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Heta conflict nears €10B solution

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Heta conflict nears €10B solution

Anegotiated solution appears to be approaching for , the bad bank that holds assets of failed lender HypoAlpe-Adria-Bank International,and some €10.8 billion of bonds guaranteed by the Austrian regional state ofCarinthia, putting an end to what has been described as "a powerstruggle" within Austria's political ranks.

TheAustrian federal state and the regions are hoping for a further offer from thecreditors after recently rejecting an offer by Carinthia to repurchase the bondsat around 80% of face value.

"Ultimately,it is a power struggle between the regional governments and the federal stateof Austria. ... I do not think that one can let Carinthia fail," BrigitteMartineau-Trauner, a senior investment analyst at Landesbank Baden-Württemberg,said in an interview with S&P Global Market Intelligence."Reason says that a solution has to be found given that so much economicdamage has been done [as a result of the long legal dispute]. Above all, thefinancial difference between the parties is not so great given that 80% of the€10.8 billion has already been offered."

AnApril 6 meeting of regional finance heads and Austrian Finance Minister HansJörg Schelling delivered general agreement, DiePresse reported, noting that "any out-of-court settlement was betterthan a long court battle" and negotiations should restart even if thepoliticians themselves were unable or unwilling to make a renewed offer tocreditors.

Carinthia'sregional finance chief, Gabriele Schaunig, said that Austria and Carinthia werewilling to examine a creditors' offer. She further indicated a belief thatcreditors wereinterested in a settlement.

InCarinthia itself, although the state parliament voted April 7 to test thelegality of the guarantees under the nation's constitution and European law,several regional politicians suggested that Carinthia should talk to itscreditors, ORF reported.

Thereare positive signs from creditors too. Various creditors have signaled theirwillingness to talk through their representative groupings. Handelsblatt reported that the largegroup, which includes Germany's Commerzbank AG, had indicated their desire to negotiate.This latter group was unable to comment to S&P Global Market Intelligence onApril 7.

TwoVienna-based analysts, who in interviews did not wish to be identified, saidthey expected a deal even though, as one added, "it would be expensive."

Apositive outcome is not certain and time is pressing. The meeting withSchelling took place to discuss a sharply worded creditor letter cited by Kurier suggesting that Carinthia couldsell assets and cut spending while Austria could repurchase the bonds at 82% oftheir value to achieve a deal. Some regional politicians responded with lessthan conciliatory views.

AMarch 17 note from Erste Group Research analysts thought that regulators at theFinancial Markets Authority would impose a debt haircut by official notice inthe weeks, with a recovery rate of 45% being mentioned in the media. The debtcut has to be effected by May 2018 at the latest when the moratorium on Hetaservicing its debt expires.

"Itis totally unclear how such a haircut is to be implemented in practice andwhether it also applies to bonds issued under German law. The legal position isvery unclear," Martineau-Trauner said in a March 18 note. "Some bondcreditors have started court proceedings in Carinthia and aim to make it meetits obligations, as they take the view that it can pay more."

Lackinga deal with creditors and without federal support, Carinthia could fail. Thiswould have massive negative consequences for financing the regions and Austrianpublic borrowers generally, Martineau-Trauner wrote.

OtherAustrian regions are partly concerned about a possible haircut because thiswould hit their guarantees for Pfandbriefbank (Österreich) AG and cost up to €85million per province excluding Vienna. Erste Group thought this might lead tothe other regions suing Carinthia.

Therehas been little sign of stress in debt markets thus far as bothMartineau-Trauner and Erste Group noted.

Inparticular, the possible effect on the federal government debt of funding theHeta guarantees seems hardly to matter. Erste credit analysts wrote March 31that Austrian government bond spreads had sunk since January, like Germanyields, and the differential between Austrian and German 10-year bonds remainsat its long-term rate of 20 basis points. They further observed that the threerating agencies had recently confirmed Austria's high rating and that theagencies were concentrating on Austria's fiscal and economic fundamentals. Yetthe Erste analysts warned: "If the situation in the Heta disputeescalates, spread rises [in covered bonds] will be hard to avoid."