First Blood Spills in Austrian Banking Meltdown: Raiffeisen Withdraws 'Capital Note' Offer

Having had very serious thoughts about the gargantuan problems of tiny Austria's banking sector stemming from overly euphoric attempts to financially recolonize Austria's long gone emporium since the end of 2007, bits and pieces of information begin to confirm this blogger's suspicions that Austria will be really hard hit during this downturn.

Resisting attempts to blog more on the matter because of possible libel suits I now can come up with more details thanks to Zerohedge's blogs, detailed publications of documents issued by Raiffeisen Zentralbank group. Here we go with a story that could not only happen in Austria but in every country with a small banking industry where everybody knows everybody and compliance regulations are only valid during sparse official business hours from 8 AM to 3 PM.

Zerohedge, a shooting star in the global blogosphere with millions of hits, first raised my attention last week when it published the prospectus for an exchange offer where RZB group offered to exchange its "€500 million non-cumulative subordinated perpetual callable step-up fixed to floating rate capital notes" - in short, unsecured crap - against some other unsecured crap called "non-cumulative subordinated perpetual callable fixed to floating rate capital notes" at 55 cents on the Euro.

This 45% haircut was sexed up with a 15% coupon (coupon of old notes was 5.69%), but when one reads the fine print it more sounded like a weak promise as the fine print says RZB group only has to pay that high coupon if it has enough resources to do so.

Oh my god, why don't we go to the horse races right away?

The new notes were to be issued by RZB Finance (Jersey) IV limited, which is a 100% indirectly owned subsidiary of Raiffeisen Zentralbank AG (RZB) (RAIFF.PK) via Raiffeisen Malta Bank, also not exactly a plush bank with €2,000 paid-up capital.

A perpetual note is an investment vehicle that never has to be redeemed by the issuer and therefore can only be resold in secondary markets - if there are bids for it.

RZB Jersey IV Ltd. has a paid up share capital of €2,000 and is 100% owned by Raiffeisen Malta bank, which also negatively stars with a paid-up share capital of €2,000. RZB Jersey's sole business is to raise hybrid capital for its parent RZB. Read all the details in the prospectus over at Zerohedge.

Both companies losses in a total default of the new issue "worth" €275 million would be limited to these €4,000 as much as I understand the complex web of finances without money.

So much about the recent past of this issue which had been made public on June 18. Find all the details of the proposed exchange offer over at Tyler Durden's (pseudonym) Zerohedge blog.

From here the story gets really hairy. RZB issued a release on Monday 29, saying that it withdrew the offer for the exchange of the old into new "capital" (haha) notes. Having stored this release on my computer, I first want to offer Zerohedge's suspicions why the issue was withdrawn:

• Complete lack of investor interest
• Concerns about what would happen once the lack of interest is made public
• Trouble with accountants
• Rating agency getting back to the bank that this would be treated as a distressed exchange (as Zero Hedge speculated), putting the company into an Event of Default.

But Tyler would not be Tyler had he not also suggested some other possibilities for the withdrawal on his mind:

Then again, the real reason is probably much more innocuous, and has to do with the bank discovering a buried gold treasure in its back yard which will be used to satisfy the several hundred billion in toxic assets as a result of chicken coups built in Transylvania at a 180% LTV (in a probably JV with GE Capital)

There is nothing to add. Austria's banking sector is up to its ears in you know what, despite officials saying otherwise (they also begin to worry about their pensions).
For more background on why every Austrian from baby to octogenarian may be liable for up to €19,600 per capita thanks to bankers who saw only bonuses and nothing else - like maybe responsibility - read this post.

NOTE: This blogger will treat all material documents sent to the email address to be found on my profile page with absolute discretion.

Comments

[Roger Knights:]

This trouble in Austria is an eerie replay of 1931.

Jun 30 08:07 AM

[darrenlobo:]

Any thoughts on how this will affect other country's banking systems?

Jun 30 08:50 AM

[Vienna:]

It may effect other countries banking systems by emotions.
Austria is considered to be the gateway to CEE, through history. A recent article (which I cannot find any more) stated there where 1,3 billion on open obligations in CEE spread through many European, US banks. Well if the Raiffeisen gets into serious trouble there, there might be a run on CEE bank and obligations.
I work in CEE and the deterioration there is speeding up very heaviliy.

FYI: In Dezember 2008 the Slovakian prime minister still publicly stated that there is no crisis on Slovakia, and business was actually doing quite well. There was a lag in this, and it is hitting very hard now.

Houses and lining costs where way beyond avarage rating in comparison to avarage income. It was build upon futur hope and credit.

Jul 04 07:49 AM

[Vienna:]

Sorry1,3 trillion. In Austria our billion is your trillion (after million we wave milliarden, which has caused some confusion before)

Jul 04 07:53 AM