Sonntag, 29. März 2009

Hypo Real Estate: The Saga Continues

Following up on this post a few weeks ago, new events have been unfolding at HRE this week-end:

1. In a press release, HRE states that the German government will take a 8.7 % stake by paying 60 m € for 20 m newly issued shares at an issue price of 3 € per share.

Market price of the shares has been below 1 € for a while, yet the government still pays 3 €. According to the press release, this is the minimum price allowed by law. It is not explained why there is such a "minimum price allowed by law". But the 3 €/share conveniently matches what Chris Flowers has always argued for.

(Edit: Apparently, 3 € is the par value of HRE's shares. Under the relevant German law, capital increases cannot be made below par.)

In any case, it is not explained why the government invests 60 m € at this stage. It is a tiny amount compared to the scale of the overall problems, and in particular compared to the ballpark 10 bn € capital need that has been rumored in the press for the last few months.

2. In a separate press release, 2008 results are summarized:

The full-year loss was 5.4 bn €. As of 9/08, the loss had been 3.1 bn €, i.e. HRE lost 2.3 bn € in Q4.

I didn't go through all the details, but it appears that most of the Q4 loss is due to additional "provisions of losses for loans and advances" of 1.7 bn €. The way they explain it, the need for provisioning is spread far and wide, and is related to real-estate loans in Germany, Britain, Spain and the US, as well as exposure to "certain public sector and infrastructure finance segments". In other words, lots of their loans are going bad all over the place.

The part of the press release dealing with HRE's capital base is downright bizarre: It is argued that HRE's equity excluding revaluation reserve was 2.6 bn € as of 12/08. Now why should the revaluation reserve be excluded? It is part of the overall equity, and it stood at -3.3 bn € as of 9/08. If the amount didn't change much in Q4, total net equity is now below zero. But we don't know, because we aren't told, which is ridiculous: Why do they make an announcement regarding HRE's capital base, if they don't tell the reader what the capital base is?

Oh, and the press release also states that HRE expects further losses "up to and including financial year 2011", i.e. for the next three years. No attempt is made to quantify those upcoming losses.

Things are quite a mess, no doubt about it.

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