EU tells HSH Nordbank to sell aviation portfolio

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Reports from Germany say HSH Nordbank has to accept a reduction in its business model and sell its aviation portfolio as the EU investigates the financial aid package provided by the federal states of Hamburg and Schleswig-Holstein during the crisis.

German newspaper FAZ says the most likely condition from the EU commission to sign off on the massive state aid HSH Nordbank did receive during the crisis will be to sell off its aircraft finance portfolio.

HSH Nordbank has a €6 billion portfolio with 640 aircraft. According to FAZ, the bank's board of directors had already discussed this possible request and is willing to accept it, should the EU decide to go down that path.

The decision would be a massive blow to the HSH Nordbank aviation department. It had started lending again this year and had received €750 million in new loans to finance 20 to 30 aircraft.

A source at the bank says HSH Nordbank will have to wait the final ruling. "The EU ruling is supposed to be coming before the Summer break, by the end of July," the source says, pointing out that the EU ruling started last summer.

"The aviation portfolio is performing well and once again this is not an issue about volume, quality of asset. It is an unfortunate situation. The bank business is based on US$ borrowings and US loans are creating a business risk situation."

"The bank is running a risk of discrepancy and has to reduce its balance sheet volume," the source adds.

"Selling this portfolio is going to be a challenging task," says a financier. "First, it has mainly grown up during the days where both margin and funding cost were low and the environment has totally changed. Second, this is a large piece of assets, and unless you propose a 'pick and choose' approach, few candidates have the capacity to absorb this portfolio. Last, HSH Nordbank was one of the very few banks playing the asset based approach on the used aircraft market, with perhaps DVB Bank and PK AirFinance. Their exit is not going to make used aircraft financing any easier."

Meanwhile HSH Nordbank continues to gradually reduce the second-loss guarantee provided by the federal states of Hamburg and Schleswig-Holstein. After reducing the size of the guarantee by €1 billion in March 2011, the Bank and the federal states agreed to cut it by a further €7 billion. HSH Nordbank says this has been made possible by the Bank's continuing stabilisation and the progress made in reducing total assets during the first few months of 2011.

"In reducing the guarantee umbrella by a total of now €2 billion, the Bank's expenditure with regard to the provision of the guarantee will decline by around €80 million per annum to around €320 million," says the bank.

The parliaments of the federal states of Hamburg and Schleswig-Holstein had decided, with effect from the second quarter of 2009, to extend a €10 billion second-loss guarantee to HSH Nordbank. In return HSH Nordbank pays a premium of 4% per annum of the outstanding guarantee amount to the federal states. By the end of the first quarter of 2011 HSH Nordbank had paid a total of some €800 million to the federal states of Hamburg and Schleswig-Holstein for the second-loss guarantee.