EN Official Journal of the European Union L 225/1

COMMISSION DECISION

of 20 September 2011

on State aid granted by Germany to HSH Nordbank AG SA.29338 (C 29/09 (ex N 264/09))

(notified under document C(2011) 6483)

(Only the German text is authentic)

(Text with EEA relevance)

(2012/477/EU)

THE EUROPEAN COMMISSION,

Having regard to the Treaty on the Functioning of the European Union, and in particular the first subparagraph of Article 108(2) thereof,

Having regard to the Agreement on the European Economic Area, and in particular Article 62(1)(a) thereof,

Having called on Member States and other interested parties to submit their comments pursuant to those provisions (1),

Whereas:

1. PROCEDURE

(1) On 30 April 2009 Germany notified the Commission of state aid measures for HSH Nordbank AG (hereinafter ‘HSH’) in the form of a guarantee comprising a EUR 10 billion second-loss tranche (hereinafter ‘the risk shield’) and a EUR 3 billion capital injection (hereinafter ‘the recapitalisation’). The measures had been provided indirectly by the public-sector owners of HSH, namely the Free and Hanseatic City of Hamburg and the Land of Schleswig-Holstein (hereinafter referred to separately as ‘Hamburg’ and ‘Schleswig-Holstein’ respectively, or together as ‘the public-sector owners’).

(2) By Decision of 29 May 2009 in case N 264/09 (2) (hereinafter ‘the Rescue Decision’), the Commission authorised the recapitalisation and the risk shield for HSH for a period of six months, as rescue measures compatible with the internal market on the basis of Article 107(3)(b) of the Treaty on the Functioning of the European Union (TFEU) (3). In the Decision the Commission required the German authorities to submit a restructuring plan within three months.

(3) On 1 September 2009 Germany notified a restructuring plan to the Commission.

(4) On 22 October 2009 the Commission adopted a Decision initiating the procedure under Article 108(2) TFEU with regard to the risk shield and the valuation of HSH in the context of the recapitalisation (hereinafter the ‘Decision initiating the procedure’) (4).

(5) On 21 November 2009 the Decision initiating the procedure was published in the Official Journal of the European Union (5) and interested parties were requested to submit their comments within two weeks from the publication date.

(6) On 30 November and 11 December 2009 the Commission received comments from Sparkassen- und Giroverband für Schleswig-Holstein and from Schleswig-Holsteinische Sparkassen-Vermögensverwaltungs- und Beteiligungs GmbH & Co. KG (hereinafter referred to separately as ‘SGVSH’ and ‘SVB’ respectively, or together as ‘the savings bank associations’).

(7) On 3 December 2009 a group of investors advised by J.C. Flowers & Co. LLC (hereinafter ‘Flowers’) requested an extension of the deadline to submit comments, which was granted by the Commission on 7 December 2009. The Commission received their comments on 17 December 2009.

(8) On 1 December 2009 Germany requested an extension of the deadline to submit comments, which was granted by the Commission on 7 December 2009. On 7 December 2009, HSH also requested an extension of the deadline to submit comments, which was granted by the Commission on 17 December 2009. On 17 December 2009, Germany forwarded joint comments from the public-sector owners and HSH on the Decision initiating the procedure.

(9) On 2 December 2009 a meeting took place between Flowers, the savings bank associations, the German authorities and the Commission.

(10) On 21 December 2009 the Commission sent Germany the non-confidential versions of the comments submitted by interested parties and requested Germany to comment within one month.

(11) On 18 January 2010 Germany forwarded the response made by the public-sector owners to the comments by Flowers and the savings bank associations.

(12) As regards the risk shield, and in particular the valuation of the portfolio of assets whose risk was covered by the risk shield (‘the shielded portfolio’), several meetings, teleconferences and other information exchanges between the German authorities and the Commission took place between September 2009 and February 2010. The German authorities submitted additional information, inter alia, on 6, 20, 21, 22, 23 and 29 October, 11, 12, 16 and 27 November and 17 December 2009, 26 and 27 January and 19 February 2010.

