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Flowers syndicate may face massive Hypo losses

Shareholders of the troubled German lender yesterday approved a government plan to nationalise the bank; JC Flowers has said it may take legal action to safeguard its investment.

A JC Flowers-led syndicate faces potentially significant losses on their investment in the troubled lender Hypo Real Estate after shareholders approved plans to allow the German government to increase its capital share to around 90 percent.

The nationalisation plan has been opposed by New York-based private equity firm JC Flowers, which together with private equity real estate firm Grove International Partners and Japan’s Shinsei Bank, invested €1.1 billion into Hypo Real Estate in June 2008 for up to 24.13 percent of the firm’s shares.

At present, the JC Flowers-led consortium holds more than 14 percent of the bank's shares. A spokesman for the firm told Bloomberg that “all options will be evaluated to safeguard the interests of the more than 500 investors which are advised by JC Flowers … This could also include taking legal steps.”

Their vote, held yesterday, paves the way for Germany’s first bank nationalisation since the 1930s.

Germany’s bank rescue fund, Soffin, which had already owned 47.3 percent of the lender, will inject €2.96 billion into the company, taking its stake to 90 percent. Around three-quarters of shareholders approved the cash injection, Soffin said in a statement.

Soffin said it would “initiate a squeeze-out under German stock corporation law in order to finalise the complete takeover“ of Hypo.

Axel Wieandt, chairman of Hypo, said the capital infusion was a “crucial component” of recapitalising Hypo but warned more will be needed in future. “We will require further capital and liquidity support to lead the group over the next few years. In conjunction with the restructuring, which has already started, the group now has a clear perspective.”

Hypo has already had €102 billion of credit lines and debt guarantees from the German government and the country’s financial institutions, after almost collapsing last September.