HAA – senior bonds cheap and unlikely to suffer bail-in

Recently concerns over a potential bail-in of senior unsecured bond of Hypo Alpe Adria International have re-surfaced and depressed bond prices, with e.g. the more liquid HAA 4.25 2016 and HAA 4.375 2017 maturity bonds trading in the mid to high 70s at the time of writing. In my view a bail-in especially of these medium term maturity bonds, but even longer dated ones covered by Carinthia guarantees is unlikely and therefore these represent a very good buying opportunity:

• Concerns over the proposed Bank-Bail-In law of Austria are misplaced. Austria has published a draft law for the implementation of the EU’s Bank Recovery and Resolution Directive which is scheduled to take effect on 1 January 2015. While the draft law allows senior bond bail-in at failing banks, it applies to credit institutions and securities firms under EU definitions. In contrast to this HAA will soon lose its bank license and instead be converted into a run-off company. As things stand at the moment therefore the Bank Bail-in law will not be applicable to HAA in run-off.

• Senior bonds of HAA are pretty much all still guaranteed by the State of Carinthia (with maybe the exception of the HAA Float 2019 in CHF - not immediately sure about this one). While Austria has voided Carinthia guarantees for subordinated debt it explicitly confirmed the senior guarantees when it passed the HAA restructuring law earlier in the year (saying – for these “… the State guarantee remains intact and therefore everything remains as it was” (own translation)). Of course one can argue that Austria has voided the guarantees for subordinated debt, but this will likely get challenged in courts and there are no indications that Austria will come back once again with a similar drastic step for guarantees for senior liabilities.

• In fact the Austrian government has acknowledged and reaffirmed the existence and immediate applicability of the senior guarantees on its website (in the FAQs for HAA), of which it says around €12bn remain outstanding. The senior guarantees would overwhelm Carinthia’s financial capacity and likely lead to an insolvency of the State – something that has never happened in Austria and a process for which there is no established legal process.

• The Austrian government has said that it estimates ultimate remaining costs for the HAA run-off of around €4bn, an amount which it has agreed with the EU Competition Commission and which in principle will burden the government’s budget/s going forward. Government hopes to lower these costs through the forced contributions from Bayerische Landesbank, Carinthia and subordinated liabilities according to the HaaSanG. The €4bn remaining expected losses are on top of contributions from the Austrian government which so far already amount to €4.35bn as well as €1.2bn of guarantees for non-performing loans and the 2.375% 2022 sub bond issue of the bank.

• There are still considerable amounts of sub debt sitting below senior bonds – the largest bond is the HAA 2. 375 2022 Rep of Austria guaranteed bond, but there are also a few smaller long dated legacy sub bonds which were not included in the haircut list of HAA sub debt (as far as I understand this was due to their issuance at a time when problems at HAA were allegedly not yet apparent).

• Downside is limited – even if the government walked away and the €4bn expected loss would have to be absorbed by creditors, around €2.7bn of this would be covered already by the existing bail-in as well as the remaining subordinated debt. Assuming e.g. if worst case senior bonds would have to absorb €1.5bn this represents a hair-cut of 12.5% relative to the outstanding senior guaranteed debt. Some senior bonds already trade lower than this theoretical discount.

Otto Dichtl ** 30 September 2014 **

http://www.anleihencheck.de/news/Artikel-LBBW_begibt_4_00_Easy_Aktienanleihe_auf_Deutsche _Lufthansa_Anleihenews-6266127

>http://www.anleihencheck.de/news/Artikel-LBBW_begibt_4_00_Easy_Aktienanleihe_auf_Deutsche _Lufthansa_Anleihenews-6266127

Seit Monaten meutern die Piloten. Erst jüngst haben die Flugbegleiter für Streik gestimmt. Und nun? Droht der Lufthansa auch noch mit ver.di ein Tarifstreit. Denn die Großgewerkschaft fordert für ihre rund 50.000 Beschäftigten 5,5 Prozent mehr Lohn.

http://www.tagesschau.de/wirtschaft/lufthansa-253.html

trotz meiner grundsätzlichen aversion gegen gewerkschaften, sehe ich lohnerhöhungen zur zeit nicht unbedingt als problematisch
an. die wirtschaft kann sie dank windfallprofits aus öl und euro verkraften, sie erhöhen die kaufkraft und haben positive auswirkung
auf loyalität und motivation. zusätzliche steuereinnahmen können infrastrukturelle investitionen erleichtern. davon abgesehen sind
sie eines der wenigen instrumente die uns für deflationsabwehr zur verfügung stellen.