The European drive toward bail-ins continues unabated. So too does the increasing uncertainty for investors in European financial institutions, for whom the bail-in concept raises the spectre of the effective loss of their investments by way of contribution to any rescue. Investors in Austria's Hypo Alpe-Adria-Bank International AG ("HAA") appear to be next in the cross hairs.
HAA was nationalised in December 2009 in the midst of the credit crunch. Following fruitless rounds of recapitalisation (HAA has received €5.75 billion in state aid since being nationalised), on 11 June 2014 the Austrian government proposed new measures to wind down the bank's assets. These measures are expected to be adopted by the Austrian Parliament before its summer recess. As well as creating a bad bank, the draft legislation envisages an €890 million bail-in by the nullification of subordinated debt instruments with redemption dates pre-dating 30 June 2019 and an associated guarantee from the province of Carinthia.
At first blush, and as the Austrian government claims, the expropriation of subordinated debt may appear consistent with the requirements of the European Union (including the prospective EU Bank Recovery and Resolution Directive1). The expropriation of holders of subordinated debt may also appear to accord with previous bail-ins, including that in the Netherlands in the context of the nationalisation of SNS Reaal NV and SNS Bank NV in February 2013.2
On closer inspection, however, the retrospective bail-in of a state guarantee in respect of subordinated debt is unprecedented in this context. It is also questionable in principle, given that the existence and creditworthiness of that guarantee until the point of expropriation fundamentally undermines the argument that investments of this nature are inherently risky, lack value or should automatically bear losses after equity. Allied to this, there is no obvious reason why the holders of subordinated debt with pre- and post-30 June 2019 redemption dates (debt in the latter period is guaranteed by the State of Austria as opposed to the province of Carinthia) should be treated differently. Further, the only reference to compensation for the expropriated bondholders appears to derive from a non-guaranteed share in any liquidation profits.
While the Austrian government may consider that its recapitalization strategy is fool-proof, the legality of this approach is questionable. The obvious difficulties in reconciling such draconian measures with investors' constitutional and fundamental rights under European law as well as Austria's obligations under the numerous Bilateral Investment Treaties to which it is party are such that their enactment and use would almost inevitably lead to a raft of challenges and claims by expropriated investors.
Although the Austrian Finance Ministry maintains that such measures are targeted only at HAA, investors in markets where financial institutions routinely benefit from state or sub-state guarantees (including Germany) should be alive to this attempt to deprive investors of that benefit on a retrospective basis.
Footnotes
1 While the proposed implementation date for this directive is 1 January 2015, the "bail-in" tool may not be applied by a resolution authority until 1 January 2018.
2 Proceedings challenging the legality and compensation payable in connection with this bail-in are ongoing, in which Jones Day acts for certain bondholders.
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