* Potential HAA sub debt bail-in seen as aggressive
* Bail-in cost to outweigh any financial gain
* Legislation to be used as threat for discounted buy-back
By Helene Durand
LONDON, May 30 (IFR) - A dangerous precedent could be set by Austria if its government goes ahead with a potential bail-in of Hypo Alpe-Adria’s guaranteed subordinated debt, market participants said this week.
This small Austrian lender could be another test case for European authorities. Bail-in of bank subordinated debt has become commonplace over the last two years, but no country has retroactively removed a guarantee before.
“The cost benefit of going down that route would be poor,” said one analyst. “The money Austria gained would only make a small contribution to the wind-down of the bank but the damage it could have on other guarantees could be far-reaching and substantial.”
Some debt bankers said that imposing haircuts on guaranteed debt would set a dangerous precedent, especially for countries like Austria and Germany where those guarantees are such a fundamental part of the funding arrangements for a large number of financial institutions.
But it appears that a legislative proposal could be put in front of Parliament very soon which would remove the deficiency guarantee previously given by the Austrian state of Carinthia on that debt.
According to Barclays research, there is 50.5bn of outstanding legacy bank debt guaranteed by sub-sovereigns in Austria, combined with 18.6bn of other guarantee commitments of Austrian regions. The latter is mainly used for the support of bank loans to public and private enterprises, with Carinthia being the biggest sub-sovereign guarantee provider.
Barclays analysts added that any challenge to the validity of the underlying guarantees could lead to doubts regarding the solvency of the whole sector.
Way back in 2010, authorities in Ireland used subordinated debt to help resolve failing banks. The Netherlands followed suit last year. But these were not guaranteed.
On May 23, Moody’s downgraded HAA’s guaranteed subordinated debt to Ba3 from Baa3, saying it thought the prospect for the government to successfully pursue legislation to bypass the statutory deficiency guarantee was reasonable.
The agency also downgraded the bank’s senior guaranteed debt to Ba1, saying that while it was at a lower risk of loss, any bail-in of the subordinated debt would set an important precedent.
“Given the amount of sub-sovereign guaranteed debt there is in Europe, this sounds like a really stupid idea to me,” a senior DCM banker said.
However, not everyone agrees that retroactive removal of the guarantee would have such widespread effects.
“It’s a fairly isolated and peculiar case,” said another senior FIG DCM banker. “The worst case of Austria bailing-in senior guaranteed debt has been avoided, which would have had a broad-based impact. While this would not be a pretty situation, this legacy subordinated debt is an exceptional case, it is not something you would see today.”
Not only is the size of what would be impacted small, at just 900m, but the guarantee was from a sub-sovereign, not from the Austrian federal government.
Some argue that Austria could potentially use the threat of introducing the legislation as a stick to make bondholders participate in a deeply discounted bond buy-back.
If this is the case, it already appears to have had an impact. Although illiquid, the bonds have dropped to a cash price of high 50s/low 60s, according to bankers, having been trading as high as 80 just a few weeks ago. (Reporting by Helene Durand, editing by Alex Chambers, Julian Baker)