Hedge Funds Facing Loss Resist German Bank Move to Retire Bonds

A fight is brewing between NordLB and some of its investors over the German bank’s decision to redeem some legacy bonds, a step that’s likely to impose large losses on the holders.

NordLB wants to retire the bonds -- issued 16 years ago -- because they’re old-style securities that will no longer benefit from special regulatory treatment known as grandfathering beyond the end of 2021. Grandfathering allows debt sold under an earlier regulatory regime to be used as capital under a new system.

A group of hedge funds and other investors holding more than 25% of around 400 million euros ($471 million) of the debt, say the bank should have exercised this termination far sooner as it’s known since at least 2013 that the bonds would eventually cease to qualify. NordLB has seen years of losses since then and the bonds’ valuation has sunk to around 45% of face value.

Terminating the bonds now “could result in significant losses in the hundreds of millions of euros to holders,” according to a public statement from the investors who also sent a letter to NordLB dated March 22, seen by Bloomberg, setting out their concerns.

The notes were issued as loss-absorbing capital in 2005, from special purpose vehicles dubbed the Fuerstenberg Capital companies. The bank announced last year an “extraordinary termination” of the silent participation agreements between NordLB and Fuerstenberg Capital, triggering their redemption.

READ MORE: Why Legacy Bank Bonds Worry Regulators, Excite Market: QuickTake

“NordLB has terminated the silent participations as they can no longer be counted as core capital in the future,” a spokesman for NordLB said in an emailed statement. “The termination took place after receipt of the necessary approval from the ECB with effect from December 31, 2022. It complies with the terms of the contract and is therefore lawful.”

The spokesman declined to comment further.

NordLB, which received a 2.8 billion-euro capital injection in 2019, reported a pre-tax loss of 13 million-euros last year. It’s in the middle of a turnaround drive to cut costs, reduce assets and help it return to profit. The bonds’ valuation could start climbing if that overhaul proves successful.

A separate group of bondholders, represented by law firm BRP Renaud und Partner mbB, also wants NordLB to withdraw the termination and to compensate them for the losses incurred, according to a statement.

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