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HSH sale to NORD/LB not impossible but unlikely

As a deadline grows closer to privatize long-struggling HSH Nordbank AG, its fellow German landesbanken seem unlikely to come to its aid, potentially raising questions over the lender's long-term future.

HSH Nordbank must be privatized by February 2018 under an agreement with European officials sealed in March 2016 and faces possible wind-down if a sale is not completed. The deal included the transfer of €5 billion in bad loans to the bank's majority owners, the German states of Hamburg and Schleswig-Holstein, and was made under state-aid rules triggered by the 2013 expansion of a guarantee initially provided during the global financial crisis.

Recent reports have suggested that Norddeutsche Landesbank Girozentrale could be in the frame to take over HSH Nordbank, which launched a sale process in January with Citigroup Global Markets Deutschland AG as exclusive financial adviser. Other landesbanken, including Landesbank Hessen-Thüringen Girozentrale, or Helaba, have also been connected to HSH Nordbank, yet no company has publicly announced interest in an acquisition.

A spokesperson for Citi declined to comment on whether any offers have been received since the Jan. 23 sale launch, while a NORD/LB spokesman told S&P Global Market Intelligence the bank has repeatedly said that it does not intend to take over HSH Nordbank as a whole and is not pursuing a course of expansion anyway.

"On the contrary, a vital part of our strategy [has been] the targeted reduction of total assets and risk-weighted assets for several years now," the spokesman said.

Single-landesbank deal unlikely

Whether NORD/LB would consider even a partial acquisition of HSH Nordbank is questionable, according to Peter Nippel, chair of the corporate finance department at Kiel University in Germany.

"NORD/LB or any other landesbank will presumably refrain from making any offer for HSH unless political pressure comes into play," he said in an interview, adding that he sees it as likelier that a deal can be struck to sell HSH Nordbank's core and noncore operations separately. The noncore operations might either be acquired by a financial investor or remain with the current owners, he suggested.

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Moody's on Feb. 7 suggested a similar structure for an eventual transaction, saying such a "club deal" might leave the privatized HSH Nordbank "a smaller, financially stronger bank" that would "no longer be burdened with high-risk legacy assets and would have fair prospects of sustainable profits." HSH Nordbank's healthy core banking unit had €50.7 billion of exposure at default as of Sept. 30, 2016, and the noncore division, where all nonperforming loans are held, represented exposure at default of €22.3 billion.

Yet Fitch Ratings in late 2016 questioned the idea of a sale to either a single landesbank or a group of landesbanken. The former is "increasingly unlikely" because of the weak financial profile of the northern German landesbanken and the continuing crisis in the shipping sector, while the latter would "require strong political consensus and complex legal execution, which are unlikely to materialize in the short time before the privatization deadline," the agency said.

Shipping worries

The shipping industry downturn would be a major factor in any decision by NORD/LB, which had its own shipping loan issues to contend with even before buying out the remaining stake in similarly burdened Bremer Landesbank. NORD/LB aims to reduce its shipping loan portfolio to €12 billion to €14 billion by 2018, having eliminated nearly €2 billion over the first nine months of 2016 and projected 2016-end exposure of some €16 billion.

HSH Nordbank had an NPL ratio of 16% as of Sept. 30, 2016, compared to 23% three months earlier. In addition to the €5 billion transfer to Hamburg and Schleswig-Holstein, it also aims to off-load a further €3.2 billion of loans into the market by mid-2017, a portfolio that includes real estate, energy and aviation loans, as well as shipping exposure.

HSH spokesman Mirko Wollrab said the lender remains confident that it will be able to complete the transfer by midyear; in January, it off-loaded €1.64 billion in nonperforming assets, mainly aviation and real estate loans.

Reinhardt Hassenstein, a spokesman for the savings banks association of Schleswig-Holstein, said it would support another landesbank as a buyer.

"All are welcome, landesbanken and private investors alike," he said.

But Nippel said a foreign institution is more likely to emerge as the buyer of HSH Nordbank since no German banks would benefit from such a takeover. He said foreign banks could be potential bidders for the core operations, while non-German private equity or hedge funds may seek to acquire the noncore unit.