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FAQs HETA Haircut

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The Austrian Financial Market Authority (FMA) as the resolution authority answers questions regarding the resolution of HETA ASSET RESOLUTION AG (“HETA”) in accordance with BaSAG:

Through the first emergency administrative decision (Mandatsbescheid) of 01.03.2015 and the order to suspend the maturity of eligible liabilities until 31.05.2016 (“moratorium”), the resolution authority gained the necessary time to prepare further measures in relation to the resolution of HETA.

The resolution authority used this time to assess the application of the resolution instrument of bail-in and the other necessary accompanying measures (the so-called “framework for resolution”). The aim of the framework for resolution is to create a well-established environment for HETA and its management, in which the management is in a position under close supervision by the FMA to proceed with the resolution process, and to ultimately to carry out the liquidation of the Company.

The procedure relating to the first emergency administrative decision of 01.03.2015 has now been concluded following the administrative decision about the challenge procedure having been issued on 10.04.2016. The FMA has examined the objections and arguments raised by the creditors in an investigation procedure, and has reached the conclusion that the emergency administrative decision (“moratorium”) remains fully binding. This finding is confirmed in the administrative decision about the challenge procedure. The creditors may submit complaints in relation to the administrative decision about the challenge procedure to the Federal Administrative Court (Bundesverwaltungsgericht).

The emergency administrative decision of 10.04.2016 determines the additional measures to be taken pursuant to BaSAG, namely bail-in, the cancellation of interest from 01.03.2015 and the harmonisation of the maturity date of all eligible liabilities to 31.12.2023. The aim is to ensure that the ongoing smooth resolution of HETA.

The resolution authority has chosen to use the bail-in resolution tool. The creditors of HETA are all involved in the loss-sharing process under the bail-in and will have to bear their share of the losses.

The resolution authority thereby makes a significant contribution to ensuring that it is primarily the creditors who are affected, and that it is therefore not necessary for the government, and therefore the taxpayer, to intervene.

A central component of the resolution framework is the calculation of the quota of the write-down for the creditors of eligible liabilities. The quota of the write-down was identified during a complex calculation and valuation process by an external valuer. It is an expert prognosis made from the cut-off point of 01.03.2015 (when the first emergency administrative decision was issued), relating to the amount of the available proceeds at the end of the settlement process (expected from today’s perspective at latest on 31.12.2023) and may be distributed on a pro rata basis among the creditors of the eligible liabilities (to which a haircut has been applied).

Since they are expert prognoses, and are therefore estimated values on the basis of certain assumptions, it is not possible to deduce the ratio directly from the published annual financial statements of HETA. The resolution authority and the external valuers are required to proceed in a sufficiently cautious way in accordance with the law, so that where at all possible a single haircut will suffice.

The 31.05.2016 is the latest possible date when it would have been possible to have implemented additional measures. The resolution authority is however required to conduct the procedure in a quick and efficient manner.

The resolution authority and an independent valuer have retroactively checked the valuation principles used in the annual financial statement for 2014 and have ensured that there is a sound basis for wind-down planning and the legally prescribed valuation. The legal grounds for the application of the bail-in instrument also ultimately exist. With an adequate information basis having been created to allow the resolution process to be continued, the emergency administrative decision was therefore issued on 10.04.2016 in the interested of procedural efficiency.

Following the emergency administrative decision of 01.03.2015 the resolution authority initiated on its own initiative the investigation procedure, which has now been concluded with the issuing of the administrative decision in relation to the challenge procedure being issued by means of an edict (challenge edict).

The administrative decision in relation to the challenge procedure replaces the emergency administrative decision of 01.03.2015 for those creditors who challenged this emergency administrative decision. This notwithstanding, the legal effects of the administrative decision in relation to the challenge procedure are also extended to those affected parties that did not challenge the emergency administrative decision of 01.03.2015.

