Portfolio till 31 December 2018
Since October 2010, FMS-WM has reduced the portfolio taken over from the HRE Group with a nominal value of EUR 175.7 billion to EUR 69.0 billion as at the end of 2018.
The remaining portfolio of EUR 69.0 billion contains the exposures of EUR 5.8 billion acquired in the context of the DEPFA Group’s accelerated wind-up strategy. Without these, the remaining portfolio would have fallen to around EUR 63,2 billion as at the end of 2018.
Since the fourth quarter of 2016, FMS-WM has sold DEPFA Group debt instruments (DEPFA liabilities) purchased on the market to the DEPFA Group. In return, exposures with a nominal value of EUR 5.3 billion (2016) and EUR 1.9 billion (2017) have been purchased from the DEPFA Group. In 2018, FMS-WM acquired further assets with a nominal volume of EUR 0.5 billion, which the DEPFA Group used to finance the repurchase of the hybrid capital bond. A total of 328 exposures were transferred from the DEPFA Group to FMS-WM in the course of these three transactions.
The number of counterparties in FMS-WM’s portfolio fell by 9.3% in 2018 to 830. Originally, there were 3,191 counterparties in the portfolio. The number of remaining exposures has dropped by over 76% since 1 October 2010 to 1,693.
The individual exposures are located in 45 countries, with significant concentrations in Italy, the United Kingdom and the USA. The share of the overall portfolio attributable to these three countries showed a further increase to around 74% of the portfolio as a whole.
Commercial Real Estate
The Commercial Real Estate (CRE) segment, which at the time of the transfer comprised 3,512 individual exposures and thus made up almost half of all acquired positions in the overall portfolio, has been reduced at the fastest pace since FMS-WM was established, helped in part by the positive market environment and the short remaining maturities of the loans.
The Infrastructure segment, which still made up around 14% of the remaining portfolio at the end of 2018, was reduced from EUR 10.1 billion at the beginning of 2018 to EUR 9.5 billion at year-end
The largest repayments were related to loans for a French tunnel project, a project financing arrangement in the medical sector and an aircraft financing arrangement.
At the end of 2018, the portfolio still contained 279 individual exposures (prior-year end: 304 exposures). Since the portfolio was taken over, the nominal value of the Infrastructure portfolio of EUR 18.0 billion has been reduced by 47%.
In fiscal year 2018, the Public Sector portfolio was reduced from EUR 40.6 billion at the beginning of the year to EUR 35.0 billion at yearend.
While scheduled repayments contributed EUR 1.3 billion of the reduction, portfolio managers continued to take advantage of favourable market conditions to sell securities with a nominal volume of EUR 4.2 billion prior to maturity. The sales centred on exposures in Italy, Poland and Portugal, while the largest scheduled repayments related to Icelandic, Spanish and Italian exposures. The Public Sector segment now accounts for almost 51% of the overall portfolio’s nominal volume. When the portfolio was transferred from the HRE Group to FMS-WM on 1 October 2010, the Public Sector segment was the largest in the portfolio, making up around 49% with a nominal value of EUR 86.6 billion.
The borrowers and issuers of securities are state and regional governments, municipalities, public law entities and semi-public companies. Receivables from European Union member states account for the majority of the portfolio, with a large percentage of this comprising exposures with very long remaining maturities. Approximately 71% of the entire Public Sector portfolio will not mature until after 2030.
The options for an even swifter unwinding of this segment’s exposures are limited, as the loans and securities were all extended or issued in asset swap packages before the financial crisis broke out, at a time when the market accepted much lower margins. Therefore, in the current market environment, with potential buyers expecting higher returns, they could only be sold at a heavy loss. In addition, many of the exposures held are very illiquid, which would lead to further price discounts in the case of an early sale. Nevertheless, in 2018, FMS-WM took advantage of the favourable market environment to either unwind some of these holdings of securities and loans incl. swaps through sales or reduce their complexity by liquidating the asset / derivative structures.
At the end of 2018, one-third of the overall portfolio was invested in the Structured Products segment. This sub-portfolio decreased from EUR 24 .1 billion at the beginning of 2018 to EUR 23.1 billion at year-end.
The year-end amount includes EUR 3.3 billion of securities that FMS-WM acquired from the DEPFA Group.
The sub-portfolio still comprised 444 exposures and 233 borrowers at the end of 2018. Among others, this segment includes structured credit instruments such as asset-backed securities (ABS), commercial or residential mortgage-backed securities (CMBS or RMBS) or collateralised debt obligations (CDO). About a third of the structured securities in FMS-WM’s portfolio are based on government-guaranteed student loans in the USA.
DEPFA Bank plc
The wind-up of Irish DEPFA Group is making progress. DEPFA Group’s total assets decreased by 68% since 2014 and the Tier 1 capital (CET1) ratio rose to 109,2% as at the end of 2018.
When examining the possibility of acquiring the DEPFA Group, FMS-WM had already identified value levers that would result in a more favourable outlook for the wind-up of the DEPFA Group. These consisted of:
- cutting costs
- systematically leveraging the funding advantages
- buying back the liabilities issued by the DEPFA Group
The remaining volume of DEPFA liabilities with maturity dates from 2020 onwards still held by third-party investors amounts to only EUR 0.4 billion. The DEPFA Group has gradually limited the expense of having its liabilities rated to the bare minimum, thereby further reducing the tradability of DEPFA liabilities. Although the liquidity of the debt instruments is now very low, FMS-WM does not expect a significant volume of further repurchases to be a possibility and will therefore cease buying up DEPFA liabilities in June 2019 as announced.
The measures planned for 2019 are intended to further reduce total assets of the DEPFA Group, simplify the organisational structure and transfer or distribute capital to FMS-WM bearing in mind regulatory minimums. The measures are designed to fully utilise the value levers identified and ensure maximum flexibility with regard to the further wind-up strategy. In light of the still-positive market environment, FMS-WM is examining the possibility of selling the DEPFA Group. In this context, the potential proceeds from selling the DEPFA Group are being compared against the benefits to be gained from FMS-WM continuing the accelerated wind-up of the DEPFA Group.
Given the progress achieved in fiscal year 2018 and irrespective of the further wind-up strategy, FMS-WM continues to assume that winding up the DEPFA Group remains the favourable option compared with the sale that was not carried out in 2014.
Further information on DEPFA Bank plc is available on the website https://www.depfa.com