Commerzbank files lawsuit against Heta resolution

Commerzbank has filed a lawsuit challenging a resolution of Austria's Heta, the so-called bad bank, which suspended all payments to bondholders in March so it could work out how much it could afford to pay creditors.

The bank confirmed it had filed a case in Germany on May 5, a day after Heta failed to make a bond payment due to the German lender. The case relates to less than a quarter of the €400m of Heta bonds Commerzbank holds, a person familiar with the situation said.

Heta, which was formed from the bad assets of collapsed lender Hypo Alpe Adria, imposed a 15-month moratorium on all bond payments from March 1 after the Austrian government announced it would not help the institution cover a potential €7.6bn capital shortfall.

The bad bank's resolution will be the first case handled under the new EU-wide bail-in designed to ensure the private sector shared losses for failing banks so taxpayers were never again exposed to the massive costs borne during the financial crisis.

The case is controversial because most of the €11bn bonds where payments have been suspended were guaranteed by Hypo Alpe Adria's home state Carinthia. Bondholders argue that even though Carinthia, which has an annual budget of €2.2bn, cannot pay, the financially robust Austrian state should make sure bondholders are not left out of pocket.

Hans Jorg Schelling, Austria's finance minister, has said the federal government will consider "providing liquidity" to Carinthia if the southern state can strike a deal with bondholders. Carinthia would have to later repay the money to the federal state.

Heta could not immediately be reached for comment on the Commerzbank action. As well as pursuing legal action for the repayment of individual bonds, creditors have until June 1 to challenge Austria's financial regulator's decision to wind up Heta. One objection has already been made on this basis.

Commerzbank's accounts show it has taken a €200m provision against its €400m Heta bonds. Germany's financial regulator had warned that the countries' banks, which own the majority of the affected Heta bonds, stand to lose about half of what they are owed.

Austria's refusal to pump more money into Heta came six years after Hypo Alpe Adria was nationalised amid large losses. The state had already paid €5.5bn to deal with a bank brought to its knees by unchecked growth into eastern Europe and overly enthusiastic lending to unviable local projects.

A review by an Austrian commission of inquiry in late 2014 was sharply critical of the way Hypo was managed and the way the government handled the bank's slow motion collapse after nationalisation.

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