guarantee obligations for Pfandbriefbank
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guarantee obligations for Pfandbriefbank
Erste Group Research Credit Focus | Fixed Income | Austria 16 April 2015 Credit Focus: Austria Q2 2015 Sovereign, Sub-Sovereigns & Agencies, Covered Bonds Analysts: Margarita Grushanina [email protected] Ralf Burchert, CEFA [email protected] Christian Enger, CFA [email protected] Ratings Republic of Austria Agency long-t. short-t. Outlook Fitch AA+ F1+ stable Moody's Aaa P-1 stable S&P AA+ A-1+ stable DBRS AAA R-1 stable Source: Bloomberg, Erste Group Research Contents Heta and the Implications for Austria 2 Retrospective: Hypo Alpe Adria Bank International 2 Heta under control of the FMA – payment moratorium imposed 3 The next steps in Heta's wind-down 6 Reaction of the rating agencies to Heta measures 7 Sub-Sovereigns & Agencies (SSA) 10 Sovereign 16 Sub-Sovereigns & Agencies Primary market 22 22 Covered Bonds 25 Appendix 26 Note: Historical performance is no indicator for future performance! All price indications are given as at April 10th, 2015 Erste Group Research – Credit Focus: Austria According to initial provisional results, the asset review at Heta Asset Resolution AG has revealed an additional capital shortfall of EUR 4.0 to 7.6 bn. As a result of this, the planned wind-down strategy was changed on 1 March 2015. The Republic won't transfer any additional taxpayer funds to the company. Instead, the financial market supervisory authority will implement a resolution according to the Bank Recovery and Resolution Act. As a first measure, a moratorium on the bulk of Heta's liabilities (excl. covered bonds) until 31 May 2016 has been imposed. As a result, insolvency has been prevented for now, and the deficiency guarantees granted by the province of Carinthia won't be triggered for the time being. In our opinion, the further approach to Heta's wind-down depends on a variety of factors, among which there is especially the potential trigger event for the deficiency guarantees. However, it seems clear that investors will have to contribute to the costs of the Heta winddown. The Heta proceedings are also affecting other institutions in Austria's banking market (e.g. guarantees for the Pfandbriefstelle of the mortgage bank sector). In the SSA segment the reevaluation of guarantees should lead to greater differentiation between individual issuers. A Heta debt haircut could possibly lower the volume of the province's guarantees, legal uncertainty will however remain high. In our opinion, Heta could become an important catalyst for reform in Austria, and cast fiscal equalization in a fresh light as well. For decades, Austria's provinces and municipalities have relied on the federal government ultimately providing support in the event of a liquidity squeeze. We don't interpret this as the end of intra-state solidarity, possibly though as a shift in the balance of power, with an increase in the willingness to enact reforms on every level of government. Even though Austria's economic growth has exhibited above-average strength over the past decade, this trend has come to an end in 2014. Weaker economic momentum was on the one hand attributable to sluggish consumer demand, and on the other hand to negative net exports. We expect that Austria's GDP growth will remain below that of the euro area in both 2015 and 2016. Effective reforms are essential to achieve sustainable growth in the mid-term. The tax reform that comes into force in 2016 is a first step, but will in our opinion only moderately affect private consumption in the first year. Weaker economic development has an effect on the budget and public debt as well. We expect that Austria's government will remain on a consolidation path. If a debt haircut can be implemented at Heta, a faster reduction in public debt over the coming years would be possible. Page 1 Erste Group Research Credit Focus | Fixed Income | Austria 16 April 2015 Christian Enger, CFA [email protected] Heta and the Implications for Austria After the Republic of Austria has decided in early March to make no additional taxpayer funds available to Heta, Austria's financial market supervisory authority (FMA) has employed the Bank Recovery and Resolution Act (BaSAG) that has come into force in January 2015 in order to prevent the threatening insolvency of Heta. This decision by the Republic is causing investors to think about the “value” of various types of guarantees and sureties in Austria. As a result of this, our report has a strong focus on the topic of Heta this time. Retrospective: Hypo Alpe Adria Bank International Emergency nationalization of the former Hypo Alpe Adria International at the end of 2009 Heta Asset Resolution AG was originally operating under the name Hypo Alpe Adria International AG (HAA). HAA was a banking group domiciled in Klagenfurt (Carinthia). The institution evolved out of “Kärntner Landes-Hypothekenbank”, which was established in 1896 as a cooperative credit institution. Due to pursuing aggressive growth without limiting risk, too optimistic expectations and severe operational deficiencies in all important areas, the bank ran into financial problems and became subject to an emergency nationalization at the end of 2009. The institution was however unable to recover from its financial difficulties and is in the meantime being wound down as Heta Asset Resolution AG. Basic structure of the winddown model: Only the winddown portfolio remains with the original HAA After a bankruptcy of HAA was initially examined as a possible option, the government rejected this approach in mid-March 2014 following a difficult struggle and decided to undertake an orderly wind-down. The legislative package adopted for this purpose in June 2014 (HAA special law) provides for the establishment of three federal holding companies, for which the Republic isn't assuming an unlimited guarantee though. This is for one thing AbbaubeteiligungsAG (ABBAG), which is holding HAA/Heta. Heta has a balance sheet total amounting to approx. EUR 18 bn., and administers the actual wind-down portfolio (mainly real estate, leasing business, nonperforming loans). Effective with 30 October 2014, the company has returned its banking license. A separate entity by the name of HBI Bundesholding AG was established for the Italian subsidiary (Hypo AlpeAdria Bank S.p.a./HBI). HBI continues to require a banking license, which made it necessary to hive it off. At the shareholder meeting of 19 August 2014, it was resolved to transfer the Italian subsidiary Hypo AlpeAdria Bank S.p.a./HBI to HBI Bundesholding AG. SEE network to be sold to a consortium consisting of Advent International and the EBRD The third company is Hypo SEE Holding, which comprises the South-East European banking network (total volume approx. EUR 8 bn.). The SEE network, which is operating under the name of Hypo Group Alpe Adria AG (HGAA), was hived off from the former HAA and transferred to the Republic of Austria as well, resp. to Finanzmarktbeteiligung Aktiengesellschaft (FIMBAG). After intermittent complications, it was announced on 23 December 2014 that the company will be sold in line with an EU directive on state aid (mandatory sale by 30 June 2015). US investment fund Advent International, with a minority participation by the European Bank for Reconstruction and Development (EBRD) will take over the South-Eastern European activities. Closing of the transaction is still contingent on a positive state aid decision by the European Commission and the approval of the relevant supervisory authorities. Closing of the sale is expected by mid 2015. However, a relationship between Heta and the SEE network remains in place for the time being. This is because Heta has agreed to continue to provide its refinancing lines to its former subsidiaries, Erste Group Research – Credit Focus: Austria Page 2 Erste Group Research Credit Focus | Fixed Income | Austria 16 April 2015 which amount to a not inconsiderable volume of EUR 2.2 bn. These will only be reduced gradually. It had been decided already in the originally presented wind-down model that subordinated creditors (including those with deficiency guarantees) and providers of participation capital would essentially have to contribute to the costs of the wind-down. Thus the HAA special law provides for the extinguishing of so-called restructuring liabilities. The same applies to the associated deficiency guarantees of the province of Carinthia. Should any assets be left after the wind-down proceedings have been concluded, these will be distributed among the restructuring creditors – with subordinated creditors enjoying seniority over shareholders. HAA's liabilities with a deficiency guarantee of the province are part of ABBAG. Contrary to subordinated bonds, little should change for senior bonds with a deficiency guarantee for the moment. The province's guarantee remains in place and former finance minister Spindelegger emphasized on 11 June 2014 that senior bond investors “will receive what has been promised to them in full”. However, in the meantime a big question mark hangs over this promise. Heta under control of the FMA – payment moratorium imposed Government changes Heta wind-down strategy Even though law suits have already been filed against the HAA special law, in which creditors are mainly disputing the burden-sharing of restructuring liabilities, the fundamental structure of Heta outlined above remains essentially in force. However, the wind-down strategy was changed in March of 2015, which has worsened the prospects of creditors. Asset review will reveal additional large impairment requirements Heta is currently conducting an asset review. This is intended to ascertain the realistic liquidation value (long term economic value) of the company's assets. According to the ministry of finance, the review is inter alia intended to serve as the basis for the drafting of a wind-down plan as required by law. In addition, the results would be reflected in the company's 2014 annual report. In the meantime a first indicative interim result of the asset review has been presented. This will lead – depending on the scenario – to a further impairment of Heta's assets ranging between EUR 5.1 to 8.7 bn., which in turn results in additional financing requirements of EUR 4.0 to 7.6 bn. The most recent reports are indicating that the most probable scenario is currently that Heta's capital requirement will amount to EUR 4.6 bn., which is at the low end of the announced range. However, in our understanding, two factors could drive the capital requirement to higher levels. This is for one thing the outcome of the law suits filed against the HAA special law. For another thing, closing of the SEE network's sale hasn't taken place yet. There still exist a number of reservations that could end up scuppering the transaction. Heta wants to present its balance