Covered bonds issued by Hypo Alpe-Adria-Bank are understood to be exempt from a Heta Asset Resolution debt moratorium announced yesterday (Sunday), although analysts said that the fate of voluntary OC could still be tested in what is the first instance of BRRD bail-in powers being used.

Heta Asset Resolution, the wind-down entity of Hypo Alpe-Adria-Bank, said yesterday that the Austrian Financial Market Authority (FMA) had issued a decree on resolution measures imposing a debt moratorium until the end of May 2016, the move coming after the Austrian government said that it would not cover a capital shortfall shown after an asset quality review. The resolution is being effected under the Federal Act on the Recovery & Resolution of Banks (BaSAG), which entered into force on 2 July 2014, with Austria moving ahead early with implementing the Bank Recovery & Resolution Directive (BRRD).

The debt moratorium covers some Eu9.8bn of senior and subordinated debt.

However, according to analysts, among those instruments excluded from the measures are public sector Pfandbriefe that had been issued by Hypo Alpe-Adria-Bank and which are now liabilities of Heta Asset Resolution. Analysts variously cited as supporting their conclusion: secured liabilities being listed in relevant Heta documents as among those instruments excluded; the Pfandbriefe not being included in the list of instruments subject to the moratorium; and covered bonds being excluded from bail-in under the BaSAG as well as the BRRD.

Analysts nevertheless said that the resolution could provide a test as to whether or not voluntary overcollateralisation (OC) is fully protected under bail-in – something that some market participants have raised as a potential area of concern since the BRRD was being drafted.

“While OC of over 300% as of 30 September 2014 makes Heta Pfandbriefe look protected during the resolution process, a share of 63.5% Carinthia debt as part of the 58% Austrian exposure in the cover pool shows that the high voluntary OC and the composition of the cover pool is crucial during the resolution process,” said Bernd Volk, head of covered bond research at Deutsche Bank. “Hence, even though the outstanding volume of Heta Pfandbriefe amounted to only Sfr237.4m (and was mainly denominated in Swiss francs) as of 30 September 2014, this is a first important practical test for the strength of the bail-in exemption of European covered bonds under BRRD.”