BRP Renaud und Partner mbB
BRP Renaud und Partner mbB: Silent participations and profit participation rights of HSH Nordbank AG

At the end of 2016, the law firm BRP Renaud und Partner mbB (“BRP”), acting on behalf of institutional investors, mainly German insurance companies, filed a lawsuit against HSH Nordbank AG (“HSH”) at the Regional Court of Kiel, Germany. The lawsuit relates to silent participations and profit participation rights issued by the legal predecessors of HSH, Landesbank Schleswig-Holstein Girozentrale and Landesbank Hamburg Girozentrale, from 2000 onwards and worth approximately EUR 250 million.

In bringing these actions, the plaintiffs are appealing against HSH’s unlawful loss participation and appropriation of funds practices.

In each of the financial years 2012, 2014 and 2016, HSH appropriated its entire profit to the fund for general banking risks (section 340g para. 1 German Commercial Code) and recorded this appropriation as an expense. In the years 2012 and 2014, HSH even allocated funds to the reserve for general banking risks to such an extent that a net loss for the year arose from this allocation, with the result that its hybrid capital investors participated in the artificial losses caused by this practice. HSH believes that as a result of the allocations to the fund for general banking risks, the book value of silent participations and profit participation rights should have decreased by approx. 6.603 percentage points in the 2012 financial year and by approx. 5.265 percentage points of the book value in the 2014 financial year. To the best of our knowledge, no credit institution in the German banking industry has ever caused a loss (in the sense of a net loss for the year) through the voluntary endowment of the fund for general banking risks and shared such artificially caused “losses” with its hybrid capital investors. Without the allocation to the fund for general banking risks, which in our opinion was unlawful, HSH would have had to show a net profit for the year in each of these financial years and to replenish the silent participations and profit participation rights.

Instead, HSH has “secured” the deferred claim of the guarantor – the hsh finanzfonds AöR – for the payment of the supplementary premium from the so-called Sunrise Guarantee by means of the endowment of the fund for general banking risks in the relevant financial years.

Our clear view is that this practice, which is documented in the annual financial statements and annual reports published by HSH, as well as in the reports of the state government of Schleswig-Holstein, does not bear legal scrutiny. That view has been confirmed by the expert opinion of a legal scholar.

We believe that the holders of silent participations and profit participation rights are entitled to a recovery of the book value reduced by the loss participation to 100 % of the nominal amount as of December 31, 2016.

Affected investors who currently hold ongoing silent participations of HSH or who held silent participations or profit participation rights of HSH that were repaid after 12/31/2014 (24:00 CET) are requested to contact us immediately and to join the group of holders of privately placed silent participations and profit participation rights represented by us.

If you believe that you are an affected investors, participation in the existing legal proceedings is still possible. As a result of the nominal volume of around EUR 250 million represented by us today, joining our group in the lawsuit would have significant cost advantages.

We would ask concerned investors to contact us promptly, irrespective of any future participation in the legal proceedings we have initiated, as the “privatisation procedure”, as currently communicated by HSH, is apparently intended to lead to further significant impairments of the hybrid capital. The “privatisation process”, if it is carried out as currently indicated, will result in a unilateral benefit for the buyers to the detriment of the bank and its hybrid capital investors.

The design of the privatisation process published in HSH’s ad hoc announcement of February 28, 2018 suggests that the buyers of HSH, i.e. Cerberus European Investments LLC (“Cerberus”) and others, are planning further disadvantages for the hybrid capital. Instead of the profit before tax of around EUR 300 million expected by HSH for the financial year 2017 shortly before the conclusion of the purchase agreement, HSH is now expecting a negative result for the financial year 2017 due to the “privatisation effects”. According to IFRS, a pre-tax loss in the mid three-digit million euro range is now expected. The HGB (German GAAP) result for the holders of privately placed silent participations and profit participation rights in accordance with the German Commercial Code (HGB) is now expected to show a significantly higher pre-tax loss than under IFRS. The main reason for this reversal is the announced sale of an NPE loan portfolio, presumably outside of any bidding process, at a much lower book value than was presumed to be the case, to a purchase vehicle whose owner presumably belongs to the group of buyers of HSH, i.e. Cerberus and others. The sale of the NPE portfolio, which could be for up to EUR 6.5 billion, is expected to generate a significant negative valuation of up to EUR 1 billion. HSH has announced that it intends to share this loss with the holders of ongoing silent participations. According to our preliminary assessment, the presumably low purchase price for the NPE portfolio, which is expected to lead to this negative valuation result, is unlikely to stand up to third-party scrutiny. According to its own statements, HSH had already made sufficient value adjustments to the NPE portfolio in all of the financial statements from previous years. The so-called coverage ratio is said to have been 55 % in total and even 62 % in shipping. The risk provisioning in euros is likely to be even greater in relation to the NPE portfolio, which is mainly denominated in US dollars. Conversely, the market value, but also the expected present value of the NPE portfolio, is likely to have risen further. Against this backdrop, further high value losses of approximately EUR 1 billion are in our opinion simply inexplicable.

As of today, there is every indication that HSH intends to reduce the hybrid capital further in future financial years and to terminate it following this write-down at the newly reduced book value.

We call upon the holders of privately placed silent participations and profit participation rights to oppose the bank’s actions.

In addition to the privately placed silent participations and profit participation rights of HSH, this announcement also applies to the following securities based on silent participations of HSH and placed on the capital market:

HSH Nordbank Sparc Securities EUR 500 million
(ISIN XS0142391894)
RESPARCS Funding II Limited Partnership Securities EUR 500 million
(ISIN DE0009842542)
RESPARCS Funding Limited Partnership I Securities USD 300 million
(ISIN XS0159207850)
HSH Nordbank Sphere Securities USD 500 million
(ISIN XS0221141400)

Investor contact:
Attorney-at-law Dr. Ulrich-Peter Kinzl
E-Mail: Ulrich-Peter.Kinzl@brp.de

Attorney-at-law Aljoscha Schmidberger
E-Mail: Aljoscha.Schmidberger@brp.de

BRP Renaud und Partner mbB
Königstraße 28
70173 Stuttgart
Germany
Tel: +49 711 16445-302
Fax: +49 711 16445-100
http://www.brp.de