sheet in midApril 2015, which should provide more clarity. The Republic of Austria will inject no additional money into the company – the FMA implements a resolution according to BaSAG At the beginning of the year, chancellor Faymann emphasized that while he continued to support the orderly wind-down of Heta, the result of the asset review could make it necessary to revise this strategy. This has now happened. On 01 March 2015, the Republic has decided that it is no longer willing to fund the shortfall described above. The Republic won't make any additional tax payer funds available to Heta. In order to avert the threat of the company's insolvency, Austria's financial market supervisory authority (FMA) is making use of the recently adopted Bank Recovery and Resolution Act (BaSAG). It has taken control of the company (management oversight) Erste Group Research – Credit Focus: Austria Page 3 Erste Group Research Credit Focus | Fixed Income | Austria 16 April 2015 Deferment of the bulk of Heta's liabilities until 31 May 2016 and as a first measure has decreed that Heta doesn't have to make any payments on the bulk of its liabilities (primarily bonds, subordinated capital, promissory notes, claims of BayernLB) with respect to interest or redemptions until 31 May 2016. Covered bonds are NOT included in these eligible liabilities and are therefore not affected by this measure. Heta is in resolution, which has averted a bankruptcy – deficiency guarantees are not triggered For a wind-down order to be given, three preconditions have to be fulfilled according to BaSAG. These are the determination that an institution is in default or is likely to default, the unavailability of private sector alternatives, and safeguarding the public interest (among other things for the prevention of negative effects on financial stability and to protect public funds). Inter alia on the basis of the preliminary result of the asset review, the FMA assumes that a state of over-indebtedness has already been reached in Heta's case. In addition, prior to the moratorium, insolvency was threatening “in the near future (in 2016 at the latest)”, which is evident from the company's liquidity planning. The FMA regards the other two preconditions as fulfilled as well. Therefore, it has now ordered the resolution of Heta in line with the BaSAG, but hasn't filed for the opening of insolvency proceedings. This means explicitly that the guarantees of the province of Carinthia for senior unsecured bonds with a deficiency guarantee will remain dormant for the time being. The latter are according to §1356 ABGB (Austrian civil code) literally solely defined as assumptions of liability in the event of bankruptcy (see Credit Focus Austria Q3 2014, p.10 ff.). Effects of final wind-down strategy especially noticeable in Austria's mortgage bank sector The measures for the final wind-down of Heta have not only affected the group itself, but have an effect on other institutions in Austria's banking market as well. Pfandbriefstelle is a pooling platform of the provincial mortgage banks, which has been used frequently especially in the past. As of 30 June 2014, its balance sheet total amounted to EUR 6.1 bn. Heta, the roots of which are also in the mortgage banking sector, has issued bonds totaling EUR 1.2 bn. (as of 30 June 2014) through Pfandbriefstelle, resp. its subsidiary Pfandbriefbank (Oesterreich) AG. These Heta liabilities of Pfandbriefbank (AT) are also included in the moratorium. Moody's has placed the 'A2' rating of the pooling company on negative credit watch (“review for downgrade”). Pfandbriefstelle doesn't have shareholders, but members. These are the nine (original) Austrian provincial mortgage banks: 1. Hypo-Bank Burgenland AG 2. Austrian Anadi Bank AG 3. Heta Asset Resolution AG 4. Niederösterreichische Landesbank – Hypothekenbank AG 5. Oberösterreichische Landesbank AG 6. SALZBURGER LANDES-HYPOTHEKENBANK AG 7. Landes-Hypothekenbank Steiermark AG 8. HYPO TIROL BANK AG 9. Vorarlberger Landes- und Hypothekenbank AG Guarantee for the liabilities of Pfandbriefstelle According to §2 of the Pfandbriefstelle law, the member institutions are jointly and severally liable for Pfandbriefstelle's obligations. The guarantors/owners of the member institutions are jointly and severally liable for all liabilities of Pfandbriefstelle created on or before 02 April 2003, as well as all liabilities that have been created in the transitional period from 02 April 2003 up to and including 01 April 2007, the agreed maturity of which doesn't go beyond 30 September 2017. With that, the nine provincial mortgage banks and the respective provinces with the exception of Vienna are liable for all liabilities of Pfandbriefstelle as joint debtors. The limitation with respect to issuance Erste Group Research – Credit Focus: Austria Page 4 Erste Group Research Credit Focus | Fixed Income | Austria 16 April 2015 date and maturity is applicable to the liability of the provinces. In the event of a default, creditors have recourse to every single member institution as well as its guarantor/owner. The member institutions have explicitly confirmed that owners of debt securities issued by Pfandbriefbank (AT) can rely on the former being jointly and severally liable for these liabilities. It is our understanding that in the wake of the Heta moratorium eight provincial mortgage banks as well as the eight respective provinces are footing the bill for the liabilities of Pfandbriefbank (AT). Indications that every province and its associated provincial mortgage bank will provide one eighth of the total, i.e., EUR 150 m., are currently becoming stronger. A final decision on how these two parties will distribute their respective share of these payment obligations internally hasn't been taken yet. Statements issued thus far however indicate that there will be province-specific differences. We expect though that a short term agreement will be made between the mortgage banks and the provinces. Nota bene, the initial step “only” concerns the provision of liquidity to Pfandbriefbank (AT). Press releases by the provincial mortgage banks to date are indicating that a sufficient amount of liquid funds is available in the sector. From our perspective it is more important how the losses that are to be expected will be distributed. Several mortgage banks have already reported significant negative effects on their earnings as a result of having to set aside loan loss reserves. Provincial guarantees for credit institutions (amounts as of year-end 2013) Province Burgenland Carinthia Lower Austria Upper Austria Salzburg Styria Tyrol Vorarlberg Vienna Total Guarantee volume (EUR m) 2,155 12,883 5,316 2,663 55 2,463 4,683 4,720 6,758 41,696 Credit institution Hypo-Bank Burgenland AG Hypo Alpe-Adria-Bank AG, HAA Int. AG HYPO NOE Gruppe Bank AG Oberösterreichische Landesbank AG Salzburger Landes-Hypothekenbank AG Landes-Hypothekenbank Steiermark AG Hypo Tirol Bank AG Vorarlberger Landes- u. Hypo.bank AG UniCredit Bank Austria AG Share 0%, sold 0%, sold 100% 51% 10% 25% 100% 76% 0%, sold Source: closed accounts of federal provinces, Courts of Auditors of the federal provinces, Federal Court of Auditors, Erste Group Research Erste Group Research – Credit Focus: Austria Page 5 Erste Group Research Credit Focus | Fixed Income | Austria 16 April 2015 The next steps in Heta's wind-down Proceedings over the coming months: Evaluation of Heta's assets and liabilities – working out a final wind-down strategy Servicing of the majority of Heta's liabilities is suspended for 15 months (until 31 May 2016). This time will be used to evaluate Heta's assets and liabilities on the basis of the 2014 annual report and to work out a strategy for the final wind-down of Heta. In the course of this it will also be determined which resolution instruments will need to be employed, and to what extent. At the end of the moratorium there are different options. The goal of Austria's government is to transfer no additional tax payer funds to Heta. With respect to the deficiency guarantees of the province of Carinthia, finance minister Schelling has said that one would attempt to “wiggle out from this”. Alas and alack, the question is: How? Guarantees of province of Carinthia continue to exist A crucial point for assessing the further proceedings is in our opinion the question of the guarantees granted by the province of Carinthia. Even though these haven't been triggered for the time being, they continue to exist and could accordingly still come into force in the future. However, experts are arguing over the value of these guarantees. In the statutes deficiency guarantees are defined as a liability in the event of insolvency. In our opinion it is not clear whether a debt haircut would be legally equivalent to insolvency and would therefore trigger payment by Carinthia (trigger event). Moody's doesn't assign any rating uplifts based on the deficiency guarantees. Due to its accessory nature (in contrast to an abstract guarantee, it is tied to the underlying debt), the agency sees a low probability that any claims against Carinthia will arise in the event of an (involuntary) haircut. In our opinion this corresponds to a literal interpretation of a deficiency guarantee according to §1356 ABGB (Austrian civil code), which is defined as a liability in the event of insolvency. FMA chairman Ettl stated an opposing view in a roundtable discussion (“Runder Tisch”) on Austrian TV on 02 March 2015. In his opinion, creditors will have a claim arising from the provincial guarantee on that portion of the debt that will be subjected to a haircut. Carinthia however is investigating whether the guarantees are legally valid at all. A suspension of the guarantees is in our opinion most closely aligned with Fitch's expectations. No legal provisions for the insolvency of a province yet National Bank president Ewald Nowotny was chairman of the so-called task force, which was charged with working out various wind-down models for HAA. In this function, he stated in the spring of 2014 that a very detailed legal examination had come to the conclusion that in the event of HAA/Heta insolvency, Carinthia's guarantees would come due immediately. As long as Carinthia's outstanding volume of guarantees still amounted to EUR 10.2 bn., Heta insolvency would threaten to push Carinthia into insolvency as well, unless the federal government was to provide a bailout. An important argument in favor of the chosen HAA wind-down model was therefore inter alia that there exist no legal provisions for the threatened subsequent insolvency of a federal province. In our opinion, it is at least improbable in the short term that political decision makers would risk such an experiment. However, a clear commitment that the Republic would provide support to a province if needed was however not provided. Possible repurchase offer for senior bonds