OREANDA-NEWS. An amicable settlement of legal disputes between BayernLB, HETA Asset Resolution and the Republic of Austria would limit any downside from HETA's resolution for BayernLB, says Fitch Ratings.

The Bavarian and Austrian finance ministers signed a memorandum of understanding (MoU) last week that commits both governments to settle their legal disputes and defines the milestones for a final contractual agreement. We believe that resolving the legal disputes in line with the terms of the MoU would effectively protect BayernLB from lower recoveries on its exposure to HETA and against unfavourable court rulings in BayernLB's complex legal disputes. BayernLB has booked material provisions for risks in 2014, and we do not expect any material potential further loss from its HETA exposure.

Resolving exposures to HETA would also help BayernLB's ability to repay the EUR2.3bn outstanding capital to Bavaria by end-2017 on time, which the bank is required to do by the European Commission. We believe the successful resolution of BayernLB's exposure to HETA would also help the bank to concentrate on its core business.

The MoU has been approved on a preliminary basis by the respective parliaments, and the parties are now requested to assess the proposal and draft contractual terms by 31 October 2015. The milestones set out in the MOU include the termination of all legal disputes between the parties, the participation of BayernLB in the resolution of HETA ranked pari passu with all other creditors and an upfront EUR1.23bn payment by the Republic of Austria to Bavaria with a conditional repayment obligation linked to BayernLB's receivables in the HETA resolution.

But hurdles remain as the final agreement requires approval from the Austrian parliament, from HETA and BayernLB, and from the Austrian Financial Market Authority (FMA). Additionally, if Bavaria were to retain money from the upfront payment, this might trigger state aid investigations if these funds are allocated to BayernLB. Any shortfall of BayernLB in the insolvency proceedings against HETA below the EUR1.23bn payment received by Bavaria from Austria would likely be passed to the bank, either directly or by offsetting this against outstanding capital repayments to the state. Also, court rulings in the meantime cannot be ruled out except for rulings from the Austrian constitutional court which forms part of the MoU.

The FMA initiated the resolution of HETA on 1 March 2015 following the Republic of Austria's decision not to provide additional funding to HETA identified in an asset quality review. The FMA is drafting a resolution plan in accordance with the Federal Act on the Recovery and Resolution of Banks in accordance with the new European resolution regime for banks.