iStock_000019736968_SmallHypo Group Alpe Adria AG, an Austrian banking group, was nationalized by the Austrian government in 2009 in order to avert a bank collapse. The Austrian province of Carinthia owned the bank until 2007 and the guarantees given by Carinthia for the bank’s debt still amount to several times its annual budget, which has made the winding-down process more complicated because sharing the losses with bondholders would lead to significant claims against Carinthia.

Heta Asset Resolution AG (“Heta”) is managing the remnants of Hypo Group Alpe Adria AG. On 15 December 2015, creditors of Heta, who own more than EUR 5,11 billion (USD 5.5 billion) of the bad bank’s bonds, entered into a lock-up agreement, under which they agreed not to accept any offer to buy back their bonds for less than the full value guaranteed by the province of Carinthia. The creditors who are party to the lock-up agreement include Commerzbank AG, Deutsche Pfandbrief AG and the members of the Par Investor Group, which consists of fourteen investors collectively holding EUR 1.5 billion in notes and debt instruments, including Helvetia Insurance, Dexia Kommunalbank Deutschland and the Deposit Protection Fund of the German Banking Association, amongst others. Collectively, the parties to the lock-up agreement allegedly hold bonds amounting to greater than one third of all of Heta’s bonds.

The lock-up agreement hinges on the supplement to the Austrian Financial Market Stability Act (FinStaG), which became effective on 6 November 2015, and creates the legal conditions for a tender offer to be made to the Heta creditors to repurchase securities. It also includes a so-called cram-down mechanism, pursuant to which claims of minority creditors who reject the repurchase offer are economically treated as if they had accepted such offer.  FinStaG also requires that creditors representing two thirds of the Heta bonds must accept the offer in order for it to be binding and in order to trigger the cram-down mechanism. The parties to the lock-up agreement believe that they hold enough of Heta’s bonds to block any tender offer below the full value guaranteed by Carinthia.

On 20 January 2016, Carinthia presented the Heta creditors with an offer to holders of senior notes of 75 percent of face value and to holders of subordinated bonds, 30 percent of face value. Carinthia’s tender offer reportedly consists of two parts: (i) the expected recovery rate from selling and winding down Heta’s assets, which according to statements by Heta may be complete by 2020 and amount to EUR 6.3 billion, and (ii) the contribution from Carinthia, which is due to be funded by loans from the Austrian federal government.  Heta’s creditors will now have until 11 March 2016 to accept Carinthia’s offer.

However, creditors have previously stated that such a discounted offer does not reflect Carinthia’s assets and its ability to serve the debt. The creditors contend that Carinthia should be able to pay par value, approximately EUR 53 million per year over 30 years, based on its reduced spending budget of EUR 2.4 billion for 2016, without negatively impacting its citizens. The creditors have, however, also signalled their readiness to negotiate and resolve the situation that is currently unsatisfactory for both sides.