Hypo Alpe Debt Cut Four Steps as Insolvency Not Ruled Out

Hypo Alpe-Adria-Bank International AG, the nationalized Austrian bank, had two of its debt ratings cut four steps by Moody’s Investors Service as the Austrian government isn’t ruling out making the lender insolvent.

Moody’s lowered Hypo Alpe’s guaranteed senior unsecured bonds to Baa2 from A1 and its guaranteed subordinated debt to Baa3 from A2 and may make further cuts, the ratings firm said in a statement late yesterday. The bonds are guaranteed by the southern Austrian state of Carinthia, which was itself downgraded to A2 from A1 by Moody’s and may be cut further. Carinthia owned Hypo Alpe until 2007.

“The main driver for the action is the rising uncertainty around the intentions of the bank’s current owner, the Austrian government,” Moody’s said in the statement. “The possibility has been mooted, and has not been conclusively ruled out, that bondholders may not be fully protected in that process.”

Austria is still embroiled in a debate about how to share the cost of winding down Hypo Alpe, whose expansion in the former Yugoslavia unraveled, more than four years after its nationalization. Finance Minister Michael Spindelegger is refusing to rule out insolvency as a possible way to force a contribution from bondholders and Hypo Alpe’s former owner Bayerische Landesbank.

Bonds Plunged

Hypo Alpe fueled its growth until 2007 with wholesale financing that was guaranteed by its home province, Carinthia, and thereafter with funding from BayernLB. About 14 billion euros ($19.2 billion) of those bonds were outstanding at the end of June, or almost seven times Carinthia’s annual tax revenue. Hypo Alpe still owes 2.3 billion euros to BayernLB.

The Carinthia-guaranteed bonds plunged in December when plans were leaked showing the Federal Ministry of Finance was pondering an insolvency. They returned to par when Spindelegger and Chancellor Werner Faymann dismissed the plans, only to resume their decline this month. Hypo’s 4.25% guaranteed senior unsecured bond maturing in 2016 and its 4.375% bond maturing in 2017 dropped to the lowest levels since March 2009 this week.

The 2016 bond had a bid price of 94.2 percent yesterday, and the 2017 bond was at 94.1 percent, according to prices compiled by Bloomberg.

The finance ministry is pursuing a winding-down plan for Hypo Alpe under which it would transfer as much as 19 billion euros of troubled assets to a “bad bank” set up as a state agency. A final decision on the structure of the bad bank hasn’t been made.

Bad-Bank Plan

The state-owned bad bank, which is modeled on Germany’s FMS Wertmanagement AoeR, would add as much as 6 percentage points to Austria’s debt level. Hypo Alpe’s banking units in Croatia, Serbia and other countries in the Balkans are being sold separately.

The ministry “took note” of the Moody’s rating decision and expects the firm to take further action when the Hypo Alpe plan is completed by the end of next month, it said today in an e-mailed statement. Moody’s is scheduled to publish an update to its rating for Austria on Feb. 28. It rates the nation’s debt AAA with a negative outlook.

To contact the reporter on this story: Boris Groendahl in Vienna at bgroendahl@bloomberg.net

To contact the editor responsible for this story: Frank Connelly at fconnelly@bloomberg.net