The Association of German Banks (BdB) moved to draw a line under the potential fall-out from Düsseldorfer Hypothekenbank exposure to Heta by yesterday (Sunday) announcing renewed support from its Deposit Protection Fund for the troubled German lender.

Fitch warned last Tuesday that DuessHyp urgently required external support, with other analysts highlighting the bank’s exposure to Austria’s Heta Asset Resolution, whose debts are facing a moratorium and expected to be subject to losses.

DuessHyp was in 2010 bought by current owner Lone Star from the Deposit Protection Fund of the private banks’ association (Bundesverband deutscher Banken, BdB or Bankenverband), which had rescued it for a first time in 2008. The US private equity fund then announced in August 2014 the planned sale of DuessHyp to a group of international investors.

However, the BdB announced yesterday that it is stepping in.

“The problem has been resolved,” it said. “The private commercial banks’ Deposit Protection Fund is providing a guarantee and ring-fencing the Heta bonds to eliminate the immediate risks. The aim is a takeover of Düsseldorfer Hypothekenbank by the Deposit Protection Fund.”

Fitch had said that it expected such support, noting the track record of systemic support available “even to small specialised German Pfandbrief issuers”. Market participants said that the BdB’s move reflected this.

“The action by the BdB is a strong signal for all DuessHyp creditors, with holders of Pfandbriefe and Schuldscheine probably the main target due to their systemic importance,” said Bernd Volk, head of covered bond research at Deutsche Bank. “In our view, this confirms ongoing strong support for systemically important Pfandbriefe.”

He also highlighted that the move is a private sector solution and does not constitute state support, meaning that there is no need for European Commission approval.

Spreads on German Pfandbriefe have been unmoved by the concerns over the fate of DuessHyp – which has no benchmark issues outstanding – and wider Heta exposure of German banks, both before and after the weekend’s move. Indeed Deutsche Kreditbank sold a Eu500m 12 year mortgage Pfandbrief at 9bp through mid-swaps on Thursday.

“In covered bonds, spreads remain relatively unmoved under the Heta story,” said Maureen Schuller, head of covered bond strategy at ING, noting that the Markit iBoxx EUR Germany Covered sub-index closed on Friday 1bp tighter than a week previously. “The further tightening of the euro benchmark covered bond spreads of these issuers confirms the limited market concerns about the potential losses arising for these banks from their exposures to Heta.”

Fitch also last week noted the wider exposure of German covered bond issuers to Heta but said these are manageable. Bloomberg reported that the German Finance Ministry today welcomed the BdB’s move and said that, alongside BaFin, it is monitoring the potential impact of German banks’ Heta exposure.

Photo: Düsseldorfer Hypothekenbank