Austria seeks Hypo solution after Moody's downgrade

VIENNA Sat Feb 15, 2014 8:23am EST

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VIENNA Feb 15 (Reuters) - Austria will decide by the end of March how to address toxic assets at nationalised lender Hypo Alpe Adria Bank International and expects ratings agencies to take this into account, the finance ministry said on Saturday after a warning shot from Moody's.

It was reacting to Moody's downgrade late on Friday of the ailing lender and its home province of Carinthia, citing the federal government's refusal to rule out letting the bank that it took over in 2009 go bust.

The finance ministry said it took note of the Moody's decision and pointed out plans to create a German-style "bad bank" that could absorb bad assets from Hypo to relieve its chronic need for aid to meet regulatory capital minimums.

An analysis of this and other options was under way so the government can decide in the first quarter how to proceed.

"As soon as this decision is made, the finance ministry expects a timely assessment of the facts from the ratings agencies," it added.

Moody's cut Carinthia to A2 from A1 and put ratings on review for further downgrade. It cited "increased uncertainty about the future of HAA and its implications for Carinthia's finances".

"In particular, Moody's is concerned about public debate indicating the central government is exploring all available alternatives to finance the bank's resolution," it said.

While the most likely outcome was that Austria will continue to support the bank, "the probability of other outcomes, including the insolvency of HAA and the triggering of the guarantee from Carinthia, has risen," it said.

Carinthia has around 12.5 billion euros ($17 billion) of guarantees on Hypo debt that it would be unable to honour should they come due all at once in an insolvency.

Moody's cut the guaranteed senior unsecured debt ratings of the bank to Baa2 from A1 and the guaranteed subordinated debt ratings to Baa3 from A2. These ratings are also on review for further downgrade.

"In the public debate around how to effect the bank's resolution the possibility has been mooted, and has not been conclusively ruled out, that bondholders may not be fully protected in that process, notwithstanding the statutory deficiency guarantee on their holdings," Moody's said.

"Even if such an outcome is unlikely, Moody's considers that the fact that it is even part of the debate and has not been ruled out implies risks for bondholders that are not commensurate with ratings in the 'A' range."

Fitch is set to give its next sovereign ratings update on Austria on Feb. 21, with Moody's announcement on Feb. 28.

($1 = 0.7307 euros) (Reporting by Michael Shields, editing by David Evans)

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