(13) The restructuring plan, risk shield and recapitalisation, and the valuation of the shielded portfolio were discussed by the German authorities and the Commission departments in a series of meetings, teleconferences and other information exchanges in the period between October 2009 and June 2011, including on 5, 21 and 27 October, 4, 12, 13, 18, 27 and 30 November, 7, 9, 14 and 15 December 2009, 14 and 19 January, 21 April, 5, 12, 20, 26, 28 and 31 May, 15 June, 13, 16, 22 and 23 July, 30 September, 22 November, 9 and 22 December 2010, 23 and 28 February, 18 March, 1 and 8 April, 25 May and 7, 16 and 29 June 2011. The final version of the restructuring plan was submitted on 11 July 2011.

(14) On 5 September 2011 Germany submitted the list of commitments that is attached in Annex I to this Decision.

2. DESCRIPTION OF THE BENEFICIARY

(15) The HSH group is the fifth-largest German Landesbank, with head offices in Hamburg and Kiel. It is a public limited company (Aktiengesellschaft), established on 2 June 2003 as the result of the merger between Hamburgische Landesbank and Landesbank Schleswig-Holstein. In October 2006, Flowers (6) acquired 24,1 % of HSH shares (26,6 % of voting rights) from WestLB, with a view to an initial public offering (IPO) of HSH in 2008.

(16) On 31 December 2008 HSH had a balance sheet total of EUR 208 billion and risk-weighted assets (‘RWA’) of EUR 112 billion.

(17) After the implementation of the measures approved by the Commission in the Rescue Decision on 29 May 2009, the ownership structure of HSH was as follows: Hamburg 10,89 %; Schleswig-Holstein 10,42 %; HSH Finanzfonds AöR, a public-law institution established and controlled in equal shares by Hamburg and Schleswig-Holstein, 64,18 %; SGVSH 4,73 %; SVB 0,58 %; and Flowers 9,19 % (7).

(18) HSH is a commercial bank, its core region is northern Germany and its main focus is on merchant and private banking. The merchant banking activities are concentrated on shipping, corporate banking, transportation, real estate and renewable energy projects. HSH is the world’s largest provider of ship finance and has a significant market share in aviation financing (part of its transportation business unit). As at December 2008 HSH was present in 21 major financial centres in Europe, Asia and America.

(19) HSH is one of the German public banks which until 18 July 2005 benefited from the unlimited State guarantees Anstaltslast and Gewährträgerhaftung (8).

(20) In the beginning of the 1990s asset and capital transfers of EUR 523 million took place that favoured HSH’s predecessor institutes, Hamburgische Landesbank and Landesbank Schleswig-Holstein. On 20 October 2004 the Commission decided that those transfers were incompatible state aid and had to be recovered (9). HSH had to repay its public-sector owners a total amount of EUR 756 million, including interest. It did so in two instalments, on 31 December 2004 and 3 January 2005.

(21) In order to compensate for the capital outflow, the shareholders increased HSH’s capital by EUR 556 million on 20 July 2005 (10). The capital increase was provided from own funds in combination with so-called partial payments. As a result of this mechanism the ownership structure changed only slightly. On 6 September 2005 the Commission decided that the capital increase was in line with the market investor principle, and thus did not constitute state aid (11).

(22) In mid-July 2008, HSH’s shareholders decided to increase its capital base with a view to financing its growth. The capital measures had a volume of nearly EUR 2 billion, and around EUR 1,26 billion of that figure was fresh funds.

(23) The first part of the capital measures consisted of a conversion into ordinary shares of all silent participations (stille Beteiligungen) totalling EUR 685 million (12), and preference shares, totalling EUR 57 million, held by the public-sector owners. At the time of the conversion, Flowers signed a cash equity issue in order to avoid a dilution of their shareholdings (13). As a result, HSH received an additional EUR 300 million or thereabouts.

