March 1, 2018 / 3:08 PM / a year ago

HSH Nordbank bondholders fear privatisation measures

LONDON, March 1 (IFR) - Bonds in HSH Nordbank have sold off after the German Landesbank said its forthcoming privatisation would also include measures to “optimise” its liabilities.

Details are expected when the bank issues its year-end results on April 26.

The lender, currently 94.9% owned by the states of Hamburg and Schleswig-Holstein, said when announcing the sale plans on Wednesday that it would not be able to make distributions on its hybrid instruments from the start of its 2020 financial year.

The two German states have agreed to sell their shares for an estimated €1bn to a group of private equity investors led by Cerberus and JC Flowers. Other funds involved are GoldenTree and Centaurus. In addition Austrian bank Bawag is also contributing.

The transaction will also see the bank’s non-performing loan portfolio, principally shipping-related, sold to a special purpose vehicle set up by Cerberus, JC Flowers, GoldenTree and Centaurus at a price below its current book value.

That will incur a charge expected to lead to a “mid-three-digit” million euro pre-tax loss for the 2017 financial year to December 31. The implication is the changes will make the bank unable to meet all its obligations to creditors, leading to the planned liability management exercise.

At the beginning of the sales process a group of bondholders offered to swap their notes for equity in the Landesbank. They held more than €700m (in principal value) of Tier 1 instruments, or roughly a third of the €2.1bn of such instruments in issue.

One instrument, a €500m perpetual FRN callable in 2018, was down by 7% on a cash basis to 39.66 cents in the euro by 2:30pm in London.

“If we assume a loss in the €1bn area, we think the T1 instruments would be written down to 40-cent area under GAAP and in the low 70s under IFRS,” wrote credit analysts at BNP Paribas.

“With the exception of the HSHN 7.25%, the other bonds could be called at the new written down amount. We view an LME in the mid 40-cent area as an effective way to take out the bonds and reduce litigation risk.”

The bondholder group is understood to be assessing the privatisation statement.

Under European Commission rules on state aid, the sale had to be announced by the end of February to prevent the bank from being wound down.

The states of Hamburg and Schleswig-Holstein ended up taking control of the bank after problems emerged in its shipping loan portfolio during the financial crisis. JC Flowers, which used to own the bank, already has 5% of its equity.

The deal will also need to be approved by the two state parliaments and vetted by the EC. (Reporting by Christopher Spink)

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