with a deficiency guarantee under discussion On occasion of the presentation of the original wind-down model in H1 2014, then finance minister Spindelegger added three complements to the proposals of the task force. One was that Carinthia had to take responsibility and provide funds for the HAA wind-down. In addition, subordinated creditors and providers of participation capital were to share in the burden as well. Lastly, in the context of a general settlement, Bayerische Erste Group Research – Credit Focus: Austria Page 6 Erste Group Research Credit Focus | Fixed Income | Austria 16 April 2015 Landesbank was requested to also contribute to the restructuring costs. For the implementation of Carinthia's contribution a possible repurchase offer for outstanding senior bonds with a deficiency guarantee is increasingly often discussed. However, whether a repurchase makes sense depends in our opinion strongly on the trigger event question. Should the accessory character of the deficiency guarantees prove to be correct, such an offer becomes less attractive for Carinthia. Should the deficiency guarantees be triggered by a debt haircut as well, investors could in our assessment only accept such an offer if.... … they have doubts about the validity of the surety … they have concerns about the Republic's willingness to lend support to Carinthia … they are questioning the timing of the provision of funds … they are shying away from having to pursue potential claims through the courts. The further approach to Heta in our opinion depends on several factors, which is why Austrian decision makers have to date kept many options open In our opinion the further approach to the Heta wind-down depends also how various legal disputes will turn out. These concern inter alia the participation of restructuring liabilities and the legal disputes with BayernLB. According to representatives of the FMA, it is clear that all creditors will be treated equally according to the category of their claims. The claims of BayernLB are however not covered by a deficiency guarantee, which means that it would get the short end of the stick in the event of a (later) insolvency of Heta. Against this background of significant uncertainty regarding a number of factors it is in our opinion sensible that Austrian decision makers have to date kept many options for action open. It seems clear that investors are supposed to contribute to the wind-down costs of Heta From the perspective of investors in senior bonds (with a deficiency guarantee), no haircut has been imposed yet. It seems however clear that they are expected to contribute to the wind-down costs. The FMA will probably stipulate a haircut near the end of the moratorium (31 May 2016) per decree. Alternatively it is possible that the moratorium will be extended, even though this is in our opinion not a desired outcome. Similar to what happened on occasion of the adoption of the HAA special law in summer of 2014, decision makers in Austria are optimistic that the most recent actions will be able to withstand judicial review. It appears to be less doubtful that law suits will once again be filed. Reaction of the rating agencies to Heta measures Approach to Heta leads to negative rating actions by Moody’s To date these measures have caused only Moody's to take negative rating actions. As a direct consequence, the agency has downgraded Heta's bonds with a provincial deficiency guarantee from 'Caa1' to 'Ca'. This is the second-lowest rating assigned by the agency, and it generally means that the instrument concerned is highly speculative. A default thus has either occurred already or will occur shortly. There is however a chance of obtaining some restitution of principal and interest. Moody's 'Ca' rating doesn't take the value of the deficiency guarantee into account and is therefore solely based on an analysis of the size of the losses. The agency expects that these will range from 35% to 65%. The rating outlook remains however negative and reflects the considerable uncertainty over the prospective size of the losses bondholders (with a deficiency guarantee) will bear. With the exception of the bond issue guaranteed by the federal government (XS086348035), the rating of which has been confirmed and will remain in line with that of the Republic of Austria ('Aaa'), Heta's subordinated bonds are rated at the lowest possible rating of 'C' (expected Erste Group Research – Credit Focus: Austria Page 7 Erste Group Research Credit Focus | Fixed Income | Austria 16 April 2015 loss exceeding 65%). As a result they no longer have an outlook assigned to them. Heta's covered bonds are explicitly not affected by the moratorium. Moody's has nevertheless downgraded them as well, from 'Baa3' to 'Ba1'. Moody’s IDRs of Hypo Vorarlberg (‚A2‘) and Hypo Tirol (‚Baa2‘) „under review“ The measures for the final wind-down of Heta have an effect on other institutions in Austria's banking market as well. The 'A2' rating of Pfandbriefstelle/Pfandbriefbank (AT), the pooling platform of the mortgage banking sector, has been placed on negative credit watch. Within the Hypo sector, Moody's only assigns issuer ratings to Hypo Vorarlberg ('A2') and Hypo Tirol ('Baa2'). Due to the liability for the obligations of Pfandbriefbank (AT), Moody's has placed their ratings on negative credit watch (review for downgrade) as well. As a result of the joint liability mechanism of Pfandbriefbank (AT), the agency sees heightened risks for the earnings situation and the capital resources of these institutions. At the moment, Moody's estimates that both banks will have to bear a burden ranging from EUR 60 m. to 111 m. each due to Pfandbriefstelle. During the review period the agency wants to evaluate whether the groups have sufficient buffers against additional downside risks and whether their current ratings are still in line with the challenges they are facing at present. Six Austrian covered bond programs from the mortgage banking sector find themselves on negative credit watch As a result of the review of bank ratings, Moody's has also placed six Austrian covered bond programs on negative credit watch: Hypo NOE Gruppe Bank AG's Mortgage Covered Bonds (‚Aaa‘/‚review for downgrade‘) Hypo NOE Gruppe Bank AG's Public Sector Covered Bonds (‚Aaa‘/‚review for downgrade‘) Hypo Tirol Bank AG's Mortgage Covered Bonds (‚Aa3‘/‚review for downgrade‘) – TPI Leeway ‚0‘ Hypo Tirol Bank AG's Public Sector Covered Bonds (‚Aa1‘/‚review for downgrade‘) – TPI Leeway ‚0‘ Vorarlberger Landes- und Hypothekenbank AG's Mortgage Covered Bonds (‚Aaa‘/‚review for downgrade‘) – TPI Leeway ‚1‘ Vorarlberger Landes- und Hypothekenbank AG Public Sector Covered Bonds (‚Aaa‘/‚review for downgrade‘) – TPI Leeway ‚2‘ Apart from the above mentioned Hypo Vorarlberg and Hypo Tirol, Hypo NOE Group is also affected by this measure. Moody's hasn't published a rating for the unsecured instruments issued by the group. There exists only an assessment by S&P, which rates the company 'A'/'stable'. In coming months, Fitch will adjust support assumptions Europe-wide, which will affect Austrian institutions as well. Fitch has confirmed the rating of the Heta subordinated bond with a federal guarantee (XS086348035). However, the agency in this case relies strongly on the guarantee of the Republic of Austria for this instrument. Heta-specific changes to the ratings of Austrian institutions are probably not going to be taken. However, Europe-wide, Fitch wants to take a decision this year regarding the reduction of support assumptions in the banking sector due to the change in the regulatory framework. Analogous to its competitors, the agency so far only assigns a negative outlook to the ratings of Austrian institutions. However, as a result of the measures concerning Heta, it confirms that bank ratings in the Alpine Republic will likely decline to their stand-alone ratings (viability ratings). This implies downgrades of between two to three notches. Erste Group Research – Credit Focus: Austria Page 8 Erste Group Research Credit Focus | Fixed Income | Austria 16 April 2015 S&P states that the recent actions will have no direct rating effects on Austrian institutions S&P states explicitly that the approach to Heta won't have any direct effects with respect to assumed support probabilities of the Republic for systemically important banks. There is a rising willingness to shift the costs of bank restructurings, resp. resolutions to senior unsecured creditors. However, at least in the short term, the agency expects that the Austrian authorities would act differently from their approach to Heta in the event of problems at banks with large deposit volumes. In these cases, possible solutions could also include government support. Nevertheless, effects on ratings have already been in evidence in the past. For one thing, S&P has downgraded Austria's large banks in the fall of 2014 due to the adoption of the HAA special law. As a result of the associated uncertainty, the agency has adjusted its rating component for “additional factors” downward by one notch. For another thing, bank ratings have been on negative credit watch for the past month. Together with Germany, the UK and Switzerland, Austria has implemented the legal adoption of the bail-in instruments as of 01 January 2015. Many other countries are taking a year longer for this. With the possibility to make use of bail-in instruments, it becomes inherently more difficult to forecast the probability of government support measures for operating companies. The agency expects that a rating decision will be taken at the beginning of May 2015. Implementation of the bail-in instruments is however not the sole trigger for potential downgrades. With respect to large Austrian banks, S&P points to numerous risks, so that downgrades of up to two notches could well be issued. Rating overview of selected Austrian institutions Issuer Erste Group Bank Austria RBI RLB OOE BAWAG RLB NOE-Wien HAA/HETA ÖVAG Oberbank Hypo NOE RLB Steiermark Hypo Vorarlberg Spk. OOE Kommunalkredit BTV Hypo OOE Hypo Tirol Total Assets (as of 30.06.2014) 198.398 183.124 127.279 38.600 34.527 28.634 25.153 18.782 17.544 15.026 14.637 14.044 12.454 12.370 9.342 9.073 8.514 S&P Issuer Rating A*BBB+ *A*A A+ - Moody's Issuer Rating Baa2 *+ Baa2 * Baa2 * Baa1 * Baa2 Baa1 * B2 *A3 *A2 *Ba1 *Baa2 *- Fitch Issuer Rating A A A B *A - Source: Bloomberg, companies, Erste Group Research Erste Group Research – Credit Focus: Austria Page 9 Erste Group Research Credit Focus | Fixed Income | Austria 16 April 2015 Ralf Burchert, CEFA [email protected] Sub-Sovereigns & Agencies (SSA) Federal government and the provinces: a new balance of power? In our opinion, Heta could turn out to be an important catalyst for reform in Austria and cast a fresh light on fiscal equalization as well. From the perspective of investors, the reevaluation of guarantees results in a stronger