Depending on the actual degree of success of the resolution, the actual quota of the write-down could ultimately be higher or lower than 46.02%.

The quota of the write-down agreed upon is based on a cautious and conservative estimation of the settlement proceeds of HETA to be expected in the future. The creditors will in any case participate in the financial success, and if necessary as a result of an upward revaluation or a further write-down of eligible liabilities by means of an emergency administrative decision.

No, not all HETA creditors will receive a quota of the write-down of 46.02%.

There will be a distribution of losses in accordance with the legally prescribed loss absorption cascade. In a first step the Tier 1 capital (shareholders) was written down to zero. In light of the fact that HETA’s losses have however emerged to be significantly higher than its Tier 1 capital, all other capital instruments and all of HETA’s subordinated eligible liabilities have been written down (given a haircut) to zero. The losses over and above this amount, which could not be assigned to these classes, were distributed on a pro rata basis among the creditors of other eligible liabilities. The quota of the write-down of 46.02% is the result of dividing the net proceeds of settlement by the other eligible liabilities.

There are also liabilities that are not allowed to be the subject of a bail-in pursuant to BaSAG. Pursuant to Article 86 para. 2 BaSAG these include liabilities towards commercial or trade creditors, employees, secured liabilities and liabilities arising from trustee relationships.

These secured liabilities are ones that have been secured against HETA’s assets. This include, for example, covered bonds issued by HETA, which have been secured by the corresponding tangible assets of HETA, such as HETA’s real estate but not, however, by third party collateral. The default guarantee of the Province of Carinthia does not constitute such a collateral as defined under BaSAG.

The liabilities, which cannot be considered as subject of a haircut pursuant to BaSAG, will be contractually satisfied at the point of their contractual maturity.

The interest accrued (and not paid) as of 28.02.2015 are added to the nominal value and are subject to the haircut. The interest from 01.03.2015 of EUR 2,706 is reduced to zero and are not to be paid by HETA. The amount payable of EUR 4,663 which is the result of multiplying the quota of the write-down with the absolute amount of the eligible liability, is paid out to the creditor by means of any voluntary interim distributions and/or a final distribution prior to the liquidation of HETA.

Whether a liability is deemed to be eligible or not, is based on the legal categorisation in BaSAG. It is not possible to deduce the total of all eligible liabilities and the quota of the write-down from the publicly available balance data for HETA. Creditors of eligible liabilities can find this information in the valuation report.

It is not possible to completely rule out the prospect of HETA insolvency.

In the case that during the subsequent resolution process the principal of equal treatment of creditors or the principle of No Creditor Worse Off in comparison with insolvency proceedings are breached, then the resolution authority shall have to decide, whether insolvency proceedings should be initiated against HETA. The resolution authority is however in principle committed to continuing the resolution process, since this is according to the valuation report, with a substantial probability, considerably more advantageous than a bankruptcy for the creditors.

In order to take due consideration of the past experiences and the legal provisions for an expedient wind-down, the resolution authority has set a target of completing the liquidation of HETA by the end of 2023.

The current resolution plan for HETA generally prescribes wind-down being completed by 2020. From the current perspective, it is necessary to assume for reasons of caution that HETA’s lines of refinancing to other companies within the former group will only be recovered after this date. Organisational measures relating to closure and the ongoing judicial proceedings may not have been concluded by 2020. The harmonisation of the maturity dates results, together with the 100% cancellation of interest from 01.03.2015, from the principle of equal treatment of creditors.

