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— Private Equity —
In May 2008, an investor group led by JC Flowers & Co. LLC picked up 24.9% of the Munich bank in a €1.1 billion ($1.5 billion) public offer. Shareholders won a 25% premium in the approach, which was spearheaded by J. Christopher Flowers, a former financial institutions investment banker at Goldman, Sachs & Co. who promised to use a position on the Hypo RE supervisory board to goad the bank's board into an expansion. He hoped that Shinsei Bank Ltd., his Japanese co-investor, could help further that cause. Flowers had been here before. He was best known for the $1.11 billion acquisition of Shinsei in 1999. Flowers partnered with Ripplewood Holdings LLC to take the Japanese lender at the height of the Asian country's last economic crisis. The deal was very profitable for the buyers.
Not so in Germany a decade later. Just a year after Flowers got his foot in the door at Hypo RE, his investment is estimated to be worth just 13% of the entry price, and the German government is weeks away from jettisoning remaining shareholders. "In retrospect, the overseas investments were too large," Flowers said in a recent interview with Bloomberg. "But they didn't seem too unusual at the time." Warning signs did flicker. In January 2008, Hypo RE took a €390 million charge on its U.S. securitized debt portfolio. That sent shares to an April low, just over €13, from €34 in January, apparently catching Flowers' eye. After buying into the bank in the summer, the investment remained stable until Lehman Brothers Holdings Inc. imploded in September. Hypo RE acknowledged it was in trouble. The bank said its Depfa Bank plc unit couldn't get short-term financing and would pull the whole bank into bankruptcy. A banking consortium and the government proposed a joint €35 billion rescue package that crumbled after a few days. Berlin eventually footed the entire bill and even guaranteed an additional €15 billion in liabilities. Hypo RE had only recently bought Depfa for €5 billion to diversify from real estate. The Dublin bank specializes in collateralized loans that, unlike other securitized mortgages, are carried on banks' books. Because they're covered by collateral and are transparent to shareholders, the investments were thought to be stable. However, Depfa continuously churned its liabilities with short-term debt, sometimes taking out loans equaling half its assets, according to documents from Bundesanstalt für Finanzdienstleistungsaufsicht, or BaFin, Germany's bank regulator, quoted recently by Handelsblatt. When Lehman collapsed, so did the short-term debt market. In the final months of 2008, Hypo RE's woes worsened, and early in the New Year, the bank was forced to go hat in hand to Sonderfonds Finanzmarktstabilisierung, or Soffin, Germany's bank rescue fund, racking up €102 billion in mostly public cash for direct loans as well as guarantees. With that much taxpayer cash at risk, politicians started to sweat. In January, reports surfaced that the German government wanted to take control of the bank and force out shareholders. There was no time, Berlin said, to fuss with minority shareholders while getting Hypo RE back on track. Flowers said he wanted to remain invested and help with the overhaul. Firmly rejecting Flowers' appeal, German politicians in March approved legislation that would let them kick out shareholders, something Germany hadn't seen since World War II. Flowers vowed to challenge the action in court, but he never got the chance. The German government acquired 47.3% of Hypo RE in the spring, through both a capital increase and a May public offer, which most analysts said Flowers should have accepted at €1.39 per share. During an extraordinary general meeting a month later, the government won approval for a €5.6 billion capital increase that will give it 90% of the bank, pushing Flowers and his investors out. Analysts say he's likely to get that €1.39 per share after all. Flowers has other German investments, notably an investment in HSH Nordbank AG, a northern German state-backed wholesale bank. JC Flowers sank €1.25 billion in a 27% stake nearly three years ago. After a €3 billion government rescue in May, that stake fell to 10%, but nobody's talking about forcing out shareholders -- yet. Car chase |
A year ago, with global economies slowing and financial stocks under pressure, a long-term investment in German commercial real estate and public sector lender Hypo Real Estate Holding AG seemed a shrewd bet. After all, most of Hypo's creditors carried a government-level credit rating. What could go wrong?
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