differentiation of investments in the SSA sector. By the end of the payment moratorium, the FMA is likely to decree an official debt haircut on the basis of the new banking legislation. Investors are therefore faced with questions over the value of sureties and guarantees (see also Credit Focus Austria Q3 2014). The provinces and municipalities for their part have for decades relied on the notion that the federal government will ultimately step in if there is a liquidity squeeze. The blanket assumption of this unwritten “implied guarantee” is hereby history. “There is no federal guarantee for a province”, as finance minister Schelling (OeVP) pointedly noted with respect to the current legal situation. Vice chancellor Mitterlehner (OeVP) is going one step further and is thinking out loud about a new provincial bankruptcy law analogous to BaSAG (Bank Recovery and Resolution Act). We aren't interpreting this as the end of intra-state solidarity, possibly though as a shift in the balance of power, and definitely as new chapter of greater self-reliance, which could also dissolve the reform gridlock. Moody´s expects recovery of 35-65% With the wind-down strategy including the moratorium and a bail-in of creditors an insolvency and with it the triggering of Carinthia's (Baa3/negative) deficiency guarantees is supposed to be prevented for the time being (EUR 10.2 bn. compared to Carnithia's provincial budget of approx. EUR 2.4 bn. according to the 2015 draft budget). A debt haircut by the resolution authority (financial market supervisory authority, FMA) could pursuant the principle of accessoriness lower the volume of the guarantees accordingly. However, there also exist opposing legal opinions, according to which the guarantees for the part subject to a haircut would be triggered. According to finance minister Schelling, negotiations between Carinthia and the creditors are planned following a debt haircut. Until then, the guarantees remain however frozen and thereafter they would still be considerably large even under conservative assumptions: Moody's expects a recovery of 3565%. This would be compatible with a debt haircut scenario of up to 65%, thus the remaining volume would amount to EUR 4.6 bn. A demand by the federal government's that Carinthia contribute to the wind-down costs to the tune of EUR 500 m. was already previously taken into account in the rating – this remains thus far open. There remain therefore considerable uncertainties for the province, which is why Moody's has lowered its rating on 06.03.2015 from A2 to Baa3. A negative outlook was assigned due to “event risks” and due to legal risks as a result of law suits filed by creditors. Erste Group Research – Credit Focus: Austria Page 10 Erste Group Research Credit Focus | Fixed Income | Austria 16 April 2015 Guarantees are coming under close scrutiny Risks related to guarantees have recently been far more intensely scrutinized by the rating agencies. Primarily the quality of guarantees, the credit profile of the guarantor and not least legal certainty are in our opinion critical questions, as even the rating agencies seem to have been surprised by the implications of the first implementation of the EU banking law (BRRD). EUR 1.5 trn. in guarantees in Europe, Austria in top place Assumptions of liability, resp. guarantees, are employed all over Europe. According to the most recent Eurostat data, EUR 1.5 trn. (2013) in liabilities are guaranteed Europe-wide. The mean level is at around 11% of GDP, in Germany the level is at 18%. With a guarantee volume of 35% of GDP, Austria is in top place in the EU, which is attributable to the high importance of the export sector, off-budget activities (Germany is currently engaging in similar deliberations with regard to the transport sector) and credit institutions partly owned by the provinces. The guarantees of Austrian provinces (incl. Vienna) amounted to approx. EUR 53 bn. as of the end of 2013, of which EUR 40.3 bn (76%) consisted of guarantees for credit institutions partly owned by the provinces, which should largely mature until 2017 and consequently improve the credit profiles of the provinces. Comparison to Germany Germany is about two years ahead in this context: its cut-off date was 18.7.2005 (Austria: 01 April 2007). All liabilities issued until then and limited to a term to maturity until 31.12.2015 (Austria: 30.9.2017) are still covered by guarantor obligations (deficiency guarantees). Without these guarantees, Austria's total volume of guarantees would amount to approx. 22% of GDP. The remaining guarantor liabilities of the provinces are mainly resulting from residential construction subsidies, hospitals or regional economic stimulus measures. The guarantees of the federal government concern mainly export promotion (42%, OeKB), transportation (35%, primarily ASFINAG and OeBB) and the EFSF (12%). No insolvency law for the provinces before 2017 In light of Carinthia's deficiency guarantees, vice chancellor Mitterlehner has announced that he wants to study the creation of a “LaSAG” (provincial recovery and resolution law), a law that would be an analogue of BaSAG for the provinces. Such a law is not to be expected before 2017. However, such a mechanism would only become effective at a much later stage than e.g. the regulations in Germany, which are focusing on an earlier stage, namely when financial problems resp. a coming budgetary emergency first become visible. Subsequent to this, it is envisaged in Germany that a recovery program is agreed upon jointly with the federal state concerned. The stability council, a joint committee of the federal government and the states, has the central function in this. It is tasked with regular oversight over the federal budget as well as of state budgets and to ensure compliance with fiscal consolidation obligations, which must currently be fulfilled by the states of Berlin, Bremen, Saarland, Sachsen-Anhalt, and Schleswig-Holstein, in order to receive “consolidation aid” until 2019 (EUR 800 m. in total between 2011 and 2019). Erste Group Research – Credit Focus: Austria Page 11 Erste Group Research Credit Focus | Fixed Income | Austria 16 April 2015 Fiscal council vs. stability council Austria's stability pact by contrast offers greater leeway and the Austrian equivalent to the stability council, the fiscal council, has solely analytical tasks with the character of recommendations. While there are a number of fiscal rules, which are oriented along the lines of EU directives, the stability pact's sanctions mechanisms are lacking in bite (consultation mechanism, evaluation procedure, final instance is the constitutional court). LaSAG perspective A “LaSAG” could in our opinion serve as an attractive political instrument for the federal government to toughen up the stability pact. However, the preconditions are different from those that apply to the wind-down of banks, since a regional authority and its tasks remain in force, which means that a “going concern” assumption is retained. Even in §16 F-VG (fiscal constitutional law, see page 15) – concerning the possibility of pledging the revenues and assets of provinces – sets a framework with respect to collateral. A LaSAG that isn't planned before 2017, can give investors in bonds issued by the provinces resp. in bonds of their agencies better orientation, could however also, as Moody's assumes, lead to a further qualification of provincial guarantees. Reordering of relationship between federal government and the provinces? The relationship between the federal government and the provinces is currently subject to a process of change, which is framed by weak economic data and a reform gridlock, and could only be driven forward by more creatively oriented policy. Minister Schelling called the tax reform a “first step”: additional measures are supposed to follow in the areas of labor markets (non-wage labor costs), pensions, subsidies and budget consolidation. Tax reform as a reform accelerant With respect to the provinces, the federal government is increasing reform pressure with the tax reform that was adopted on 17.03.2015 as well. We expect that provinces and municipalities will have compensatory financing needs of EUR 1 bn. in total, primarily due to lower revenues from their tax revenue share. Thus they must also take compensatory funding steps in the context of the tax reform, in order to maintain their medium term budget path. Given that the tax reform comes into force on 01.01.2016, the time window for additional reforms is already defined. Erste Group Research – Credit Focus: Austria Page 12 Erste Group Research Credit Focus | Fixed Income | Austria 16 April 2015 Share of Austrian provinces in revenues, expenses, debts and guarantees (2013, in EUR bn.) EUR bn. *) provinces including Vienna. Source: Statistics Austria, Erste Group Research Reform projects Once the still outstanding budget reform has been undertaken (“VRV new”), the key will be the reordering of competences between the federal government and the provinces (reform of tasks, administrative reform and even government reform), in order to create the preconditions for solving long-term problems, resp. tackling the budget pressures of coming years. Among these are for instance stationary health care (hospitals), pensions and wide-ranging subsidy schemes (residential construction, economy, regional subsidies). In terms of subsidies a total volume of savings of EUR 1.1 bn. has been mentioned. Not least due to the events surrounding Heta, we have had the impression in recent months that the federal government is pressing ahead with reforms – and is increasingly prepared to make use of already existing legal instruments. Reform framework conditions The constitutional regulations regarding fiscal equalization and the credit system essentially leave the federal government in a very strong position. Fiscal equalization and financing of provinces in Austria Current financing – fiscal equalization With respect to fiscal equalization, the fiscal constitutional law regulates that the federal government and the remaining regional authorities are in principle liable for the expenses resulting from pursuing their tasks (§2). Taxation powers are regulated by federal legislation in this context (§3). While the provinces are empowered to charge municipal levies, this can be limited by federal laws (§3(2)). However, the federal government is obliged to take the distribution of burdens in public administration into account, so that the capabilities of the regional authorities concerned are not exceeded (§4). In practice, this is the subject of negotiations between the regional authorities. The result is reflected in the fiscal equalization law (FAG), currently valid for the time period 2008 – 2016. Erste Group Research – Credit Focus: Austria Page 13 Erste Group Research Credit Focus | Fixed Income | Austria 16 April 2015 Legal Framework – Fiscal Constitutional Law (F-VG 1948) I. Fiscal equalization §2. The federal government and the other regional authorities bear, unless stipulated otherwise by relevant legislation, the expenses which arise from the execution of their tasks §3. (1) Federal legislation regulates the distribution of taxation powers and tax revenues between the federal government and the provinces (municipalities) and may moreover grant these regional authorities financial allocations from general federal funds for their administrative expenses as such as well as grants for specific purposes. (2) The provinces have the right to levy charges from municipalities or where applicable, municipal associations, by means of provincial legislation. Federal legislation can limit the maximum extent of provincial levies. To the extent that municipal associations exist on the day of this federal constitutional law coming into force, provincial legislation regulates the apportionment of their requirements. §4. The regulation provided for in §§ 2 and 3 has to be congruent with the distribution of burdens in public administration and has to take into account that the limits of the capabilities of the regional authorities concerned are not exceeded. Share of the federal government in the financing mix approx. 