The EAA thus continues to help stabilise the financial markets
- Loans and securities: minus EUR 6.3 billion or minus 18%
- Remaining notional volume: roughly EUR 29.7 billion
- Derivative financial products: minus EUR 83 billion or minus 24%
- Remaining notional volume: roughly EUR 259 billion
The EAA’s portfolio is already significantly smaller than originally planned for this date. This clearly shows that the EAA is making good progress towards attaining its goals.
The EAA has a clear public mandate of winding up the acquired multi-billion portfolio in a risk-minimising and value-preserving manner. The EAA consistently examines the options of accelerating the wind-up of the portfolio of the former WestLB, but not at all costs. If higher values for a position can be achieved in the long term, it has the option to wait.
In order to achieve its objectives, the EAA has created its own range of tools centred around its long-term wind-up plan. This provides analyses for each individual asset position as well as information on its fundamental value, potential risks and the costs of management. Based on these tools, the EAA is able to design the wind-up process in a both value- and risk-optimising manner.
Successful activities in 2016
The EAA reduced its loan and securities portfolio in a balanced way. The investment-grade share was 69% at the end of 2016 and is higher than at the time the portfolio was taken over in 2012 and 2010.
In order to optimally manage the wind-up process, the EAA divides its loan and securities portfolio into clusters. Also in 2016 the EAA continued to make significant progress in reducing commitments in numerous segments, for example in winding up loan exposure in various – partly difficult – sector clusters.
- Aviation: minus 42%, wind-up of around EUR 220 million to roughly EUR 300 million.
- Construction/ specialty chemicals/ health industry: minus 55%, wind-up of around EUR 160 million to roughly EUR 130 million.
- Energy producers: minus 31%, wind-up of around EUR 230 million to roughly EUR 530 million.
- Logistics/ services: minus 84%, wind-up of roughly EUR 170 million to around EUR 30 million.
- Shipping: minus 17%, wind-up of around EUR 50 million to roughly EUR 270 million.
When winding up the trading portfolio, the EAA in 2016 has also concentrated on reducing the complexity of the portfolio. This facilitates the management of the portfolio and reduces costs and risks.
- Complete wind-up of individual product groups, for example commodity derivatives. Future IT costs will decrease because a system used for managing the products is no longer necessary.
- Targeted wind-up of complex equity derivatives, in particular by transfer (novation) to other banks.
- Reduction in the number of derivative contracting partners by additional six per cent to around 500 in 2016; at the time the trading portfolio was taken over, this figure was over 900. Risks from a possible deterioration of the counterparty’s creditworthiness are lower and management expenses are reduced.
Announced and implemented
In the past fiscal year 2016, the EAA was able to successfully implement several measures that had been under preparation for a long period. Significant progress was made in the wind-up of its participations portfolio as well as in sub-portfolios, where the wind-up is being complicated by litigataions.
A large portfolio with interest rate swap contracts led to legal disputes with – at its peak – more than 60 municipalities. By the end of December 2016, the EAA was able to reach a settlement in approx. two thirds of all cases that had led to a legal claim. The agreement was possible only after the EAA had appealed in several cases to the German Federal Court of Justice (BGH). Decisions by the BGH from 2015 and 2016 strengthened the EAA’s position.
In the United States, the EAA achieved a settlement with a major bank that had acted as a trustee in a loan securitisation transaction. The financial crisis centred on loan securitisations, and they are therefore the subject of several legal cases in the United States. While other claimants usually pursue a claim only against the investment banks that had issued such securities, the EAA also examined the role of trustees and successfully integrated this into its legal strategy.
The EAA took over more than 320 participations – 120 direct and 200 indirect –, ranging from credit institutions and private equity companies to business schools. Approx. 1,400 special-purpose entities worldwide were also added, for example, for leasing and other financing or banking transactions. At the end of 2016, there were still 154 participations – 80 direct and 74 indirect – as well as 402 special-purpose entities.
The EAA’s participation management focused on accelerating the wind-up of complex commitments requiring considerable management effort. For instance, the sale of WestFonds Immobilien Anlagegesellschaft mbH alone enabled a simultaneous wind-up of 70 indirect participations. Also in 2016, the EAA ended a participation in which its withdrawal had been blocked for over 20 years due to a legal dispute with a central bank in South America.
By implementing measures in the participations portfolio, the EAA was able to increase the value in many cases and thereby stabilise its equity. An example of this is the sale of a poorly marketable participation in a company that provides electronic card systems. This sale enabled the EAA to realise significant hidden reserves in 2016.
The trading portfolio is mainly made up of interest derivatives with a notional volume of EUR 256 billion, accounting for a share of 99 per cent.
The remaining banking book portfolio of nearly EUR 30 billion consists of loans and securities.
- The loan portfolio centres on project financing. The EAA manages around 40 long-term loans for infrastructure projects, including toll motorways, roads and bridges, airports and harbours or even hospital and water supply projects. In addition to these, it also has nearly 100 large power plant projects, with both conventional as well as alternative energy sources.
- The structured loans portfolio is dominated by commitments that are connected to loans in the US housing market (67%). The market value of these loans has increased considerably after the financial crisis; however, they have yet to recover to pre-crisis levels.
- Tradable securities mostly consist of European government bonds and similar instruments from public borrowers. As at 31 December 2016, the portfolio included over five billion Euros, approx. two thirds of which are distributed among the southern European countries of Italy, Spain and Cyprus.