Moody's downgrades more Hypo debt on bail-in concerns

VIENNA Tue May 27, 2014 12:09pm EDT

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VIENNA May 27 (Reuters) - Ratings agency Moody's downgraded more debt of nationalised Austrian lender Hypo Alpe Adria on Tuesday on concerns that state guarantees could be undermined by the government's plan to impose losses on some subordinated bondholders.

Moody's, which last week cut its ratings for Hypo's guaranteed subordinated and guaranteed senior unsecured debt, downgraded the bank's guaranteed public-sector covered bonds to A1 on review for downgrade from Aa2.

"If losses were to be imposed on guaranteed subordinated debt, this would set a precedent that would significantly diminish the value of the guarantee for senior debt," it said.

Loss of confidence could boost borrowing costs in Austria, whose 10-year government bond yields are second-lowest in the euro zone after Germany.

Austria will propose next month draft legislation to make subordinated creditors help pay for winding down the nationalised bank, the finance ministry said on Saturday. It had already flagged the move in March.

The legislation will focus on "bailing in" holders of nearly 900 million euros ($1.23 billion) of debt guaranteed by Hypo's home province of Carinthia, not the 1 billion euros of debt with federal guarantees, a ministry spokesman said.

No more details have emerged since then. Finance Minister Michael Spindelegger wants an "orderly, clean and constitutional solution" on involving subordinated creditors, the APA news agency quoted him as saying after a cabinet meeting.

Austrian National Bank Governor Ewald Nowotny told reporters at a separate event that the topic did not directly affect the central bank and he did not know the details of the plan.

"I think the government's decisions have shown it is aware of its responsibilities and this is seen in the positive reactions of the rating agencies," he said.

($1 = 0.7325 Euros) (Reporting by Michael Shields; editing by Susan Thomas)

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