Germany decides against sale of Depfa, opts for unwinding
After nearly five years of looking for a suitable buyer for Depfa Bank, the Dublin-based public-sector financing subsidiary of bailed-out lender Hypo Real Estate (HRE), Germany’s bank bailout fund Soffin took the decision to wind down Depfa rather than conclude a sale of the unit, the Berlin finance ministry announced earlier this month.
The German government abandoned plans for a sale after months weighing up bids from potential buyers. Now, Hypo Real Estate’ ‘bad bank’ FMS Wertmanagement will take over the task of unwinding Depfa’s positions over the next twenty years, in addition to its enormous existing burden of unwinding parent bank HRE’s own toxic paper, accumulated prior to the financial crisis. This decision should prove less disadvantageous for the German taxpayer, said Germany’s finance ministry in a statement. HRE has long preferred a clean sale of the Depfa unit, warning the finance ministry that it would otherwise be dragging down the bank with Depfa’s unquantified risks.
The ‘good’ part of HRE, finance provider pbb Deutsche Pfandbriefbank, is however still on the block, in accordance with an EU diktat, with the government committed to finding a long-term buyer for the Munich-based bank by the end of 2015. It remains to be seen whether this task will be now made more difficult with the millstone of having to handle the unwinding of Depfa for twenty years hanging around the bank’s neck.
Among bidders interested in buying Depfa were thought to have been private equity group Third Point, an investor group led by Mead Park Management, and finance investor Leucadia and its partner Massachussetts Mutual, with the latter though to have been ready to buy the bank for about €320m. Depfa still has 200 employees and a loan book of €34bn.
The decision by the government to wind down, rather than sell, the Depfa unit led to the price of Depfa-issued bonds falling by the most in almost three years. Depfa’s 5% perpetual Tier 1 securities, with €500m outstanding, have dropped by 21% since the May 13th decision. The €400m of 6.5% Tier 1 bonds fell 16% while a €300m issue of similar securities sank 20%. The bonds are trading at about 50 cents on the euro.
The fear is that Germany could impose losses on the holders of the securities and extend a ban on coupon payments indefinitely. As part of HRE’s restructuring plan, the EU banned Depfa from making coupon payments on the Tier 1 instruments. The ban would have expired had Depfa been sold, rather than wound down. The securities, which were sold between 2003 and 2007, would rank lower than senior debt in a liquidation.
According to Katharina Barten, an analyst with Moody’s in Frankfurt, “Banks in unwinding typically post losses and this is also true for Depfa, which has been structurally loss-making for some time. Future losses imply that investors in junior subordinated instruments, including in Depfa’s trust preferred securities, are most exposed to absorb losses over time.”