(24) As a second part of the capital measures the owners made a new convertible silent capital contribution, totalling EUR 962 million. The public and private shareholders participated in the silent partnership in line with the ratio of their shareholdings (public EUR 660 million, private EUR 240 million). An additional EUR 62 million was taken over by the private shareholders. With effect from 31 December 2010, these silent partnerships were converted into ordinary shares.

(25) Germany informed the Commission about the capital measures described in recitals 21 to 23. The Commission considered the investments by the public-sector shareholders to be in conformity with the market economy investor principle, because a private investor participated significantly in the transaction on the same conditions as the public-sector shareholders. On 1 August 2008 the Commission informed Germany that it would not pursue the issue.

(26) In the period 1999-2009, HSH registered cumulated losses of EUR 1,85 billion and paid cumulated dividends of EUR 354 million to its public-sector owners. In the same period the public-sector owners recapitalised HSH with EUR [4-5] (14) billion of new capital and guaranteed liabilities of up to EUR 166 billion. Table 1 HSH financial track record for public-sector owners 1999–2009 (15) Business year 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Profit and Loss (EUR million) (16) 111 110 204 239 261 127 400 460 270 –3 195 – 838 Cumulated Profit and loss (EUR million) 111 221 425 664 925 1 052 1 452 1 912 2 182 –1 013 –1 851 Dividend payments to public-sector owners (EUR million) 36 44 72 96 105 0 0 Cumulated dividend payments to public-sector owners (EUR million) 36 80 153 248 354 354 354 New capital injection by owners (EUR million) according to local GAAP [300-600] 0 0 [700-1 400] 3 000 Cumulated capital injection by public-sector owners (EUR million) [300-600] [300-600] [300-600] [1 000-2 000] [4 000-5 000] Risk shield — guarantee (EUR billion) 10 Guaranteed liabilities (EUR billion), of which 162 166 152 144 161 88 78 75 73 Gewährträgerhaftung (EUR billion) 162 166 152 144 161 88 78 65 56 SoFFin guarantees (EUR billion) 0 0 0 0 0 0 0 10 17

(27) Historically HSH has been rated in the AA range by all three major rating agencies (17). The long-term rating has reflected the unlimited state guarantees provided by HSH’s public-sector owners. The assumption of future support from the public-sector owners remains a significant factor in HSH’s credit rating, which includes a rating uplift (18) of 7 notches by Fitch. Moody’s assigns in total 7 notches support uplift, of which one notch is for the support provided by the public-sector owners (regional support).

(28) The C stand-alone rating (for Moody’s ‘Bank Financial Strength Rating’, or ‘BFSR’) (19) reflected the rating agencies’ view that HSH possessed adequate financial strength with a limited but valuable business franchise. According to Moody’s BFSR methodology, banks rated at C display either acceptable financial fundamentals within a predictable and stable environment or good financial fundamentals within a less predictable and stable operating environment.

(29) In July 2004 Fitch started to provide a rating for HSH’s non-guaranteed obligations in an A range, keeping its stand-alone rating at C. Moody’s and S&P followed with ratings for non-guaranteed obligations in July 2005. Until the beginning of the crisis in 2008, the ratings of HSH remained stable.

(30) Since October 2008, two trends can be observed in the ratings of HSH. The first trend started in October 2008 when HSH’s stand-alone ratings were successively downgraded to the lower D and higher E range by Fitch and Moody’s (E being the lowest possible BFSR rating by Moody’s) (20). As reasons for the downgrading the agencies referred to (a) the significant risk stemming from HSH’s cyclical asset base and in particular the shipping assets; (b) HSH’s limited access to capital while running a highly capital-intensive lending business; and (c) HSH’s weak and low profitability compared to pre-crisis levels due to lower asset yields, relatively higher risk-provisioning levels in asset-based finance and significantly increased funding costs compared to the pre-crisis environment. Furthermore, the agencies raised fundamental concerns about HSH’s business profile. Because HSH does not have access to retail customers to any significant extent, the bank will continue to rely on the wholesale markets where it will have difficulties securing funding. Compliance with more stringent regulatory requirements on capitalisation, liquidity buffers, and funding mismatches would be a particular challenge for pure wholesale banks like HSH.

