

KesselRunin12Parsecs's picture
KesselRunin12Parsecs (not verified) Mr. Universe Apr 10, 2016 5:33 PM

Real central bankers drink virgin goats blood

williambanzai7's picture

You understand there are different levels of comprehension in this audience.

847328_3527's picture

"bad loans" were not so bad for the folks who got the money and never repaid. The money went somewhere and lined the pockets of someone.

 

Just like many of those "bad loans" in China are actually sitting in RE in Hongcouver, SF and Seattle. It's just "bad" for whomever gets stiffed with th e bill but the debtors are sitting pretty.

maskone909's picture

Were these senior terrorists at the saudi soccer match too?

TrustbutVerify's picture

So, let's clarify.  How much of the borrowing, and even the lending, when the lending institution doesn't suffer consequences, is intentionally made in bad faith?  One can consider this as a worldwide problem, but bringing it home, its important to consider things closer to home.  In regard "good loans" going bad, consider the continuing and ongoing subprime housing loans, the subprime auto loans business, and school loans, many of which are subprime, or at the very least based on the useless degrees for which the loans were made and the inflated cost of more useful degrees, the result of their being larded with useless politically correct classes that serve no purpose but to brainwash the young while expanding the balance sheets of universities one must ask, "What's the purpose."  

In addition to welfare, in its traditional form, and less traditional welfare in the form of inflated government salaries, pensions and benefits - transfer payments, in the form of loans never intended to be paid back and salaries, etc., are a great ways to buy votes.   

lincolnsteffens's picture

Isn't this a bit like "musical chairs"?

Strelnikov's picture

Hulk no understand.

 

Hulk sad.

Monetas's picture
Monetas (not verified) williambanzai7 Apr 10, 2016 2:01 PM

Yeah, the written word .... isn't for everyone ?

Stroke's picture

WTF is Finanzmarktaufsicht   financemarketofshit?.....what could one expect?

Bemused Observer's picture

LOL!

That's exactly what I thought when I saw that word...

Too funny.

worbsid's picture

Boris should comment on that one ... :-)

MsCreant's picture

Financemarkettoughshit?

Telemakhos's picture

But the avarice and folly of our investor class are systemically important!  If you refuse to shelter private investors and creditors from risk, how is society supposed to reap the profits of a vibrant market?

NidStyles's picture

Pfft who cares, if they Plebes get upset we'll just bring in vibrants for then to be distracted by and so that they are kept busy arguing over what we will call diversity.

 

When the SHTF we will just waltz out the backdoor leaving a million plus angry vibrants on their doorsteps with a collapsing welfare state leaving the "refugees" homeless and hungry in the middle of winter.

 

This shit is planned out already. The invasion is their escape plan.

boattrash's picture

Thanks for clearing that up Knukles.

I thought I might have been missing something, because when I make a bad bet, I lose $$.

Maybe some day, I'll understand all this "high finance biz".

williambanzai7's picture

Bail-In is an odd phrase used to disabuse certain participants in the capital structure of the Harvard Soviet idea that lending to a bank is a riskless investment guaranteed by the taxpayers.

Theonewhoknows's picture
Theonewhoknows (not verified) williambanzai7 Apr 10, 2016 1:48 PM

The debt - good that we talk about it. Especially when you connect the dots about war on cash, gold being repatriated or sold (Germany or Canada) according to wisdom or stupidity of regimes and continuation of Bubblenomics (the train started in 2009 by the FED, then BOJ and now ECB). These are the ingredients and the result? Inflationary escape from debt. http://independenttrader.org/war-on-cash-a-piece-of-a-bigger-puzzle.html

Beowulf55's picture

Ah...come on........get a grip.........they only burned through 5.5 Euros.  Heck I spend more than that on a pound of coffee.

knukles's picture

Thank you william.  That's an elegant explinaiton.

Monetas's picture
Monetas (not verified) williambanzai7 Apr 10, 2016 2:04 PM

You're rambling, again .... try using punctuation ? 

dicksburnt's picture

Monetas, doesn't the CIA take sundays off?

Kirk2NCC1701's picture

Like your prose. Others could learn from you, WB7.

Twox2's picture

The problem here is that most depositors don't consider themselves lenders.  One day, all doubt will be removed...

 

Kaervek's picture

From what I could gather, for the average citizen a bail-in is always preferrable to a bail-out and should've been done way earlier.

Now the way they did it with the state guaranteeing shit to lenders, this becomes a camouflaged bail-out all over again. Taxpayer to the rescue.

 

What's more interesting is the question when is all this worthless debt doing to be marked zero? Just as they can't really raise rates, they can't declare this shit worthless. As long as people accept these fraudulent practices nothing is going to change. They can add zeroes forever and onwards, who still gives a fuck?

Today you can give out loans to anyone, bundle those obligations (securitization), get triple A rating on your junk loans and sell them to the next fool. Pocketing a nice profit on the margins and fees, all at zero risk to the lender. This practice is simply fraudulent and destroys our beloved "economy" every day it's allowed to happen. There is no effective capital allocation happening anymore, anyone can get a loan and any shitty business can stay liquid on borrowed money - this is not capitalism, it's some kind of smoke & mirrors cleptocratic oligarchy.

RaceToTheBottom's picture

Accounting used to be so much simpler before it was corrupted..

