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Guest Editorial: Under the HETA Spell

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Large parts of the Austrian legal market are currently under the spell of the HETA saga.

There is hardly a business conversation among the partners of the major law firms in the country that does not at least mention HETA and the numerous civil, insolvency, constitutional, and European law issues associated with it. I myself am involved in it as advisor to several of HETA’s creditors, including its former main shareholder. No single topic, currently, provides a deeper insight in the Austrian legal market, which is why I would like to use this editorial to share a few thoughts on it.

HETA is the former Hypo Alpe-Adria-Bank, which used to be Austria’s sixth largest bank and had to be nationalized in 2009. The bank had built a large lending network in SEE which, in the wake of the global financial crisis, became unsustainable. Following its nationalization, the bank continued its operations for several years. However, on March 1, 2015, it was put into “resolution proceedings” pursuant to new EU legislation for failed banks and – on April 10, 2016 – became subject to a so-called “bail-in”, a forced write-down of its senior liabilities to approximately 46% of their original amount.

The heavy involvement of Austrian and foreign lawyers in the HETA case has, in no small part, been due to attempts by the Austrian government to use innovative legal routes to defuse HETA’s financial disaster, and the threat that it poses to the Province of Carinthia, which is liable for EUR 11 billion of HETA’s liabilities under a statutory deficiency guarantee. Under an arrangement between Austria and the European Commission in 2003, the deficiency guarantee expired in 2007 but covers liabilities maturing until 2017. Carinthia claims it lacks the financial means to make up for HETA’s default.

A law enacted by the Austrian government in 2014, annihilating certain subordinated liabilities and (former) shareholder liabilities of HETA, had caused an outcry amongst large parts of the legal community and was culled by the Austrian Constitutional Court because it infringed upon the constitutional right to property. HETA’s current “resolution” proceedings are, equally, the subject of legal challenges because, under EU law, such proceedings should only apply to systemically important licensed banks, whereas HETA’s bank license expired in 2014. Claims for several billion EUR in HETA liabilities are currently pending in proceedings before the courts of Frankfurt, Germany. Should the German courts allow creditors to enforce upon HETA’s assets irrespective of its ongoing Austrian “resolution”, this could lead to HETA being declared bankrupt in the near future. This, in turn, would further worsen Carinthia’s position.

A bid made in February 2016 by a government-sponsored fund to purchase HETA’s debt at a price of 75% of its nominal amount, which would have helped to shield Carinthia from its liability, was rejected by a large majority of HETA’s creditors. For them, more is at stake than just Carinthia’s liability, which had acted as an incentive for regulated lenders to subscribe HETA’s debt. Allowing Carinthia to disown its obligations would set an unacceptable precedent from the lenders’ point of view in times of heavy public debt burdens. A further important aspect of the HETA case is the heavy exposure by German lenders who historically have provided a large part of the funding need of Austrian institutional and public borrowers due to the closeness of both countries. The HETA case, and the sustained alienation of German lenders that it has caused, has had a negative impact on market access by Austrian borrowers, especially public debtors and banks.

Recent press reports suggest that talks between the various HETA parties have resumed; however, the reluctance so far by Carinthia’s leaders to contribute to any settlement remains a key difficulty. With the German proceedings looming, the coming weeks may provide a time window for all sides to agree a solution. From the creditors’ point of view, this could take the form of a deferment of Carinthia’s payment obligations over a number of years. Already, an increasing number of creditors are taking direct legal action against Carinthia. It seems almost inconceivable that these law suits should, ultimately, fail. The guarantee is clearly set out in the law, and similar guarantees have been provided by other Austrian provinces and public debtors in large amounts. And while some have called for Carinthia’s insolvency, putting an Austrian province into insolvency does not seem politically feasible. It seems like the HETA case is putting our political system to the test in more than one way.

By Friedrich Jergitsch, Partner, Freshfields Bruckhaus Deringer (Vienna)

This Article was originally published in Issue 3.2. of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

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