HSH owners said to propose US$11b 'bad bank' plan to EU

[HAMBURG] HSH Nordbank AG's owners are debating plans to transfer more than half of the German shipping lender's 16 billion euros (US$18 billion) of bad loans into a separate bad bank in an effort to win European Union state-aid approval, people with knowledge of the plans said.

In meetings with the EU in recent weeks, HSH and its owners proposed moving about 10 billion euros of loans into a special purpose vehicle controlled by HSH Finanzfonds, a public agency that manages most of the shares held by the German states that control the lender, said the people, who asked not to be identified because the talks are private. HSH bankers may continue to oversee the sale or winding down of the loans, the people said.

The northern states of Hamburg and Schleswig-Holstein, which jointly hold 85.4 per cent of HSH, are still struggling to reach a final decision on options to purge the German shipping lender's books of bad loans, as fees to use the state guarantees swell, eroding earnings.

Hamburg and Schleswig-Holstein in 2009 supplied 3 billion euros of capital and granted a 10 billion-euro guarantee to cover losses stemming from risky investment-banking deals and non-performing shipping loans.

The bank still held 15.9 billion euros in bad loans, accounting for 23 per cent of its total credit book, according to a company presentation in May. More than 90 per cent of those ailing shipping and real estate loans were covered by the guarantee.

The EU approved the guarantee on a preliminary basis under state-aid proceedings in June 2013. Since then the EU, HSH and its state-owners have held regular discussions on the rescue package, which haven't been completed, Daniel Stricker, Hamburg finance ministry spokesman, said by phone on Thursday.

HSH may discuss the effort at a press conference in Hamburg on Friday, when it reports first-half earnings. Of the five German state-owned banks known as Landesbanken, which used their state backing to go on a lending binge before the financial crisis of 2008 that later soured, the Hamburg lender is suffering most from a downturn in the shipping industry.

BLOOMBERG