HalinCA's picture

As I recall, haricuts happen to people holding bonds when issuers cannot make the payment and negotiate default terms (assumming the debt holer did not have insurance against default).  It's between the debt issuer and the holders of the debt.  So taht would be the people tha bank loande dmoney to and the bank itself.

'Bail-ins' are when the entire bank is insolvent and so people who have loaned money to the bank are forced to convert the debt into equity positions.  In effect, instead of the bank owing you money and you getting interest payments on the debt, you become a shareholder and may or may not ever get a dividend.

Now, say GM can't make its debt payments ... then the debt holders may be willing to agree to a bail in, where they swap debt for equity.  

It's not clear to me what is going on - is the bank in such dire straights that its own debt is so vast that not only does the bank itslef need to ask its creditors to take haricuts, and then in addition they need to convert the reduced debt to equity?

If so the thing to look at, if you want to estimate the value of the deal, are the cash sterams coming from the loans the bank has made.  How much of that will be dedicated to repaying the bank's creditors?

The depositors ... well I assume some level of deposits are 'guaranteed' vis some European equivalent of the FDIC.  So the should get that back.  But anything beyond that ... will probably get converted into bank equtity, a la Malta.

So the operative question if ZHers: for bank deposit insurance purposes, will they apply the 'insured limit' to each individual account, or apply it to the holder of the accounts in aggregate?  In the first case, large depositors may lose nothing, in the second case, they could lost everything over the stated limit.

Good luck!

Kirk2NCC1701's picture

FYI, the "bad" loans to "former Yugoslavia" were in fact made to private parties in what is now Slovenia.

You know, the tiny "Emerging democracy", as the CIA World book describes it, whose flag has an emblem that includes three Stars of David, arranged in an inverted triangle pattern? (Look it up!)

Yeah, that's the place the "Bad loans" went to.  LMAO.

Prost / zum Wohl / Na Zdravje / Mazel tov !

JRobby's picture

No haircut for Jr. & Unsecured. A decapitation.

armageddon addahere's picture

Banks are supposed to be regulated. They are supposed to be audited. If the liabilities exceed the assets by $1 the trustees are supposed to step in and reorganize or liquidate the bank like any other bankruptcy. They are not supposed to conceal the true state of affairs, the government is not supposed to prop them up for years while they lose billions throwing good money after bad.

Dr_Snooz's picture

"Well of course the sr. creditors take a haircut. That's normal, folks. Anything other than a state guaranteed deposit (Anything other than that is potentially toast) is like any other company. The debtors take it on the chin along the lines from the bottom of the capital structure up the balance sheet hierarchy. Imagine the "haircut" for the unsecureds. Hah! For the life of me I do not understand why this paradigm is so perplexing to anybody. It's the way it's supposed to be done."

The problem is that the DEPOSITORS are now considered creditors (subordinated creditors). Their deposit guarantees have been revoked. That's a BIG, UNPRECEDENTED change. With all this NIRP and bail-in nonsense, expect huge massive runs on the banks and a massive collapse of the global financial system. Hope everyone is ready...

Lucky Leprachaun's picture

'Mr. Hitler has declared war on the international financiers and I believe it will be the finish of him.'

Winston Churchill, 1934

BullyBearish's picture

Spoken by a true GAS guy:

In the summer of 1919, 94 years before the devastating strike in Syria, Churchill planned and executed a sustained chemical attack on northern Russia.

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

In 1917, following the defeat of the Ottoman Empire, the British occupied Iraq and established a colonial government. The Arab and Kurdish people of Iraq resisted the British occupation, and by 1920 this had developed into a full scale national revolt, which cost the British dearly. As the Iraqi resistance gained strength, the British resorted to increasingly repressive measures, including the use of posion gas.

Winston Churchill, as colonial secretary, was sensitive to the cost of policing the Empire; and was in consequence keen to exploit the potential of modern technology. This strategy had particular relevance to operations in Iraq. On 19 February, 1920, before the start of the Arab uprising, Churchill (then Secretary for War and Air) wrote to Sir Hugh Trenchard, the pioneer of air warfare. Would it be possible for Trenchard to take control of Iraq? This would entail *the provision of some kind of asphyxiating bombs calculated to cause disablement of some kind but not death...for use in preliminary operations against turbulent tribes.*

Churchill was in no doubt that gas could be profitably employed against the Kurds and Iraqis (as well as against other peoples in the Empire): *I do not understand this sqeamishness about the use of gas. I am strongly in favour of using poison gas against uncivilised tribes.*

prmths2's picture

 

For completeness:

Winston S. Churchill: departmental minute (Churchill papers: 16/16) 12 May 1919 War Office

I do not understand this squeamishness about the use of gas. We have definitely adopted the position at the Peace Conference of arguing in favour of the retention of gas as a permanent method of warfare. It is sheer affectation to lacerate a man with the poisonous fragment of a bursting shell and to boggle at making his eyes water by means of lachrymatory gas.

I am strongly in favour of using poisoned gas against uncivilised tribes. The moral effect should be so good that the loss of life should be reduced to a minimum. It is not necessary to use only the most deadly gasses: gasses can be used which cause great inconvenience and would spread a lively terror and yet would leave no serious permanent effects on most of those affected. 

from Companion Volume 4, Part 1 of the official biography, WINSTON S. CHURCHILL, by Martin Gilbert (London: Heinemann, 1976)