In this case, the resolution authority will issue further measures under BaSAG, the precise content of which cannot yet be anticipated.
In principle the maturity dates of all eligible liabilities have been harmonised by this emergency administrative decision as (until) 31.12.2023. However, the resolution authority reserves the right to partially satisfy creditors – in a similar way to a bankruptcy proceeding – by means of voluntary, non-compulsory, interim distributions in the mean-time prior to the maturity date. Whether, and to what extent, such interim distributions will be possible, depends on the one hand on HETA’s liquidity position, and on the other hand on the assertions of creditors in other legal proceedings.
A necessary further write-down of eligible liabilities (a reduction of the quota of the write-down), a possible write-up (an improvement of the quota of the write-down) or any extending of maturity dates beyond 31.12.2023 could be implemented by means of an emergency administrative decision, although such measures are currently unlikely. Furthermore, the resolution authority also has the option to issue an administrative decision to apply orders upon HETA to perform acts or prohibit certain acts to ensure that the resolution objectives are achieved in an expedient manner.

The principle aim of  this second emergency administrative decision is in any case to place HETA in a position to be able to carry out the resolution process from now on without further recourse to an emergency administrative decision while also maintaining the objectives of BaSAG. The resolution itself will occur under the consequent ongoing supervision of the resolution authority. In the event that it should emerge over the course of time that additional supporting measures are required to enforce the law, then such measures will be deployed at the appropriate time.

The governing rights associated with shares in HETA will be exercised by the resolution authority from the point when the emergency administrative decision is issued, with proprietary rights expiring. The resolution authority is currently unaware of the existence of any reasons that could lead to the owners regaining their former legal position. Only once all creditors have been satisfied in full would the owners and holders of the relevant capital instruments be entitled to participate in distributions. The findings of the valuation report suggest this eventuality to be unlikely.
The authority is not obliged to draw up a resolution plan under BaSAG for HETA, and currently does not plan to do so. Furthermore, resolution plans are not intended for publication. The valuation report, is however subject to the right of creditors to access files. The resolution authority will also instruct HETA to publish an update about its medium-term planning at an appropriate time.
A de-listing of HETA is currently not planned. The securities may therefore be continued to be traded on the stock exchange until further notice.
The taking over of control of HETA pursuant to Article 67 BaSAG is currently not required.

The resolution authority will also continue to monitor how HETA conducts its business once the haircut has taken place in accordance with company law. This is the mildest means to guarantee the achievement of the resolution objectives. There is currently no reason to assume that the achieving of this objective is being endangered. However, in the event that circumstances require, the resolution authority could instruct the conducting of certain individual business transactions or their omission by means of an administrative decision or – as a last resort – even take over control.

No rights of consultation or participation rights are prescribed for creditors in BaSAG for the resolution proceedings. The resolution authority shall take account of the legal principles of equal treatment of creditors and not being placed in a less favourable position in comparison with a bankruptcy. The resolution authority will however instruct HETA, at an appropriate time, to disclose the information relating to the development of the company over and above the information that is obliged to be disclosed in accordance with the Stock Exchange Act (BörseG – Börsegesetz).
The creditors have not been named for data protection reasons and banking secrecy requirements. The chosen designation for the liabilities in the emergency administrative decision contains sufficient information to ensure that the affected creditors are able to identify themselves).
The Landgericht Frankfurt am Main (Germany) was requested on the basis of the European Bank Recovery and Resolution Directive 2014/59/EU (“BRRD”) to suspend the pending civil lawsuits against HETA to prevent the eventuality of an option of provisional enforcement and to consider any preliminary ruling in the ECJ.

In the event that creditors use means of execution, this could constitute a breach of BaSAG principles regarding the protection of all creditors. This could lead to the resolution process being cancelled and a insolvency petition being submitted to the resolution authority.

The independent expert has arrived at the conclusion based on a cautious and realistic valuation that an insolvency proceeding would be associated with significant financial disadvantages for the creditors in comparison to Resolution.
Whether, when, and to what extent, the creditors will be able to approach the Province of Carinthia, is a matter to be clarified by the competent civil courts. The resolution authority has not affected the integrity of these guarantee instruments in either the first or second emergency administrative decision. The resolution authority is required to enforce BaSAG. With the options available under law, the resolution authority is not in principle permitted to impinge upon the rights and obligations of third party guarantors.