Wounded Hypo Retreats to Home Territory

It hasn’t received much attention in the U.S., but Germany’s Hypo Real Estate Group—long a giant in the world of international finance—suffered very severe wounds in recent months.  Much of the harm came through a Dublin-based subsidiary, Depfa, whose global public sector financing included substantial infrastructure projects.  After Lehman Brothers foundered, Depfa faced collapse.  Now, bleeding red ink and dependent on German government support, Hypo is obliged to pull back and graze closer to home.

Some observers blamed Depfa’s failure on its funding gap, caused by long-term loans that it funded with shorter term instruments.  Projects such as infrastructure can pose difficult asset-liability matching challenges.  

In years past, Depfa has been involved in many U.S. public-sector projects.  According to its website, it issued the first 30-year U.S. dollar-denominated covered bond (with an 88% allocation in the U.S.).  It helped arrange liquidity facilities for entities including the Georgia Municipal Association and the Industrial Development Authority of Kansas City.

Hypo announced over the weeikend that it will reposition itself as “a leading specialist for real estate and public-sector finance in Germany and Europe, with a banking strategy focused on Pfandbrief issuance.”  In finance for the public sector, this will mean looking for business “in Europe” that is “eligible for inclusion as cover assets in Pfandbrief[s]” (the traditional German form of covered bonds).  

By implication, public-sector loans outside Europe no longer appear to be on Hypo’s radar.  And Hypo’s announcement includes a specific statement that “[n]o new business is planned in infrastructure finance.”   So it seems that the U.S. has lost a useful previous source of public-sector finance.

Capital markets and trading activities deemed “no longer in line with the [new] business model” also will be dropped.  Hypo’s commercial real estate finance segment will seek business as a “partner to real-estate investors” through offices in Munich, London, New York, and Paris.

To download Hypo’s press release click on the item under “Attachment” below.