Privatization bid US investors close in on HSH Nordbank

Cerberus and J.C. Flowers are in negotiations to buy the troubled state-owned bank, whose sale is being demanded by the European Commission. But it isn't out of the woods yet.
Deal ahoy! Hamburg-based HSH was once the world's largest provider of shipping loans.

Many ship owners have experienced nervous waits for their ships to return to harbor after a storm. The same thing could be said of the owners of HSH Nordbank, the troubled publicly owned bank that was once the world’s largest provider of shipping loans: They have long waited for good news – in the form of a rescue deal – to appear on the horizon.

That now seems likely. The German states of Hamburg and Schleswig-Holstein are in exclusive talks with US financial investors Cerberus and J.C. Flowers about the privatization of HSH, which has dual headquarters in Hamburg and Kiel. Sources in the financial sector say promising progress is being made, and the contracts are expected to be ready to sign by the end of February.

The US investors are said to be willing to pay €700 million ($875 million) to €1 billion for the bank, a lot more than anticipated at the beginning of the process. Even if the deal goes ahead as planned, however, that doesn’t mean that champagne corks will be popping. The state owners are expected to be left with losses of billions.

The worst-case scenario, i.e. liquidation, could cost up to €16 billion.

J.C. Flowers already owns 5.1 percent of HSH, while Cerberus holds stakes in several German banks. It acquired at least 3 percent of Deutsche Bank, the German market leader, at the beginning of November and has held 5 percent of Commerzbank since last summer, making it the bank's second-largest shareholder.

HSH is one of Germany's Landesbanken, which were originally set up to function as central banks for each federal state's public-sector savings banks. The Landesbanken began branching out into international banking from the 1980s onward, but in many cases were not very successful. The sector was left with widespread problems after the 2008 crisis.

HSH got into difficulties following a crisis in the global shipping sector and had to be bailed out by Hamburg and Schleswig-Holstein in 2009. The European Commission approved further state subsidies in May 2016, but on the condition that it be privatized in view of its high levels of debt. Since then the clock has been ticking. HSH was given a temporary reprieve until the end of this month; if it is not sold for a positive price by then it could face liquidation.

Even if the bank is not liquidated, the losses sustained by the two states would come to almost €13 billion in total, which is still a huge burden. The worst-case scenario, i.e. liquidation, could cost up to €16 billion, though this outcome is thought to be unlikely.

16 p22 HSH Nordbank-01

The fact that HSH is capable of being sold at all is thanks to the bank's crisis-management team, led by Stefan Ermisch. "The rapid reduction in non-performing loans results in lower residual risks, which in turn means that investors are more willing to buy," a source close to the bank's owners said.

The bank halved its bad loans to €7 billion within a year, and this was then written down by about 50 percent. "The quick reduction in non-performing loans has exceeded our expectations," rating agency Moody's said, adding that HSH also succeeded in raising its core capital ratio, based on the figures for the first nine months of last year. At the same time, HSH kept the volume of new business stable year-on-year at just under €9 billion and anticipates a profit of around €120 million for last year.

But HSH still faces obstacles. As a newly privatized bank, it will have to leave an insurance system set up for Germany's public-sector savings banks within two years. But private banks have to wait for three years before joining a separate deposit insurance fund organized by the private sector. It is unclear how the gap of one year will be bridged.

Still, the new investors seem to think HSH is a good bet. Experts believe Cerberus CEO Stephen Feinberg is counting on banks in Europe and Germany going through the same recovery that their counterparts in the United States have long since completed, against the backdrop of a more robust economy and gradual improvements in prospects for interest rates. If he's right, Cerberus' gamble could prove lucrative after all.

Frank Drost is a Handelsblatt editor in Berlin, covering financial supervision and banks. Michael Maisch is the deputy chief of Handelsblatt's finance desk in Frankfurt. To contact the authors: [email protected], [email protected]