Depfa potential bidder holds talks with preferred securities holders

By Caroline Salls

Pittsburgh, Feb. 27 - Holders of substantial amounts of Depfa preferred securities have been in talks with financial institutions considering bidding for Depfa as part of the proposed sale of Depfa announced by Citigroup Global Markets Deutschland AG in August 2013, according to a news release from Adam Friedman Associates.

The securities are all guaranteed by Depfa Bank plc and include €400 million of 6.5% guaranteed non-voting non-cumulative perpetual preferred securities issued by Depfa Funding II LP, €300 million of fixed-rate/variable-rate guaranteed non-voting non-cumulative perpetual preferred securities issued by Depfa Funding III LP (the CMS securities) and €500 million of fixed-rate/floating-rate guaranteed non-voting non-cumulative perpetual preferred securities issued by Depfa Funding IV LP (the 5.029% securities).

Adam Friedman Associates said the discussions began on Jan. 14 and ended near the end of January without the parties reaching an agreed framework or price for a transaction.

The discussions focused on proposals for the redemption of all of the preferred securities in exchange for new consideration following the purchase by the financial institutions of 100% of the common equity of Depfa, assuming the institutions were to be the successful bidder in the sale process.

Suggested transactions

After multiple rounds of discussions, Adam Friedman Associates said the preferred securities holders suggested a transaction that included 61 cents of consideration in the form of cash or cash equivalents, including up to 37 cents in a new, short-dated, unsecured bond issued by post-sale Depfa, with a duration no longer than 18 months and a coupon designed to have the instrument trade at par or above, and 12% of the fully diluted common equity of a post-sale Depfa.

Meanwhile, the institutions had offered 59.5 cents of consideration in the form of cash or cash equivalents, including up to 37 cents in a new, short-dated, unsecured bond and 11.33% of the fully diluted common equity of a post-sale Depfa.

Under both proposals, no payment was to be made for accrued distributions on any of the preferred securities; the holders in question and other institutional holders of the preferred securities would commit to support the proposals on an exclusive basis; and the support of 50.1% of each of the 6.5% securities, the CMS securities and the 5.029% securities would be required to cause acceptance of a definitive proposal.

A proposal by the institutions to provide preferred security holders the option to put the common equity issued to them for a price of 3.5% of face value per preferred security was also considered at different stages of the talks, the release said.

Following numerous discussions, Adam Friedman Associates said the institutions introduced the concept of a transaction similar to the other proposals, which would involve cash and cash equivalents and a percentage of the fully diluted common equity of a post-sale Depfa only to the holders of the 6.5% securities and the 5.029% securities at a slightly higher price for those two securities than previously discussed.

However, there were no discussions on the terms of this proposal because the security holders viewed the proposal as not viable.

Depfa Bank is a Dublin-based subsidiary of Hypo Real Estate Holding AG.

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