OREANDA-NEWS. A comprehensive restructuring of troubled HSH Nordbank AG (HSH) looks increasingly likely following recent comments made by Schleswig-Holstein's (SH) finance minister, says Fitch Ratings. The states of SH and Hamburg jointly control 85% of the bank.

Until recently HSH, its two state owners and the European Commission's state-aid division were discussing whether a EUR10bn public-sector guarantee complies with state-aid rules. The guarantee largely covers the bank's problem asset portfolio, consisting mostly of poorly performing shipping and commercial real-estate loans. HSH pays a fee in return for the guarantee and these payments have been a significant drag on the bank's performance. We believe that alternative solutions to resolving HSH's longstanding asset quality problems could be credit positive for the bank but much will depend on the terms of the restructuring.

Alternative solutions could include the transfer of parts of HSH's troubled assets into a separate vehicle tasked with either selling or running them down. A spin-off would have the added advantage of freeing up management time, allowing it to concentrate on running its core corporate and asset-based lending business. The performance of core activities has improved recently, driven by stronger demand, plus aggressive growth targets established by the bank.

HSH's Viability Rating of 'b' is on Rating Watch Evolving, reflecting a material risk of failure and also the possibility that a successful restructuring either of the public sector-guarantees or of the bank's balance sheet negotiated with the European Commission could strengthen its standalone financial strength.

HSH's 'BBB-' Long-Term IDR is support-driven and reflects our view that the bank performs an important role for its owners. Other rated German Landesbanken have higher Long-Term IDRs, at 'A-'. HSH's rating is lower because we believe that it lacks a sustainable business model and this makes a long-term investment strategy by the owners more questionable. There is the additional risk that the EU's Bank Recovery and Resolution Directive (BRRD) could restrict support from the bank's owners.

Additional information related to Fitch's support assumptions for German Landesbanks is provided in a report available by clicking on the link below. A major restructuring of HSH, enabling it to develop a sustainable business model and a stronger company profile, could result in an upgrade of its Long-Term IDR, in line with its peers. However, the owners are still at an early stage of working through their options, so any upgrade is likely to take some time.