OREANDA-NEWS. The acceptance by HETA creditors of a discounted offer for their bonds will moderately improve Austria's government debt/GDP ratio and lessen - although not fully remove - the uncertainties created by the bad bank's resolution, Fitch Ratings says.

It was announced this week that holders of 99.55% of the outstanding nominal amount of HETA's senior debt instruments, and 89.42% of subordinated instruments, had accepted a revised offer from Kaerntner Ausgleichszahlungs-Fonds (KAF). This acceptance rate comfortably meets the threshold for KAF's offer. KAF was set up last year by the Province of Carinthia to acquire bonds from HETA, which is the wind-down unit of Hypo Alpe-Adria-Bank.

The offer provides for a buyback of HETA debt covered by Carinthia's guarantee at a discount. Creditors can settle the offer by cash or by exchanging their debt for zero-coupon bonds to be issued by KAF. These bonds will be guaranteed by Austria and can be sold to back to KAF after 1 December, with a net present value of 90% for senior debt and 45% for subordinated debt. The cost of settling the deal, of approximately EUR9.3bn (2.7% of GDP), will be met largely by the Austrian federal government, which will provide the funds to KAF. Carinthia will contribute EUR1.2bn. The final cost will also depend on continued recoveries from HETA asset sales.

However, HETA's liabilities have been recorded in full on the sovereign balance sheet since 2014. The partial write-down of HETA's debt would therefore reduce recorded gross general government debt (GGGD) by the same amount as the haircut incurred by senior and subordinated creditors, which Fitch estimates at around 0.4% of GDP. The issuance of the zero-coupon bonds is already included in 2016's planned issuance volumes.

This reduction is consistent with our forecast that GGGD as a percentage of GDP peaked last year, at 85.5%, and that risks to Austria's debt trajectory from the resolution of nationalised bad banks (HETA, KA Finanz and immigon) are now remote. It has no impact on Austria's 'AA+'/Stable sovereign rating. Liquidation of the assets of KA Finanz and immigon could improve the debt trajectory further.

The high acceptance rate appears to limit the risk that holdout creditors will seek legal redress, although this cannot be ruled out. A European Court of Justice ruling is still due on a suit by one German investor for full repayment. However, a key risk - that a large number of creditors would claim compensation from Carinthia under the guarantee it provided for HETA's liabilities, testing legal uncertainties surrounding the insolvency framework for Austrian sub-sovereigns - is substantially reduced.