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Fitch: BRRD May Prompt Carinthia-Like Distressed Debt Exchanges
May 15, 2015 / 8:18 AM / in 2 years

Fitch: BRRD May Prompt Carinthia-Like Distressed Debt Exchanges

(The following statement was released by the rating agency) LONDON, May 15 (Fitch) The Austrian province of Carinthia's potential debt restructuring deal offers an example of a potential distressed debt exchange (DDE) route for future failed EU banks to avoid resolution, says Fitch Ratings. The deal being discussed would involve the creditors of Heta Asset Resolution AG (Heta) guaranteed by Carinthia. DDEs could become more popular because powers granted to resolution authorities under the EU's Bank Recovery and Resolution Directive (BRRD), implemented in Austria on 1 January 2015, are likely to encourage senior creditors of failed banks to negotiate private-sector solutions if resolution action can be avoided. Recovery prospects for senior creditors may be better if they can negotiate swiftly and accept write-downs/equity conversion as part of a broader recapitalisation that satisfies supervisors. The inherently greater uncertainties of a formal resolution process also mean resolution authorities may bail in more of the liability structure to complete the resolution strategy and maintain market confidence. This is because resolution authorities, mindful of their "no creditor worse off" obligations and potential lawsuits from "over bailing in" liabilities, may err on the side of caution as they assess capital requirements for failed banks and determine the level of liabilities to be bailed in to restore viability. Carinthia is unable to honour EUR10.2bn of guarantees ("Gewaehrtraegerhaftung") on the senior debt of Heta, a wind-down institution that is the legal successor to failed bank Hypo Alpe Adria (HAA), as these are considerably greater than the province's annual revenues. The wind-down of HAA has been ongoing since 2010, although a dedicated wind-down vehicle was set up in 4Q14 and a regulatory stress test of Heta's assets concluded in 1Q15. This highlighted large potential losses, prompting the Austrian Financial Market Authority to start resolution steps for Heta on 1 March 2015. A temporary moratorium, to l May 2016, was declared on Heta's liabilities, including those assumed covered by Carinthia. Heta is subject to Austrian BRRD legislation. Finance minister Joerg Schelling suggested last week that Carinthia's government should negotiate a reasonable debt write-down with Heta's creditors, in exchange for their agreement to give up all claims against Carinthia. Such a deal could free up additional liquidity support from the central government to Carinthia. DDEs on senior bank debt are rare, concerning only four banks among Fitch's total portfolio of rated banks since the global financial crisis. Resolution of Heta is likely to be protracted. The European Commission is investigating the Austrian government's handling of HAA and Heta at the request of investors who faced losses. It is also examining an Austrian law passed in 2014 that wrote off around EUR900m of Heta's debt guaranteed by Carinthia. In addition, lawsuits are still outstanding between BayernLB, backed by the German state of Bavaria, and the Austrian state. Under these circumstances and against the backdrop of BRRD, DDE might prove increasingly attractive to creditors. Contact: James Longsdon Managing Director Fitch Ratings Ltd +44 203 530 1076 Fitch Ratings Limited 30 North Colonnade London E14 5GN Patrick Rioual (Austrian banks) Director +49 69 7680 76 123 Fitch Ratings GmbH Neue Mainzer Strasse 46 -50 60311 Frankfurt am Main Janine Dow Senior Director Fitch Wire +44 20 3530 1464 Media Relations: Elaine Bailey, London, Tel: +44 203 530 1153, Email: elaine.bailey@fitchratings.com. The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings. ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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