When it comes to the sweeping of (trillions of) toxic assets until such time as the ECB starts purchasing not only government bonds but equities, bank loans and really anything else that in a normal world would have some “mark to market” value, Europe had a ready answer: bad banks. A tradition which started with Switzerland and the semi-bailout of UBS during the great financial crisis, “bad banks” have been proposed every time there are a few hundred billion in bad assets that need to be swept away or otherwise removed from the the public eye.
In fact, it was just a few hours ago that Spain’s economy minister praised the usefulness of bad banks, which have certainly seen their fair share of use in Spain over the past 5 years.
- GUINDOS: BAD BANKS USEFUL INSTRUMENT TO CLEAN UP BALANCE SHEETS.
Yes, useful. Until you have a massive blow up like in Austria when several years of avoiding reality exploded in everyone’s face when the Bad Bank meant to fix the mess left after the collapse of Hypo Alpe Adria itself became insolvent, after the horrendous state of its balance sheet could no longer be masked, and creditors were shocked to learn they would foot the bail out, or rather bail in costs thanks to massive debt writedowns.
And since there is never just one cockroach when it comes to hiding Europe’s biggest financial problem, namely trillions in non-performing loans, the question always is: which cockroach is next?
For now the answer, thanks to the ECB’s relentless intervention in all capital markets is hiding, but one proposal comes from Daiwa Capital Markets which suggests to take a long hard look at Austria’s Pfandbriefbank Oesterreich AG.
Here is what Daiwa’s Jakub Lichwa thinks:
- A relatively low-profile entity in Austria – Pfandbriefbank Oesterreich AG (Pfandbriefbank) – is becoming the next critical chapter in the Austrian banking system story.
- This all started with the capital shortfall disclosure by Heta Asset Resolution AG (Heta), which prompted the Austrian Financial Market Authority (FMA) to announce on 1 March 2015 a moratorium on Heta’s debt securities, including €10.2bn of senior unsecured bonds guaranteed by the State of Carinthia. Carinthia has indicated that it does not have either the resources or will to honour these guarantees, which should be activated upon the bail-in or insolvency of Heta. This has sparked investor uncertainty about the broader guarantee framework in Austria.
- Given Pfandbriefbank’s exposure to Heta, that moratorium has a direct effect on Pfandbriefbank’s standalone ability to repay nearly €600mn of bonds due in June 2015. As things currently stand, these can only be repaid if Pfandbriefbank’s own guarantees are invoked. If they are not, that will further undermine guarantee mechanisms in Austria, and possibly beyond.
- The Austrian regional mortgage banks have publicly announced their commitment on 4 March 2015 to adhere to these guarantees, although the current trading level of senior unsecured bonds (PFBKOS 2.875 07/17) does not imply investor confidence in these assurances.
- Nevertheless, the PFBKOS 2.875 07/17 bond is currently quoted at around 95 (z-spread of 583bps), a significant discount from the 108 (z-spread of 2bps) level seen prior to the announcement of the Heta moratorium, reflecting investors’ increasing doubts about Austria’s guarantee mechanisms.
- The reaction from the rating agencies to the Heta moratorium has been more sanguine, suggesting that they believe that Pfandbriefbank’s own guarantees will be honoured. S&P sees no immediate effect of the recent events on the two related Austrian entities it rates, while Moody’s placed Pfandbriefbank’s A2 rating on review earlier in March, but did not downgrade it.
