Düsselhyp back again in warm embrace of Germany’s BDB

For the second time in five years, the tiny commercial real estate lender Düsseldorfer Hypothekenbank (Düsselhyp) has been expropriated by Germany’s BDB association of private sector banks (similar to the US’s FDIC, or Federal Deposit Insurance Corporation, the state’s bank guarantee fund). The BDB bought out the bank from US turnaround specialist Lone Star, to whom it had sold the bank five years ago.

Düsselhyp needed a second rescue after its holdings of about €350m in Heta bonds, bonds issued by scandal-ridden Austrian lender Hypo Alpe Adria’s “bad bank” Heta, were suddenly made subject to a €11bn debt moratorium imposed by Austrian financial regulators until May 2016, with the possibility of the bank being declared insolvent. The BDB’s managing director simply commented, “With the acquisition of the bank the continuation of the bank has been guaranteed in the interest of its customers and the stability of financial markets.”

The moratorium has affected several German banks, including BayernLB, which owned Hypo Alpe Adria before it was nationalised in 2009, and is likely facing the largest writedowns. Others with large holdings included Deutsche Pfandbriefbank (which is taking €120m in writedowns against €395m in debt securities issued by Heta), HSH Nordbank, real estate lender Deutsche Hypo (€245m) and its parent Nord/LB (€135m) in Hanover, and insurer Munich Re.

According to Germany’s finance ministry, bank regulators were continuing to study the moratorium's impact on German banks but characterised the problems at DüsselHyp as an “isolated case”. The ministry said “The Bafin and (resolution authority) FMSA stood ready at all times to use crisis measures under the banking supervision law and the new recovery and resolution act.”

Rating agency Fitch has said that, assuming a haircut of 50 % and assuming that German banks hold around 40% of Heta's liabilities that are affected by the moratorium, this could cost German banks up to 10% of the sector's 2015 net profit.

After an outside audit found additional writedown needs of up to €7.6bn for Heta loans, Austrian financial regulator FMA took control of the workout entity earlier this month and imposed a debt service moratorium on more than €11bn of its debt until May 2016, with the possibility that the bank could be declared insolvent.

The move by the BDP to take Düsselhyp under its wing means that Lone Star’s planned sale of the unit to a consortium led by London-based Attestor and German investment banker Patrick Bettschneider is now off the table.

REFIRE: The immediate cause of the cloak-and-dagger action by Germany’s BDB was that Düsselhyp’s core Tier 1 (CT1) capital of €233m was suddenly not enough after the Austrian moratorium would have led to a likely 50% haircut on its holdings of senior unsecured Heta bonds. The bank would have been unable to continue trading, and since Lone Star was not obliged under German law to contribute fresh capital, its proposed sale could not go ahead and it would have collapsed.

The issue at stake here (and in other planned disposals such as the Westimmo sale, recently resolved by that bank’s takeover by Aareal Bank) is the integrity of the German Pfandbrief. Like many Pfandbrief-issuing banks, the much-vaunted German covered bond is its principal vehicle for refinancing itself, and makes up the majority of its liabilities. Without retail deposits, its only other source of financing is institutional deposits, again covered by effective guarantees from the German deposit fund. Between such deposits and its Pfandbrief issuance, German government guarantees underpin practically all of its liabilities.

Given the riskiness of its still-steadily shrinking balance sheet (legacy US mortgages and mortgage-backed securities, heavy exposure to cross-border commercial property loans, and a liberal sprinkling of Spanish, Portuguese and Italian sovereign debt), the bank would be difficult to recapitalise. The German authorities obviously saw no alternative but to get the bank back in amongst their own ranks and let time do the rest, rather than risk any default or any threat to the integrity of the Pfandbrief – the sacred cow of German real estate banking and financing.