On 19 December 2014, FMS-WM acquired 100% of the shares in Irish bank DEPFA. As an independent bank, DEPFA is regulated by the Central Bank of Ireland and subject, among other things, to Irish banking and supervisory law. At the end of 2015, the DEPFA Group still employed 163 people at six sites.

DEPFA Group was organisationally and strategically designed to resume new business after its planned sale to a private investor. The decision by the Federal Republic of Germany’s inter-ministerial steering committee in May 2014 not to privatise the DEPFA Group but to transfer it to FMS-WM, the German government entity tasked with winding up, therefore required a strategic realignment, as DEPFA is still not permitted to underwrite new business. Instead, the remaining portfolio must be unwound in a way that maximises its value.

In 2015, FMS-WM made changes to DEPFA’s management. The new management team then developed a modified business plan reflecting the changed requirements. This is based on using the value levers identified with the help of FMS-WM to wind up DEPFA in a way that maximises its value. The aim is to largely preserve the remaining equity while unwinding the portfolio as quickly as possible. Key value levers include using funding advantages and simplifying and streamlining the organisational structure in order to reduce costs. Buying back liabilities is also a suitable means of gaining additional flexibility to speed up unwinding.

Partly with the support of FMS-WM, the DEPFA Group has already taken several measures to improve earnings and speed up the unwinding of the portfolio, the main ones being:

  • In the course of an initial workforce reduction measure, headcount at the DEPFA Group was reduced from 209 at the end of 2014 to 163 at the end of 2015.
  • The DEPFA branches in Rome and London were closed. Further branch closures in New York and Tokyo are scheduled for the end of 2016.
  • The Irish banking licence for the banking subsidiary Hypo Public Finance Bank in Dublin was relinquished. The company’s liquidation process was initiated.
  • By restructuring derivatives, it was possible to reduce DEPFA’s total assets significantly.

In May 2015, hybrid capital (preferred securities) was purchased, or repurchased, by FMS-WM and the DEPFA Group at a discount of approximately EUR 459 million. In January 2016, FMS-WM published a buy-back offer for DEPFA’s covered bonds. The very successful buy-back provides the basis for the faster unwinding of the DEPFA Group’s two mortgage bank subsidiaries.

FMS-WM also assists DEPFA with funding. By using existing rights to call outstanding liabilities, the aim is to achieve a clear improvement in DEPFA’s earnings. Flexibility is also being increased to enable the wind-up task to be carried out.

The aim of this package of measures is to wind up DEPFA more quickly while at the same time improving its earnings wherever possible. This is intended to prevent losses and the related erosion of existing equity. It is important to bear in mind here that certain measures, such as repurchasing hybrid bonds and Pfandbrief securities, are primarily aimed at speeding up the unwinding and do not affect DEPFA’s earnings. At the same time, these measures make higher contributions to FMS-WM’s earnings, which are important for the wind-up process. The losses incurred by DEPFA at present and budgeted for the coming years were known at the time of the decision to wind up rather than sell DEPFA. Taken together, DEPFA’s existing capital base and the value to be leveraged from the aforementioned instruments are more than enough to offset the losses incurred by it over the entire windingup period.

Regardless of the successful implementation of these measures, FMS-WM was forced to write down the book value of the equity investment in the DEPFA Group by EUR 83 million in 2015. This was due to persistently low interest rates and high expenses resulting from the obligation to permanently meet increasing regulatory requirements. There were also higher contributions to the bank rescue fund. However, this adjustment to the book value of the equity investment does not allow any conclusions to be drawn about the expected wind-up result because, as already mentioned, some measures to wind up DEPFA have an impact on FMSWM rather than on DEPFA itself.

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