May 18, 2016 / 7:56 AM / 3 years ago

UPDATE 3-Austria and Heta creditors strike deal to break debt impasse

* Repayment of senior bonds planned at 75 pct, junior bonds 30 pct

* Maturity of special bond to be shortened to 13.5 years

* Finance ministry expects new offer in September

* Main creditors accept deal given lack of alternatives (Adds quotes, background, criticism of ECB)

By Kirsti Knolle and Alexandra Schwarz-Goerlich

VIENNA, May 18 (Reuters) - Austria’s government has reached agreement in principle with creditors of “bad bank” Heta , paving the way for a bond buyback offer in early September to settle a dispute that risked bankrupting an Austrian province.

The overall repayment rate to creditors is seen at about 90 percent if they also accept a special 13.5-year zero-coupon bond as a sweetener, sources close to the matter said on Wednesday.

This would be about 8 percentage points more than an offer rejected by creditors in March.

The latest move comes a month after Austria’s financial watchdog cut the nominal value of the bulk of bonds by more than half, making Heta a test case for new European rules aimed at ensuring a failed bank’s losses are shared with creditors.

The deal announced on Wednesday by Austrian Finance Minister Hans Joerg Schelling should stave off the threat of bankruptcy for the southern province of Carinthia.

The province, which guaranteed Heta’s outstanding debt of about 11 billion euros ($12.4 billion), will offer senior creditors 75 percent of the original face value of the bonds and junior creditors 30 percent.

“Under the circumstances and upon evaluating the alternatives we consider the offer acceptable,” said Friedrich Munsberg, spokesman for an umbrella group of creditors with about 5 billion euros of Heta debt.

Bondholders include Pimco, Commerzbank, Deutsche Pfandbriefbank and Dexia Kommunalbank .

Carinthia will contribute 1.2 billion euros to the buyback, which the federal government will finance with loans, and Schelling said that Vienna will guarantee the zero-coupon bond.

A financial source said that some creditors still hope to get back all their money through a Frankfurt court case that resumes next month. FMS, a German equivalent of Heta, had brought the legal challenge in an effort to speed payment.


The deal also served to place the European Central Bank under the microscope over its response to the Heta saga, with banking sources saying that the expected repayment rate of around 90 percent showed that the ECB had been wrong when it told banks to write down at least 50 percent of their Heta bonds last year.

Property lender Duesseldorfer Hypothekenbank ran into problems after complying with the ECB request and had to be taken over by Germany’s deposit protection fund.

The German banking association, which runs the protection fund, said on Wednesday that it would support the Heta deal but would not comment further. An ECB spokeswoman declined comment.

The Heta case dates back to the failure of lender Hypo Alpe Adria after rapid expansion into Eastern Europe. The federal government had to pour about 5.5 billion euros into Hypo, which was nationalised in 2009.

“If the offer is accepted, we get legal certainty and we can avoid legal proceedings,” Schelling told reporters.

“It’s a good day if the burden of Heta is lifted from the shoulders of the republic and the finance ministry.” ($1 = 0.8871 euros)

Additional reporting by Shadia Nasralla in Vienna, Alexander Huebner in Frankfurt and Chris Spink of IFR in London; Editing by Michael Shields, Keith Weir and David Goodman

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