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HSH Nordbank owners confirm €1B sale to private equity investors

The German states of Schleswig-Holstein and Hamburg confirmed Feb. 28 that they had agreed to sell a 94.9% stake in HSH Nordbank AG to U.S. private equity firms Cerberus Capital Management LP, J.C. Flowers & Co. LLC and GoldenTree Asset Management for around €1 billion.

Austrian bank BAWAG PSK, which is co-owned by Cerberus and GoldenTree, is also involved in the sale. J.C. Flowers was already a minority shareholder of HSH Nordbank, with a 5.1% stake, prior to the privatization.

The deal concludes a privatization process requested by the European Commission that had to be concluded by the end of February to comply with EU state aid rules.

The sale is also a precedent in German banking history as it is the first time a landesbank has entered into majority private ownership. Germany's landesbanken act as central institutions for savings banks in specific states and are typically held by the regional governments and state-owned savings bank associations.

"This is the start of a new era for our bank," CEO Stefan Ermisch said in a Feb. 28 statement.

Legacy assets

Once the world's biggest lender to the shipping sector, HSH Nordbank ran into trouble during the financial crisis as the industry collapsed. Over the last 10 years, the bank has been reducing its legacy assets, which are held in a separate noncore entity. In 2017, the bank managed to more than halve the nonperforming exposures in its noncore unit to €6 billion from €13.6 billion at the end of 2016.

In the course of the privatization, all remaining legacy assets of HSH Nordbank will be carved out and transferred to an acquisition vehicle, which will be managed by Cerberus, J.C. Flowers, GoldenTree and employee-owned hedge fund Centaurus Capital LP, which services pooled investment vehicles primarily in Europe and Asia.

The carve-out will be completed with the closing of the privatization of HSH Nordbank. Upon completion, the noncore banking unit will be terminated and, as a result, also the €10 billion state guarantee provided by Schleswig-Holstein and Hamburg. The two states originally bailed out HSH Nordbank with an equity injection of €3 billion, in addition to the state guarantee.

Capital strength

HSH Nordbank expects its common equity Tier 1 ratio — a key measure of capital strength — after the privatization to be at around 15% in 2018, which is a healthy level compared to peers in both Germany and Europe, the bank said. Its CET1 ratio was 18% as of Dec. 31, 2017.

The NPE ratio, which measures the amount of nonperforming exposures relative to tangible equity, will fall below 2% upon completion of the privatization from 11.7% at the end of September 2017, HSH Nordbank said.

The bank also provided preliminary figures for 2017, saying it had managed to more than double its pretax profit to €290 million from €121 million in 2016. Total annual income rose to some €1.2 billion from €920 million in 2016, while the bank managed to reduce costs to around €500 million in 2017 from €634 million a year earlier.

The bank's new business volume stagnated year over year due to the general market environment, low interest rates, and increased uncertainty during the sale process, HSH Nordbank said. The lender was able to bring in €8.5 billion of new business in 2017, compared to €8.9 billion in 2016.