30% The fiscal equalization law provides the provinces (and municipalities) however with wide-ranging financial autonomy with respect to financing; bond issues and loans are explicitly mentioned. Nevertheless, the federal government is financing a considerable part of about 30% of the liabilities of the provinces through the federally owned financing agency (OeBFA). Here too, the federal government, namely the federal minister of finance, plays a decisive role, not least because he must issue a “request” in order for funding for the provinces being obtained. Financing of provincial debts (2013) Source: Statistics Austria, Erste Group Research Erste Group Research – Credit Focus: Austria Page 14 Erste Group Research Credit Focus | Fixed Income | Austria 16 April 2015 Fiscal Constitutional Law 1948 in its present form IV. Credit Act §14. Provincial legislation regulates the issuance of bonds (taking up of loans) of provinces, municipal associations, and municipalities. §9 shall apply mutatis mutandis. §15. The federal government may grant loans to the provinces (municipalities) solely on the basis of a special federal law or the federal fiscal law. The same holds for shares of provinces (municipalities) in revenues of the federal government, which are not stemming from taxation. §13 shall apply mutatis mutandis in these cases as well. V. Budgeting Law and Financial Statistics §16. …....... (2) The transfer or pledging of taxation powers, shares in tax revenues and claims involving economic interests, which the regional authorities with the exception of the provinces, the provincial capitals and statutory cities are entitled to receive from the federal government or other regional authorities based on the fiscal equalization law, is prohibited. Compulsory enforcement actions with respect to such rights or claims cannot take place. The federal minister of finance may upon request by a provincial government grant exemptions from this prohibition. Federal Law on the Administration and Coordination of Fiscal and Other Federal Debts – Federal Financing Law (1992, in the 2014 version) §2 ….... Upon request by the federal minister of finance, OeFBA must on behalf of and for the account of the federal government under consideration of the goals according to §2 of the Federal Budget Law, BGBL Nr. 213/1986, 1. perform and settle credit operations for the provinces and then extend loans to them from these funds 2. enter into currency exchange agreements and then enter into agreements with the provinces in order to alter obligations arising from credit operations of these provinces retroactively by transferring in substance claims and obligations arising from these currency exchange agreements. Erste Group Research – Credit Focus: Austria Page 15 Erste Group Research Credit Focus | Fixed Income | Austria 16 April 2015 Margarita Grushanina [email protected] Sovereign Economic trend: below average growth compared to the euro zone Over the past decade Austria has exhibited above average economic growth (2004-2013 average AT: 1.6%; EA: 0.9%; DE: 1.2%). However, 2014 brought this trend to a halt: for the first time in more than 10 years Austria’s GDP growth rate fell behind that of its European peers (2014 AT: 0.3%; EZ: 0.9%; DE: 1.2%). What were the reasons for disappointingly weak growth reported last year? Snapshot economic situation: Q2/14 GDP (%, q/q) Unemployment (%) Q3/14 0.0 5.4 0.1 5.6 Q4/14 -0.2 5.6 Inflation (%) 1.6 1.5 1.2 Industrial production (%, y/y) 0.5 -2 -1.4 Exports (%, y/y) 0.5 2 1.5 Retail sales (%, y/y) 0.4 0.4 -0.3 Source: Statistics Austria, Erste Group Research 2014 2015 (f) 2016 (f) GDP (%, y/y) 0.3 0.8 1.4 5.6 5.6 5.8 Unemployment (%) 1.5 1.2 1.5 Inflation (%) Government debt (% GDP) 84.5 84.4* 83.8* 2.4 2.2** 1.9** Budget deficit (% GDP) Source: Statistics Austria, Eurostat, Erste Group Research *Erste Group Research estimate **Projection by WIFO For one thing, private consumption, which has contributed positively to GDP growth even during the crisis period, became sluggish in 2013 (with a small negative contribution to GDP for the first time in years and only a minor positive contribution in 2014). For another thing, net exports, which were the main driver of positive economic growth in 2013, have delivered a strongly negative contribution (-0.4%). This was the result of relatively strong growth in imports (2.5% in 2014 vs -0.3% in 2013), which couldn't be offset by moderate growth in exports (2014: 1.5%, 2013: 1.4%). Investment activity remained limited despite favorable financing conditions due to the low interest rate environment. Although gross fixed capital formation (GFCF) has improved from -1.5% in 2013 to 0.7% last year, it nevertheless only delivered a minor contribution to economic growth. Real GDP growth recently lower than Germany's Real GDP indexed, 2005=100 Negative net exports und stagnation of investment and consumption dampen growth GDP y/y, contribution of components to GDP in % 5% 115 115 4% 3% 2% 1% 105 105 0% -1% 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 -2% Austria Euro Area Q3 2014 Q1 2014 Q3 2013 Q1 2013 Germany Source: Eurostat, Erste Group Research Disappointing performance of net exports Q3 2012 Q1 2012 Q3 2011 Q1 2011 Q3 2010 Q1 2010 Q3 2009 Q1 2009 Q3 2008 Q1 2008 Q3 2007 Q1 2007 Q3 2006 Q1 2006 Q3 2005 95 Q1 2005 95 -3% -4% -5% Net exports Govt. cons. GFCF Private cons. GDP y/y Source: Eurostat, Erste Group Research The poor performance of net exports can be attributed to two main reasons: lower than expected growth in exports and relatively strong growth of imports, especially in comparison with sluggish export growth momentum. One of the factors responsible for last year’s subdued growth in exports was that the recovery in several of Austria’s major export destinations was weaker than expected. Another reason for the decline in exports (and by contrast to this, accelerated import growth) is the recently elevated differential between inflation rates in Austria and the euro zone – Austria's largest trading partner. However, for several reasons, we expect exports to pick up in 2015 and 2016. Firstly, the gap in inflation rates between Austria and the euro zone should begin to narrow and will therefore have a smaller impact on exports Erste Group Research – Credit Focus: Austria Page 16 Erste Group Research Credit Focus | Fixed Income | Austria 16 April 2015 A decline in the inflation gap and the devaluation of the euro should lend support to exports from the second half of 2015 onward. This is also going to be reflected in a change in unit labor costs, which are expected to decline throughout 2015 by both the OeNB and WIFO. This would be positive for exports, as it increases the relative competitiveness of Austrian goods and services. Secondly, the QE program initiated by the ECB should boost exports to non-EA countries as well, due to the euro's devaluation vs. other currencies. Lastly, the recovery in Austria's main export destinations should stimulate demand there, including demand for imported goods. Thus we expect exports to grow by 3.4% in 2015, followed by acceleration in growth of up to 4.5% in 2016. Sluggish economic output in main export destinations pressures exports Goods exports, y/y Growing gap between inflation rates in Austria and the euro zone Total HICP, y/y 3,5% 4% 2,5% 3% 1,5% 2% 0,5% 1% -0,5% IT CEE FR+UK+NE+SP Source: Statistics Austria, Erste Group Research Q3 2014 Q4 2013 Q1 2013 Q2 2012 Q3 2011 -1% HICP AT DE Q4 2010 Q1 2010 Q2 2009 Q3 2008 Q4 2007 Q1 2007 Q2 2006 Q3 2005 10 2014 07 2014 04 2014 01 2014 10 2013 07 2013 04 2013 01 2013 10 2012 07 2012 04 2012 01 2012 10 2011 07 2011 Q4 2004 Q1 2004 0% -1,5% HICP EA Scandinavia Source: Eurostat, Erste Group Research Low growth of disposable income and high savings rates are dampening consumption One of the major factors hampering private consumption in 2014 was lower than expected growth in disposable household income. This was undermined by weak wage growth as well as concurrently high inflation (and core inflation) in the country and intensified by a relatively high household savings rate compared to the euro zone average (7.3% in Austria vs 6.6% in the EZ in 2013). As sentiment indicators are signaling uncertainly about the future, households are not inclined to increase their spending and reduce their rate of saving. Another factor that leads to high savings rates having less effect on consumption in Germany and France than in Austria is Austria's very high income tax in compared to most of the euro zone's core countries. After taking inflation and taxes into account, Austrian consumers thus have less spending power than many of their European neighbors. The tax reform should only have a moderate impact on private consumption in 2016 This once again underscores the necessity and importance of the announced tax reform for the economy, which comes into force in 2016. We would expect the reform to initially have only a moderately positive effect on household consumption in 2016, as there is usually a time lag of several months between the change in a factor and the actual, visible effects on a macroeconomic variable such as consumption. We expect that the full effect of the reduction in taxes won't become noticeable before the end 2016. Another crucial, possibly even the most important factor that explains the deviation in private consumption is core inflation. By excluding energy, food and beverages from the calculation, we have deducted a significant part of Erste Group Research – Credit Focus: Austria Page 17 Erste Group Research Credit Focus | Fixed Income | Austria 16 April 2015 the consumption of staples. This cannot fluctuate a lot when economic conditions change. What is left is the price increase of less basic goods and services, the consumption of which consumers can reduce or completely abandon in difficult times. We expect core inflation to decrease in line with headline inflation (if at a somewhat slower rate) and that disposable income will therefore begin to slowly pick up in 2015. We are forecasting moderate growth in private consumption of 0.6% in 2015 and 0.9% in 2016. Low core inflation is positive for consumer demand Private consumption hampered by low growth of disposable income HH & NPISH consumption and disposable income y/y, smoothed 10% 3,5% 8% 2,5% 6% High core inflation prevents expansion of private consumption Core inflation, HH & NPISH final demand, y/y Forecast 3,5% -2% 3,0% -1% 2,5% Source: Eurostat, Erste Group Research Weak economy and subdued sentiment weigh on investment Core inflation, y/y Q1 2016 Q3 2014 Q1 2013 Q3 2011 5% Q1 2010 Q4 2014 Q1 2014 4% 0,0% Q3 2008 HH & NPISH disposable income, y/y, smoothed (rhs) HH & NPISH consumption, y/y, smoothed (rhs) Q2 2013 Q3 2012 Q4 2011 Q1 2011 Q2 2010 Q3 2009 Q4 2008 Q1 2008 Q2 2007 Q4 2005 Q3 2006 Q1 2005 Q2 2004 Q3 2003 Q4 2002 Q1 2002 Q2 2001 -1,5% Q3 2000 -4% 3% 0,5% Q1 2007 -2% 2% 1,0% Q3 2005 -0,5% Q1 2004 0% 1% 1,5% Q3 2002 0,5% Q1 2001 2% 0% 2,0% Q3 1999 4% Q1 1998 1,5% -3% Private consumption, y/y (rhs, inv) Source: Eurostat, Erste Group Research The sluggish trend in private consumption and exports had a dampening influence on investment growth in the course of 2014. In view of less than expected domestic and external demand for domestic goods, inventories could not be fully sold, which has held producers back from investing in the further expansion of production facilities. Moreover, the decline of sentiment indicators, which was inter alia influenced by the conflict between Russia and Ukraine and the unexpectedly weak performance of exports, has reflected uncertainty about future sales volumes, which has slowed down capital expenditures as well. The accumulation of inventories leads to capacities not being fully utilized, as fewer production facilities are employed. However, the expected acceleration in export growth is cause for optimism with respect to investment, as it will improve perceptions regarding potential sales volumes. A slow recovery in domestic demand should help to reduce inventories and increase capacity utilization, which in turn should result in an increase in investment activity. However, these adjustments will take time, thus the full effects of the above mentioned factors should only become visible by the end of 2015. We therefore expect investment to grow only moderately in the first half of 2015 and reach an annual growth rate of 1.1%, which should increase to up to 2.2% in 2016. Erste Group Research – Credit Focus: Austria Page 18 Erste Group Research Credit Focus | Fixed Income | Austria 16 April 2015 WIFO early warning indicator shows decline in manufacturer sentiment WIFO early warning indicator, GFCF, y/y Growing exports create room for investment GFCF, Exports, y/y Forecast 2 10% 17% 8% 1 12% 5% 0 7% 3% 0% 2% -1 -5% -3% -2% -2 -8% -10% -3 -13% -7% -18% GFCF y/y Source: Eurostat, WIFO, Erste Group Research Economic recovery to remain moderate in 2015 Q1 2016 Q1 2015 Q1 2014 Q1 2013 Q1 2012 Q1 2011 Q1 2010 Q1 2009 Q1 2008 Q1 2007 Q1 2006 Q1 2005 Q1 2004 Q1 2003 Q1 2002 Q1 2001 Q1 2000 -23% Q1 1999 -12% Q1 1998 BAI j/j (rhs) WIFO Early Warning Indicator FLASH Q2 2014 Q3 2013 Q4 2012 Q1 2012 Q2 2011 Q3 2010 Q4 2009 Q1 2009 Q2 2008 Q4 2006 Q3 2007 Q1 2006 Q2 2005 Q3 2004 Q4 2003 Q1 2003 Q2 2002 Q3 2001 Q4 2000 -15% Q1 2000 -4 Exports y/y (rhs) Source: Statistics Austria, Erste Group Research We expect Austria to exhibit real GDP growth of 0.9% in 2015 (euro zone: 1.3%), followed by an acceleration to 1.4% in 2016 (euro zone 1.5%). According to our estimate, the main drivers of economic growth will be consumer demand and beginning in the second half of 2015, exports as well. The contribution of investment should remain moderate until 2016. Public finances: despite ESA 2010 and Heta, debt levels lower than initially expected 2014 budget deficit and public debt revised lower According to the new revised data of Statistics Austria (30.3.), public finances are in a better state in terms of debt levels and the budget deficit in 2014 than was initially expected. Thus government debt amounted to EUR 278.1 bn. (84.5% of GDP) at the end of 2014, and the budget deficit to EUR 7.9 bn. (2.4% of GDP). One-off effects due to the establishment of Heta amounted to EUR 4.5 bn. (1.4% of GDP) with respect to the budget deficit and to EUR 13.4 bn. (4.1% of GDP) with respect to total public debt. 2012 and 2013 debt revised lower - ESA influence not as large as initially expected The deficits and debt levels for the years 2012 and 2013 were also revised lower compared to the estimate of September 2014. The main reason cited for this by Statistics Austria was that the effects of off-budget entities which have been reclassified in the framework of ESA 2010, contributed less to indebtedness than was previously assumed. According to the new calculations, the budget deficit stood at 1.3% of GDP in 2013 (instead of 1.5%) and the debt ratio amounted to 80.9% of GDP instead of 81.2% of GDP. At present there is no recent information regarding precise estimates of the new consolidation path. However, due to previously released statements by the ministry of finance, we are of the opinion that the government will stick to its debt reduction program. According to our simulation of the consolidation path, we have made the following assumptions: Erste Group Research – Credit Focus: Austria Page 19 Erste Group Research Credit Focus | Fixed Income | Austria 16 April 2015 - Growth rate of nominal GDP: - - Year 2015 2016 2017 2018 2019 Nominal GDP, y/y 2.0% 2.9% 3.2% 3.3% 3.6% The government is able to capitalize approx. EUR 1 bn. per year from Heta activities. To exercise caution, we have not assumed a 1 debt haircut . The consolidation path corresponds to the calculations by WIFO from January 2015. Simulation of future government debt, taking into account Heta and lower economic growth Government debt, % of GDP 86 84.5 84.4 83.8 84 82 4.1 3.7 82.7 3.3 2.9 80 80.8 2.6 78.4 78 2.2 76 74 72 2014 2015 Effects of Heta 2016 2017 Other debt 2018 2019 Total debt Source: WIFO, Statistics Austria, Erste Group Research Rating agencies are concerned about high indebtedness and the banking sector's exposure to the CESEE region Fitch has downgraded the Republic of Austria All three rating agencies have updated their assessments of Austria in the first three months of 2015. While Standard & Poor’s and Moody's have maintained both their ratings and outlooks, rating agency Fitch has downgraded the Republic of Austria on February 13 by one notch to AA+/F1+/stable. The main reason for the downgrade was a higher than previously expected level of general government debt, whereby it is expected that it will remain at an elevated level for longer than previously assumed. According to Fitch's estimates, Austria's general government debt ratio should reach its peak at approx. 89% of GDP in 2015 (with the contribution of support provided to the banking sector amounting to more than 11% of GDP), which is higher than for all countries in the 'AAA' category with the exception of the US, and significantly reduces the government's ability to absorb shocks. Another factor of concern to Fitch is also the higher than initially planned budget deficit. 1 In case of successful implementation of a debt haircut on Heta (including reduced deficiency guarantees by the provinces) the level of government debt will decline faster. Erste Group Research – Credit Focus: Austria Page 20 Erste Group Research Credit Focus | Fixed Income | Austria 16 April 2015 The rating agencies expect that the government will stick to the consolidation path While all three rating agencies have estimated Austria's debt levels to be several percentage points higher in 2014 than the level published by Statistics Austria at the end of March, Moody's and S&P are more optimistic in their assessment of the momentum of debt and deficit reduction. Moody's expects the budget position to be balanced in structural terms already by 2017, while S&P expects a zero deficit to be reached by 2019. Both agencies are of the opinion that the government will in principle stick to the consolidation path, and assess the efforts with respect to debt reduction as positive. S&P has assumed in its calculations that the tax reform planned for 2016 won't lead to large revenue losses for the budget. Since currently only rough estimates exist regarding compensatory financing for the tax reductions, it is difficult to judge whether this assumption has merit. Heta moratorium is differently assessed by the rating agencies Another point the effect of which the rating agencies assess differently is the implementation of the new legislation in connection with the planned bail-in of creditors of nationalized Heta. According to Moody's, “questions arising regarding the predictability of Austrian government policies are not conducive to Austria's investment climate”. S&P by contrast assesses the Heta moratorium as positive, as it reduces the potential for the Republic's contingent liabilities being triggered. Economic growth and reforms crucial All three rating agencies agree, however, that the recent slowdown in economic growth to some extent represents a threat for the consolidation path, as well as to medium term economic expectations, and that economic stimulus measures as well as structural reforms are necessary. Fitch even mentions an immediate implementation of effective structural reforms as a precondition necessary for a rating upgrade. The other two agencies are somewhat more optimistic in their assessment of Austria's economic trends and emphasize the strong foundations of Austria's economy, especially in comparison to other countries in the euro zone's core as well as European AAA peers. We concur with this view. The most recent “output gap” shows that Austria will be unable to get an above average growth trend back on track in the medium term without implementing efficient reforms. Large CESEE exposure of banking sector could represent a risk Another point about which the agencies are in agreement is the large exposure of Austria's banking system to the CESEE region and the associated risk. The high level of non-performing loans in some CESEE countries and the uncertainty with respect to developments in the Russian/Ukrainian conflict represent a potential threat to the quality of bank assets. Erste Group Research – Credit Focus: Austria Page 21 Erste Group Research Credit Focus | Fixed Income | Austria 16 April 2015 Ralf Burchert, CEFA [email protected] Sub-Sovereigns & Agencies Primary/secondary market Comparison of ASW spreads (in basis points) of EUR benchmarks of ASFINAG, OeBB Infra, ELG Performance comparison iBOXX EUR RAGB government bonds as well as SSA segments (indexed, 2.1.2013=100) Sources: Bloomberg, markit/iBOXX, Erste Group Research In the new year, the performance trend has continued again, with government bonds exhibiting extraordinary strength. Driven by lower sovereign yields and a lower spread over Germany, which at times had declined to just 10 bps, agencies have likewise continued to exhibit positive performance. In the 10-year segment, the spread of the OeBB Infra benchmark bond is by now e.g. below 10 bp. However, premiums have recently stabilized, resp. widened a bit in the short term, resp. even begun to enter an uptrend, which we would however not necessarily ascribe to the events surrounding Heta. The ASW spread of OBND 3 7/8 06/30/25 currently stands at approx. -10 bps. Relative to each other, a slightly stronger differentiation in favor of ASFINAG is noticeable, we would however not expect this to become a sustainable trend. Primary market OeKB already on the market with three new issues New issuance volume in Austria in the sub-sovereigns and agencies sector stood at approx. EUR 6.0 bn. in 2014, and thus remained slightly below redemptions of more than EUR 7.5 bn., which will amount to approx. EUR 6.0 bn. in 2015. Oesterreichische Kontrollbank (OeKB, Aaa/stable, AA+/stable) predominated in Austria's SSA primary market in the first three months of 2015, with total issuance volume of a converted EUR 1.3 bn. (USD 1.2 bn. an AUD 200 m.). In early February a new USD benchmark bond over 1 bn. with a maturity of 5 years and a 1.375% fixed coupon was issued (as of 10.2). Pricing stood at mid swaps +3 bps and with that fills precisely the gap between the existing USD 3/12/2019 issue over USD 1.25 bn. and the 20/01/2021 issue over USD 1 bn. The transaction took place a few days after the topping up of the USD 200 m. LIBOR floater issued in September 2014 maturing in 2018. In a third issue, AUD 125 m. with a maturity of 10.5 years and a fixed coupon of 3.2% was placed at 64 bps Erste Group Research – Credit Focus: Austria Page 22 Erste Group Research Credit Focus | Fixed Income | Austria 16 April 2015 above the sovereign benchmark. Another AUD 75 m. followed in the wake of this at +67.5 bps. In 2015 a total of EUR 4.2 bn. in redemptions is planned, of which the majority is denominated in USD, with the total amounting to USD 3.5 bn. in 2015. One of three USD benchmark issues (March, July and October) has already matured in March, and in addition to this a CHF benchmark issue will be redeemed in October as well (CHF 1.050 m.). The long term annual financing volume has been estimated at approx. EUR 3-4 bn. in 1-2 issues, primarily in USD and EUR. ELG sold EUR 50 m. with a 5 year maturity Erdoel-Lagergesellschaft (ELG, AA+/stable), the central crude oil storage facility of the Republic of Austria that ensures the country's supply with energy, resp. oil over a time period of 90 days, has issued a bond over EUR 50 m. with a 2019 maturity. The fixed coupon was set at 0.25%, pricing was seen at 46 bps over RAGB 1.95 06/19, resp. 13 bps above mid-swaps (source: Bloomberg). With that, ELG has a total volume of EUR 753 m. outstanding, but will only have redemptions again in 2016, of two CHF bonds over CHF 30 m. and CHF 45 m. respectively. New issues in the SSA segment in Austria (since January 2014) Name OKB 2 12/17/18 OKB 1 1/8 07/24/20 OKB 1 5/8 03/12/19 NIEDOE 0 10/20/18 ASFING 1 3/8 04/09/21 NIEDOE 0 10/20/23 OBND 2 1/4 05/28/29 NIEDOE 0 07/28/21 NIEDOE 0 07/02/18 NIEDOE 0 09/13/32 NIEDOE 0 09/13/32 KAERTN 3 06/25/26 LKABG 2.38 06/26/25 MRKGUN 3.9 07/18/44 KARNTN 0 09/12/19 KARNTN 2.178 09/12/24 KARNTN 3.05 09/12/39 KARNTN 2.621 09/12/29 OKB 0 09/18/18 NIEDOE 0 10/01/19 NIEDOE 0 1/2 10/27/22 NIEDOE 0 3/8 04/27/21 NIEDOE 1.12 11/17/23 OBND 1 11/18/24 BUNIMM 0 12/01/20 BUNIMM 0 12/02/16 OKB 0 09/18/18 OKB 1 3/8 02/10/20 OKB 3.2 08/25/25 ERDLAG 0 1/4 07/17/19 Collateral Date of issue GOVT GUARANTEED 03.02.2014 GOVT GUARANTEED 21.02.2014 GOVT GUARANTEED 12.03.2014 SR UNSECURED 12.03.2014 GOVT GUARANTEED 09.04.2014 UNSECURED 22.05.2014 GOVT GUARANTEED 28.05.2014 UNSECURED 28.05.2014 UNSECURED 28.05.2014 UNSECURED 02.06.2014 UNSECURED 02.06.2014 SR UNSECURED 25.06.2014 UNSECURED 26.06.2014 SECURED 18.07.2014 SR UNSECURED 12.09.2014 SR UNSECURED 12.09.2014 SR UNSECURED 12.09.2014 SR UNSECURED 12.09.2014 GOVT GUARANTEED 18.09.2014 SR UNSECURED 01.10.2014 SR UNSECURED 27.10.2014 SR UNSECURED 27.10.2014 SR UNSECURED 17.11.2014 GOVT GUARANTEED 18.11.2014 UNSECURED 01.12.2014 SR UNSECURED 02.12.2014 GOVT GUARANTEED 30.01.2015 GOVT GUARANTEED 10.02.2015 GOVT GUARANTEED 25.02.2015 SR UNSECURED 09.03.2015 Maturity 17.12.2018 24.07.2020 12.03.2019 20.10.2018 09.04.2021 20.10.2023 28.05.2029 28.07.2021 02.07.2018 13.09.2032 13.09.2032 25.06.2026 26.06.2025 18.07.2044 12.09.2019 12.09.2024 12.09.2039 12.09.2029 18.09.2018 01.10.2019 27.10.2022 27.04.2021 17.11.2023 18.11.2024 01.12.2020 02.12.2016 18.09.2018 10.02.2020 25.08.2025 17.07.2019 Curr. GBP CHF USD EUR EUR EUR EUR EUR EUR EUR EUR EUR EUR EUR EUR EUR EUR EUR USD EUR CHF CHF EUR EUR EUR EUR USD USD AUD EUR Face value 350,000,000 175,000,000 1,250,000,000 20,000,000 750,000,000 5,000,000 500,000,000 5,000,000 3,000,000 25,000,000 25,000,000 150,000,000 30,000,000 30,500,000 27,800,000 28,100,000 1,200,000 1,500,000 300,000,000 210,000,000 175,000,000 125,000,000 35,000,000 1,000,000,000 32,500,000 100,000,000 200,000,000 1,000,000,000 200,000,000 50,000,000 Cupon 2.000 1.125 1.625 0.577 1.375 0.757 2.250 0.704 0.654 0.752 0.752 3.000 2.380 3.900 1.049 2.178 3.050 2.621 0.234 0.234 0.500 0.375 1.120 1.000 0.281 0.262 0.243 1.375 3.200 0.250 Yield Type Cupon (YTM) FIXED 1.03 FUNGED FIXED 1.30 FLOATING FIXED 0.12 FLOATING 0.03 FIXED 0.67 FLOATING 0.01 FLOATING -0.01 FLOATING 0.16 FLOATING 0.16 FIXED 1.50 FIXED 0.54 FIXED FLOATING 0.05 FIXED 0.60 FIXED 1.04 FIXED 0.91 FLOATING 0.28 FLOATING -0.01 FIXED 0.09 FIXED 0.04 FIXED 0.72 FIXED 0.36 FLOATING 0.00 FLOATING -0.04 FLOATING 0.28 FIXED 1.50 FIXED 2.93 FIXED 0.48 Sources: Bloomberg, Erste Group Research Erste Group Research – Credit Focus: Austria Page 23 Erste Group Research Credit Focus | Fixed Income | Austria 16 April 2015 Agencies versus Sovereigns, Republic of Austria and Germany Yield (YTM, in %) Time to maturity(years) Source: Bloomberg, Erste Group Research ASFiNAG OeBB Infra OeKB BIG ELG Rating overview of Austrian agencies ASFING Aaa AA+ stable stable 9.0 Republik Österreich OBND Aaa AA+ stable stable 15.2 Republik Österreich OKB Aaa AA+ stable stable 21.2 Austrian banks BUNIMM Aaa -stable -2.3 Republik Österreich ERDLAG -AA+ -stable 0.7 oil companies explicit explicit -- -- Legal foundation ASFINAGGesetz Bundesbahngesetz explicit AFFG, AusfFG BIG-Gesetz EBG Most recent opinion: S&P Moody´s 08.08.2014 01.09.2014 08.08.2014 06.11.2014 08.08.2014 09.12.2014 02.09.2014 27.02.2015 - Rating-Update: Agency S&P on 27.2.2015 regarding ELG: AA+ with stable outlook confirmed Bloomberg Rating Moody's Rating S&P Outlook Moody´s Oulook S&P Amount outstanding Owner Guarantuees Source: Rating agencies, companies, Bloomberg, Erste Group Research Vienna Bloomberg 0621076D KARNTN NIEDOE 1234Z SALZLD 1000Z 1146Z Rating Moody's -Baa3 Aaa ----Rating S&P AA -AA/u AA+ -AA AA+ Outlook Moody´s -negative stable ----Oulook S&P stable -stable stable -stable stable Amount outstanding -0.5 1.4 -0.2 --- Moody´s on 6.3.2015 reg. province of Carinthia: downgrade from A2 to Baa3, outlook change from stable to negative Vorarlberg Tyrol Styria Salzburg Upper Austria Lower Austria Carinthia Province Burgenland Rating-Overview Sub-Sovereigns (Austrian provinces) ------- VIENNA Aaa -stable -0.2 Source: Rating agencies, issuers, Bloomberg, Erste Group Research Erste Group Research – Credit Focus: Austria Page 24 Erste Group Research Credit Focus | Fixed Income | Austria 16 April 2015 Christian Enger, CFA [email protected] Covered Bonds Primary/secondary market Four large volume covered bond issues in Austria in Q1 2015 In the first three months of 2015 Austrian issuers have joined what was an overall quite lively primary market activity. Four large volume Austrian covered bonds with mortgage cover were issued. Erste Group led the proceedings with a EUR 500 m. bond issued at the end of January 2015. The ten-year security was placed in the market at a spread of 6 bps above mid-swaps. It was followed in early February 2015 by Hypo Vorarlberg. The company issued a covered bond (a Pfandbrief according to Austrian Pfandbrief law) in the sub-benchmark segment (EUR 300 m.) with a spread of 7 bps above mid-swaps (maturity 2025). In mid-February 2015 UniCredit Bank Austria and Raiffeisenlandesbank Niederoesterreich-Wien scraped up the courage to enter the market as well. These issuers each chose a 10 year maturity for their mortgage covered bonds. Bank Austria paid a spread of 3 bps above mid-swaps, while RLB NOE-Wien was able to score a risk premium of only 1 bp above mid-swaps a few days later. Spread widening in Austrian covered bonds and senior unsecured bonds On 1 March 2015, the Alpine Republic let it be known that it wouldn't make any fresh taxpayer funds available to Heta. Since then not only Austrian primary market activity has ground to a halt, but in the secondary market, a widening of spreads could be observed counter to the general trend, especially in senior unsecured bonds. Until May of 2014, Heta bonds were also components of the senior index. However, after these had been downgraded into junk territory and were thus removed from the index, the average risk premium of Austrian unsecured senior bank bonds traded in mid-2014 close to the overall market average of EUR benchmark issuers. In the beginning of 2015, spreads began to widen after the Swiss National Bank discontinued its minimum exchange rate and the announcement of RBI's reorganization. After an initial slight easing of tensions, renewed spikes can recently be observed again due to the Heta problems. Covered Bonds: Spread history (ASW in BP) (EUR benchmark IG issuers) Source: iBoxx, BondRadar, Bloomberg, Erste Group Research Erste Group Research – Credit Focus: Austria Bank senior unsecured: Spread history (ASW in BP) (EUR benchmark IG issuers) Source: iBoxx, BondRadar, Bloomberg, Erste Group Research Page 25 Erste Group Research Credit Focus | Fixed Income | Austria 16 April 2015 Appendix Calendar Austria Date Event 08.04.2015 Retail trade - Sales Indices 10.04.2015 External trade (imports, exports) 17.04.2015 Consumer price index (CPI/HICP) 17.04.2015 Consumer price index (CPI/HICP) 24.04.2015 Production index and other economic indicators 29.04.2015 Unemployment according to international definition 04.05.2015 Economic statistics (production inc. construction) 