HSH Nordbank

Early beginnings

HSH Nordbank was created as a result of a merger between Hamburgische Landesbank and Landesbank Schleswig-Holstein on June 2, 2003. In the course of the merger HSH was transformed into a joint-stock company (Aktiengesellschaft) and thereby formally privatised, i.e. the bank is not anymore governed by public law.^[4] In 2003, the bank had a balance sheet total of 172 billion euros and employed 4,500 people.

In 2006, HSH Nordbank pledged to seek an unprecedented stock market listing, edging out its chief executive Alexander Stuhlmann to prepare the way.^[5] Shortly after, WestLB agreed to sell its 26.6 per cent stake in HSH Nordbank to a consortium of five institutional investors,^[6] led by J.C. Flowers & Co., for 1.25 billion euros.^[7] Flowers had competed with three investors – Cerberus Capital Management, Hellman & Friedman, and Corsair Capital – for the stake.^[8] The investment marked the first part-privatisation of a Landesbank^[9] and its experience was being closely watched as an indicator of how difficult it would be for others to prise open the state-controlled sector.^[10] By 2008, J.C. Flowers injected about 300 million euros of fresh equity, in spite of the bank’s failure to have an initial public offering that year.^[11]

Financial crisis of 2007-2010

Similarly to peers such as NORD/LB, Commerzbank, Deutsche Hypothekenbank and KfW, HSH Nordbank buckled under excessive risk-taking prior to the financial crisis of 2007-2010, when it had sought to expand beyond its roots as a regional lender to companies and savings banks into global capital markets.^[12][13] It had done so in anticipation of the expiry of a rule that allowed for generous refinancing of German state-backed banks.^[14] With the beginning of the crisis, HSH had to report losses on their credit investment portfolio. In September 2008 HSH Nordbank announced further writedowns. As a direct consequence the CEO Hans Berger stepped down and in the following weeks HSH announced extensive restructuring.^[15] Branches in Copenhagen and Hong Kong were reduced to representations and new business was focused on the core region in northern Germany.

In December 2008, HSH Nordbank was granted to issue up to 30 billion euros guaranteed notes under the German SoFFin program. One requirement that was imposed on HSH was to raise the capital ratio to at least 8%. On January 20, 2009 3 billion euros 3 year guaranteed notes were issued.^[16] On February 24, 2009 HSH received new capital of EUR 3 billion and credit guarantees of 10 billion euros by the two main shareholders, the states of Hamburg and Schleswig-Holstein.^[17] The other shareholders, JC Flowers and the Savings Banks Association of Schleswig-Holstein, did not participate in the capital infusion. Together with this increase of its core-capital, HSH announced further restructuring. It planned to spin off non-strategic activities and the toxic asset portfolio into a—yet to be created—Bad Bank.

In 2008, HSH Nordbank filed a claim with the New York Supreme Court against UBS over losses it says it suffered on a $500 million portfolio of collateralized debt obligations linked to the U.S. mortgage market.^[18] By 2012, the court found that HSH should have been able to conduct its own due diligence and dismissed the fraud claim, a decision that lawyers interpreted as having broader implications for investors seeking damages for losses incurred in the financial crisis.^[19]

On April 9, 2009, president of supervisory board Wolfgang Peiner appointed Freshfields Bruckhaus Deringer to investigate recent management decisions of the Vorstand.^[20] On April 17, 2009 the supervisory board of HSH Nordbank relieved Frank Roth, member of the management board of his duties and started pressing criminal charges against him. The bank claims that Roth leaked strictly confidential information to outside parties.^[21]

In May 2009 Standard & Poor’s dowgraded HSH to BBB+.

On October 13, 2009, Norddeutscher Rundfunk reported on a questionable CDO deal codenamed "Omega 55" between HSH Nordbank and BNP Paribas in late 2007, that eventually cost HSH Nordbank 500 million euros. Parts of that deal were not disclosed to the German Federal Financial Supervisory Authority (BaFin).^[22] Omega 55 was a hybrid CDO which exposed HSH Nordbank to the risks of default of other financial institutions including the now bankrupt Lehman Brothers and Washington Mutual. However, also included in the deal were several billion euros of risk tied to HSH Nordbank's own assets. It is alleged that he inclusion of this last element allowed HSH Nordbank to move several billions of risky assets off its balance sheet at year end and avoid costly capital reserves which BaFin would require the bank to post. The assets were repurchased several weeks later after auditors had closed the books of the bank for the year.

In 2009, HSH Nordbank had a balance sheet of 174.5 billion euros and reported a loss of 678 million euros.^[23]

Restructuring

The European Commission, HSH Nordbank and its owners negotiated for years over a plan to restore the bank to health and avoid future state aid.^[24] In September 2011, all sides reached a settlement with the European Commission, ending state aid proceedings in return for tough limits on the size of the bank’s balance sheet and a one-off financial penalty of 500 million euros.^[25] Under the settlement, the bank was to pull out of asset-backed aviation finance and to limit property finance to its home market by 2014. It also included plans to reduce its staff from 3,300 to 2,100.^[26] For 2013, the bank presented its worst set of results since 2008, with an annual net loss close to 800 million euros.^[27]

In 2015, Minister-President Torsten Albig of Schleswig-Holstein and First Mayor of Hamburg Olaf Scholz negotiated a restructuring deal with the European Commission that allowed HSH Nordbank to offload 6.2 billion euros in troubled assets – mainly non-performing ship loans – onto its government majority owners and avoid being shut down, saving around 2,500 jobs.^[28] The agreement stipulated that if is no private-sector buyer emerged by 2018, HSH Nordbank had to be wound down.^[29]

The European Commission approved a bailout in March 2016 and HSH asked investment bank UBS to find buyers for the loans which were extended to shipping and aircraft companies and for real estate and renewable energy projects.^[30] In an initial deal, Macquarie Bank and Merrill Lynch bought 800 million euros in aviation loans and 540 million euros in real estate credits, respectively.^[31]

Privatization

In mid-2016, the bank’s owners hired Citigroup to organize the process to privatize HSH Nordbank under European state-aid rules by the end of February 2018. Over the course of 2017, Apollo Global Management of the United States^[32] as well as Anbang Insurance Group,^[33]HNA Group and ICBC^[34] of China were considered as interested buyers but ultimately did not sumbit a bid for the bank.^[35] By the end of the year, bids were submitted by Apollo, Socrates and a consortium of private equity groups Cerberus and J.C. Flowers.^[36]

In February 2018, the state governments of Schleswig-Holstein and Hamburg – at the time led by Daniel Günther and Olaf Scholz – agreed to sell their shares for an estimated 1 billion euros to a group of private equity investors led by Cerberus and JC Flowers. Other funds involved were GoldenTree Asset Management and Centaurus.^[37] In addition, Austrian bank BAWAG also contributed. The transaction also saw the bank’s non-performing loan portfolio, principally shipping-related, sold to a special purpose vehicle set up by Cerberus, JC Flowers, GoldenTree and Centaurus at a price below its current book value.^[38][39] The sale is subject to the approval of the European Commission and the European Central Bank. After its privatization, HSH Nordbank will also have to leave the deposit insurance scheme of Germany’s publicly owned banks and join the private sector plan.^[40]

Hamburg and Schleswig-Holstein later said that total losses they incurred in their HSH investment would range from 10.8 billion to a maximum of 14 billion euros.^[41]