Large loss caused by Greece write-downs
FMS Wertmanagement today announced that the financial result for its first full fiscal year 2011 is dominated by write-downs taken on the Greek portfolio, which had become unavoidable after the bond and debt swap programme conducted by the government of Greece. Total valuation allowances and risk provisions amounted to EUR 10.25 billion at the federal winding-up institution, which took over risk positions and non-strategic operations of the HRE Group in 2010, resulting in a net loss before loss compensation of EUR 9.97 billion.
“The large risk provisions caused by the Greek exposure and totalling EUR 8.9 billion could not have been foreseen in the original planning for the winding-up institution,” states Executive Board spokesman Dr. Christian Bluhm. “With risk provisions of these dimensions the successes we ́ve had winding up the portfolio unfortunately took a back seat.“
From the time the portfolio was transferred to the end of 2011, the original nominal value of EUR 175.7 billion was reduced to EUR 160.7 billion, a decrease of 8.5%. Excluding currency effects, the value of the portfolio would have declined by EUR 19.6 billion, or 11.2%, thanks to sales as well as principal and other repayments.
Moreover, initial highly complex portfolios were restructured with the aim of significantly improving the results of liquidation of individual portfolio components.
Despite the reduced portfolio, total assets increased by 2.6% to EUR 341.8 billion in fiscal 2011. Among other factors, this is attributable to the need to provide increased collateral to counterparties due to contractual obligations relating to financial derivatives as a result of the strained market situation.
Net interest and commission income totalling EUR 611 million considerably exceeded general and administrative expenses amounting to EUR 348 million. The volume-related decrease in interest income was largely balanced out by more favourable funding opportunities. For instance, commission expenses were down sharply as a result of full repayment of SoFFin- guaranteed issues by way of FMS Wertmanagement’s own issues in the course of 2011.
FMS Wertmanagement quickly established as a reliable issuer on international money and capital markets. The institution raised medium- to long-term financing of around EUR 20.8 billion via several bond issues in 2011. Awarded the highest ratings from leading rating agencies, FMS Wertmanagement also easily covered short-term funding requirements on the money market and therefore reduced ECB funding by nearly two-thirds as at 31 December 2011. “This confirms that the fundamental principle of a government winding-up institution implemented by the German Financial Market Stabilisation Act works and is financially successful, too," says Dr. Bluhm. “With affordable funding, we are gaining the time we need to unwind the portfolio while maximising value.”
The EUR 348 million in administrative expenses incurred by FMS Wertmanagement mainly comprise expenses for services performed by the HRE Group in accordance with a cooperation agreement. In fiscal 2011, FMS Wertmanagement spent a total of EUR 267 million for this servicing of the portfolio by the HRE Group. Because the EU requires the cooperation agreement to be terminated in September 2013, FMS Wertmanagement undertook extensive preparatory work over the past year to establish its own service company to provide the required services from this point onward. The service company was formed in April 2012. At the same time, invitations to tender have been issued for other services, such as IT, that FMS Wertmanagement aims to outsource to external providers. “Severing the final ties to HRE is an ambitious project, and one we are working on at full throttle along with our colleagues at HRE,” according to Executive Board spokesman Dr. Bluhm.
The loss from ordinary activities reported for fiscal 2011 is offset in the annual financial statements of FMS Wertmanagement by a loss compensation claim in respect of the German Financial Market Stabilisation Fund SoFFin. At the end of 2011, the current loss compensation amount was EUR 9.9 billion.
For 2012, FMS Wertmanagement expects a greatly improved result. “However, appreciation of our portfolio’s value depends highly on macroeconomic factors,” says Bluhm. “Regardless, we will, of course, take advantage of any opportunity that arises to unwind additional positions while maximising value and further reduce complexity in the portfolio.”
FMS Wertmanagement was founded in 2010 with the aim of winding up the risk positions and non-strategic operations that were transferred to the company from the Hypo Real Estate Group (HRE Group) effective 1 October 2010. As a financially independent entity under public law, FMS Wertmanagement defines the best possible wind-up strategies in each case and implements them based on the following maxim: Seize opportunities for generating income and minimise losses. FMS Wertmanagement is supervised by Federal Agency for Financial Market Stabilisation (FMSA). The Financial Market Stabilisation Fund SoFFin is obligated without limitation to provide additional funds under Section 8a of the German Law Establishing a Financial Market Stabilisation Fund (Gesetz zur Errichtung eines Finanzmarktstabilisierungsfonds - FMStFG) for losses incurred in winding up the portfolio.
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