06.05.2015 Retail trade - Sales indices 08.05.2015 External trade (imports, exports) 19.05.2015 Consumer price index (CPI/HICP) 19.05.2015 Consumer price index (CPI/HICP) 22.05.2015 Production index and other economic indicators 29.05.2015 Economic statistics (production inc. construction) 02.06.2015 Unemployment according to international definition 03.06.2015 Retail trade - Sales Indices 09.06.2015 External trade (imports, exports) 17.06.2015 Consumer price index (CPI/HICP) 17.06.2015 Consumer price index (CPI/HICP) 25.06.2015 Production index and other economic indicators 26.06.2015 External trade (imports, exports) 29.06.2015 Unemployment according to international definition 29.06.2015 Household income and saving 30.06.2015 Economic statistics (production inc. construction) 03.07.2015 Retail trade - Sales indices Source: Statistik Austria, Erste Group Research Period Feb.15 Jan. 15 Feb.15 Mar. 15 Feb.15 Mar. 15 Jan. 15 Mar. 15 Feb.15 Apr.15 Mar. 15 Mar. 15 Feb.15 Apr.15 Apr.15 Mar. 15 Apr.15 May 15 Apr.15 Jul.05 May 15 1Q2015 Mar. 15 May 15 Calendar of issues of bonds by the Republic of Austria Issue date 13.01.2015 13.01.2015 10.02.2015 10.02.2015 03.03.2015 03.03.2015 07.04.2015 07.04.2015 05.05.2015 09.06.2015 07.07.2015 04.08.2015 01.09.2015 06.10.2015 03.11.2015 15.12.2015 Name 1.65% BA 2014-2024/1 0.25% BA 2014-2019/2 2.40% BA 2013-2034/1 1.65% BA 2014-2024/1 1.65% BA 2014-2024/1 0.25% BA 2014-2019/2 4.85% BA 2009-2026/2 3.50% BA 2006-2021/1 Auktion / Auction Auktion / Auction Auktion / Auction (Reserve Date) Auktion / Auction Auktion / Auction Auktion / Auction Auktion / Auction ISIN AT0000A185T1 AT0000A19XC3 AT0000A10683 AT0000A185T1 AT0000A185T1 AT0000A19XC3 AT0000A0DXC2 AT0000A001X2 - Value date 16.01.2015 16.01.2015 13.02.2015 13.02.2015 05.03.2015 05.03.2015 09.04.2015 09.04.2015 07.05.2015 11.06.2015 09.07.2015 06.08.2015 03.09.2015 08.10.2015 05.11.2015 17.12.2015 Maturity TTM % p.a. Type 21.10.2024 9.5 1.65 A 18.10.2019 4.5 0.25 A 23.05.2034 19.1 2.40 A 21.10.2024 9.5 1.65 A 21.10.2024 9.5 1.65 A 18.10.2019 4.5 0.25 A 15.03.2026 10.9 4.85 A 15.09.2021 6.4 3.50 A - Source: OeBFA, Erste Group Research VOL TVOL covered* 440 8,630 2% 660 5,320 6% 495 4,556 8% 605 9,235 12% 495 9,730 14% 605 5,925 17% 528 8,451 20% 627 14,257 23% - Total 4,455 TTM… term to maturity 2015 planned of Government Bonds: 15-19bn Type... increase (I) or new (N) % completed 23%-30% (T)VOL… (total) amount (EUR mn) Financing 2015 total: 22-24bn * % of maximum refinancing need in 2015 Erste Group Research – Credit Focus: Austria Page 26 Erste Group Research Credit Focus | Fixed Income | Austria 16 April 2015 Maturity profile Republic of Austria (Bond principal, money market, in EUR million) Face value Source: Bloomberg, Erste Group Research Maturity of federal debt Time structure (as at 31. March 2015) Source: OeBFA, Erste Group Research Erste Group Research – Credit Focus: Austria Page 27 Erste Group Research Credit Focus | Fixed Income | Austria 16 April 2015 Austria: Sub-Sovereigns & Agencies Agencies: Total volume outstanding (currencies, in EUR bn., % ) 25 JPY; .5418; 1% JPY 20 USD; 12.2808; 25% USD 15 NOK 10 CHF; 7.5852; 16% NOK; .1769; 0% GBP EUR 5 GBP; .6930; 2% CHF EUR; 27.0549; 56% 0 ASFING OBND OKB BIG ELG Number of issues (all currencies): Volume outstanding (EUR bn): Average duration (years): Number of EUR issues ≥500m: Average volume (EUR bn) Average duration (years): 113 48.3 6.6 22 1.1 7.6 Agencies: Maturities (all currencies, in EUR mn) 7,000 ELG 6,000 BIG 5,000 OKB OBND 4,000 ASFING 3,000 2,000 1,000 0 Agencies: Residual time to maturity (years) and yield (YTM, % ) 1.5 1.0 0.5 0.0 0 5 10 15 20 25 30 -0.5 ASFING OBND OKB BIG ELG AT SOVEREIGN DE SOVEREIGN -1.0 Source: Bloomberg, Erste Group Research Erste Group Research – Credit Focus: Austria Page 28 Erste Group Research Credit Focus | Fixed Income | Austria 16 April 2015 ASW-Spreads (EUR-Benchmarks, in BP) 60 50 40 30 20 10 0 -10 0 5 10 15 20 -20 ASFING -30 OBND ELG Source: Bloomberg, Erste Group Research Sub-Sovereign: amounts outstanding in currencies (translated into EUR bn and shares % ) 1,600 1,400 1,200 CHF; 950; 21% 1,000 800 EUR 600 CHF 400 ATS 200 EUR; 3,622; 79% WOHNAV VIENNA Total amount outstanding (EUR m): Issues Average size (m): WIENHG SALZLD NIEDOE LINZ LKABG LIG LIGK KIG KARNTN KARWFF GRZCTY BURLHG BELIG 0 4,551 85 54 EUR Issues ≥100m: Average volume (EUR m): Average duration (years): 10 187 4.1 1,400 WOHNAV WIENHG 1,200 VIENNA 1,000 SALZLD NIEDOE 800 LKABG LINZ 600 LIGK 400 LIG KIG 200 KARWFF 0 2039 2038 2037 2036 2034 2033 2032 2031 2030 2029 2028 2027 2026 2025 2024 2023 2022 2021 2020 2019 2018 2017 2016 2015 KARNTN GRZCTY Source: Bloomberg, Erste Group Research Erste Group Research – Credit Focus: Austria Page 29 Erste Group Research Credit Focus | Fixed Income | Austria 16 April 2015 Contacts Group Research Head of Group Research Friedrich Mostböck, CEFA Major Markets & Credit Research Head: Gudrun Egger, CEFA Ralf Burchert (Agency Analyst) Hans Engel (Senior Analyst International Equities) Christian Enger, CFA (Covered Bonds) Margarita Grushanina (Economist AT, CHF) Alihan Karadagoglu (Senior Analyst Corporate Bonds) Peter Kaufmann, CFA (Corporate Bonds) Stephan Lingnau (International Equities) Carmen Riefler-Kowarsch (Covered Bonds) Rainer Singer (Senior Economist Euro, US) Bernadett Povazsai-Römhild (Corporate Bonds) Gerald Walek, CFA (Economist Euro) Katharina Böhm-Klamt (Quantitative Analyst Euro) Macro/Fixed Income Research CEE Head CEE: Juraj Kotian (Macro/FI) Zoltan Arokszallasi (Fixed income) Katarzyna Rzentarzewska (Fixed income) CEE Equity Research Head: Henning Eßkuchen Franz Hörl, CFA (Basic Resources, Real Estate) Daniel Lion, CIIA (Technology, Ind. Goods&Services) Thomas Unger; CFA (Banks, Insurance) Vera Sutedja, CFA (Telecom) Vladimira Urbankova, MBA (Pharma) Martina Valenta, MBA (Real Estate) Editor Research CEE Brett Aarons Deniz Gurgen Research Croatia/Serbia Head: Mladen Dodig (Equity) Head: Alen Kovac (Fixed income) Anto Augustinovic (Equity) Ivana Rogic (Fixed income) Milan Deskar-Skrbic (Fixed income) Davor Spoljar, CFA (Equity) Research Czech Republic Head: David Navratil (Fixed income) Head: Petr Bartek (Equity) Vaclav Kminek (Media) Jiri Polansky (Fixed income) Dana Hajkova (Fixed income) Martin Krajhanzl (Equity) Lubos Mokras (Fixed income) Jan Sedina (Fixed income) Research Hungary Head: József Miró (Equity) Gergely Ürmössy (Fixed income) András Nagy (Equity) Vivien Barczel (Fixed income) Tamás Pletser, CFA (Oil&Gas) Research Poland Head: Magdalena Komaracka, CFA (Equity) Marek Czachor (Equity) Tomasz Duda (Equity) Adam Rzepecki (Equity) Ludomir Zalewski (Equity) Research Romania Chief Economist, Director: Radu Craciun Head: Mihai Caruntu (Equity) Head: Dumitru Dulgheru (Fixed income) Chief Analyst: Eugen Sinca (Fixed income) Dorina Cobiscan (Fixed Income) Raluca Florea, CFA (Equity) Marina Alexandra Spataru (Equity) Research Turkey Head: Can Yurtcan Evrim Dairecioglu (Equity) M. Görkem Göker (Equity) +43 (0)5 0100 11902 +43 (0)5 0100 11909 +43 (0)5 0100 16314 +43 (0)5 0100 19835 +43 (0)5 0100 84052 +43 (0)5 0100 11957 +43 (0)5 0100 19633 +43 (0)5 0100 11183 +43 (0)5 0100 16574 +43 (0)5 0100 19632 +43 (0)5 0100 17331 +43 (0)5 0100 17203 +43 (0)5 0100 16360 +43 (0)5 0100 19632 +43 (0)5 0100 17357 +43 (0)5 0100 18781 +43 (0)5 0100 17356 +43 (0)5 0100 19634 +43 (0)5 0100 18506 +43 (0)5 0100 17420 +43 (0)5 0100 17344 +43 (0)5 0100 11905 +43 (0)5 0100 17343 +43 (0)5 0100 11913 +420 956 711 014 +90 212 371 2538 +381 11 22 09 178 +385 72 37 1383 +385 72 37 2833 +385 72 37 2419 +385 72 37 1349 +385 72 37 2825 +420 224 995 439 +420 224 995 227 +420 224 995 289 +420 224 995 192 +420 224 995 172 +420 224 995 434 +420 224 995 456 +420 224 995 391 +361 235 5131 +361 373 2830 +361 235 5132 +361 373 2026 +361 235 5135 +48 22 330 6256 +48 22 330 6254 +48 22 330 6253 +48 22 330 6252 +48 22 330 6251 +40 3735 10424 +40 3735 10427 +40 3735 10433 +40 3735 10435 +40 3735 10436 +40 3735 10428 +40 3735 10429 +90 212 371 2540 +90 212 371 2535 +90 212 371 2534 Erste Group Research – Credit Focus: Austria Sezai Saklaroglu (Equity) Nilufer Sezgin (Fixed income) Ilknur Kocaer (Equity) Research Slovakia Head: Maria Valachyova, (Fixed income) Katarina Muchova (Fixed income) +90 212 371 2533 +90 212 371 2536 +90 212 371 2531 +421 2 4862 4185 +421 2 4862 4762 Treasury - Erste Bank Vienna Saving Banks & Sales Retail Head: Thomas Schaufler Equity Retail Sales Head: Kurt Gerhold Fixed Income & Certificate Sales Head: Uwe Kolar Treasury Domestic Sales Head: Markus Kaller Corporate Sales AT Head: Christian Skopek +43 (0)5 0100 84225 +43 (0)5 0100 84232 +43 (0)5 0100 83214 +43 (0)5 0100 84239 +43 (0)5 0100 84146 Fixed Income & Credit Institutional Sales Institutional Sales Head: Manfred Neuwirth Bank and Institutional Sales Head: Jürgen Niemeier Institutional Sales AT, GER, LUX, CH Head: Thomas Almen Bernd Bollhof Rene Klasen Marc Pichler Dirk Seefeld Charles-Henry de Fontenilles Bank and Savingsbanks Sales Head: Marc Friebertshäuser Fabian Bütger Mathias Gindele Andreas Goll Ulrich Inhofner Sven Kienzle Jörg Moritzen Michael Schmotz Bernd Thaler Klaus Vosseler Institutional Sales CEE and International Head: Jaromir Malak Central Bank and International Sales Head: Margit Hraschek Christian Kössler Institutional Sales PL and CIS Pawel Kielek Marcin Chmielewski (Fixed Income) Institutional Sales Slovakia Head: Peter Kniz Sarlota Sipulova Institutional Sales Czech Republic Head: Ondrej Cech Milan Bartos Radek Chupik Pavel Zdichynec Institutional Sales Croatia Head: Antun Buric Natalija Zujic Željko Pavičić Institutional Sales Hungary Norbert Siklosi Attila Hollo Institutional Sales Romania Head: Ciprian Mitu Institutional Solutions and PM Head: Zachary Carvell Brigitte Mayr Mikhail Roshal Christopher Lampe-Traupe +43 (0)5 0100 84250 +49 (0)30 8105800 5503 +43 (0)5 0100 84323 +49 (0)30 8105800 5525 +49 (0)30 8105800 5521 +43 (0)5 0100 84118 +49 (0)30 8105800 5523 +43 (0)50100 84115 +49 (0)711 810400 5540 +49 (0) 151 53810580 +49 (0)711 810400 5562 +49 (0)711 810400 5561 +43 (0)50100 85544 +49 (0)711 810400 5541 +49 (0)30 8105800 5581 +43 (0)5 0100 85542 +43 (0)5 0100 85583 +49 (0)711 810400 5560 +43 (0)50100 84254 +43 (0)5 0100 84117 +43 (0)5 0100 84116 +48 22 544 5610 +43 50100 85611 +421 2 4862 5624 +421 2 4862 5629 +420 2 2499 5577 +420 2 2499 5562 +420 2 2499 5565 +420 2 2499 5590 +385 (0)7237 2439 +385 (0)7237 1638 +385 (0)72 37 14 94 +36 1 2355 842 +36 1 2355 846 +40 373 516 532 +43 (0)50100 83308 +43 (0)50100 84781 +43 (0)50100 84787 +49 (0)30 8105800 5507 Page 30 Erste Group Research Credit Focus | Fixed Income | Austria 16 April 2015 ^x Group Bank AG Erste 1010 Wien, Börsegasse 14/DG1 Telefon: +43 (0)5 0100 interior 11902 Disclaimer This publication has been prepared by the Major Markets& Credit Research department within EG Research. 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