(31) The second trend started in May 2009, when S&P downgraded HSH’s credit rating to BBB+, followed by Moody’s and Fitch downgrading HSH to A3/A- in May and July 2010. As justification for the downgrading the rating agencies pointed to the limit on further support by the public-sector owners due to (a) the EU state aid rules and (b) their budgetary restrictions. The extent of the past support measures represented a high burden on the public-sector owners’ financial strength so that they would be less inclined to offer further support. An important aspect in assessing the public-sector owners’ further availability to offer support measures was the large amount of grandfathered debt (21) that then remained on HSH’s balance sheet.

(32) Already in 2007 the impact of the financial crisis led to EUR 1,3 billion of loss-provisioning in HSH’s USD 30 billion structured credit portfolio (CIP) (22). The contagion effect on the real economy adversely affected the traditional loan portfolio and had a severe impact on the quality of HSH’s claims related to its shipping, transportation, real estate and renewable energy project financing. Additional loss-provisioning of EUR 1,6 billion on the CIP and loan loss provisions of EUR 1,9 billion on the loan portfolio significantly contributed to the negative result of EUR 3,2 billion in 2008.

(33) The bankruptcy of Lehman Brothers in September 2008 also intensified the refinancing difficulties of HSH, so that it applied for EUR 30 billion liquidity guarantees with the Sonderfonds Finanzmarktstabilisierung (German Fund for Stabilising the Financial Markets, hereinafter ‘SoFFin’).

(34) On 29 April 2009, the Bundesanstalt für Finanzdienstleistungsaufsicht (German Banking Regulator, hereinafter ‘BaFin’) informed HSH that, in light of its prudential situation, BaFin considered that HSH had difficulties meeting the regulatory capital requirements. BaFin announced that it would order a moratorium pursuant to paragraph 47 of the German Banking Act if the owners of HSH did not reinforce its capital basis.

(35) On 6 May 2009, S&P downgraded HSH’s credit rating by two notches from A to BBB + with a negative outlook.

3. THE AID MEASURES

(36) In May and June 2009 HSH obtained aid of two kinds from Schleswig-Holstein and Hamburg: the EUR 3 billion recapitalisation and a EUR 10 billion second-loss guarantee measure (the ‘risk shield’). In addition HSH received aid from SoFFin in the form of liquidity guarantees which in the end amounted to EUR 17 billion (hereinafter ‘liquidity guarantees’).

3.1. THE RECAPITALISATION

(37) The recapitalisation consisted of a cash injection of EUR 3 billion in total of core Tier 1 capital in exchange for ordinary shares with voting rights. The shares were issued by HSH and fully subscribed by HSH Finanzfonds AöR. The latter is an institution under public law established, owned and controlled by Hamburg and Schleswig-Holstein in equal shares.

(38) HSH Finanzfonds AöR obtained the financial means needed for the recapitalisation by issuing bonds on the capital markets. Its liabilities resulting from the bond issues are guaranteed equally by Hamburg and Schleswig-Holstein as partial debtors and by means of guarantees to the bond holders. The bonds issued by HSH Finanzfonds AöR serve solely to finance the HSH recapitalisation. HSH Finanzfonds AöR operates exclusively as a vehicle for Hamburg and Schleswig-Holstein and does not pursue any other purpose besides providing the recapitalisation and the risk shield.

(39) The issue price of the new shares was based on a valuation of HSH by PricewaterhouseCoopers (‘PwC’), which arrived at a value in a range between EUR [> 2] billion and EUR [< 3] billion (EUR [> 19] to EUR [< 28] per share). The average value of HSH based on the valuation is EUR [2-3] billion (EUR [19-28] per share). The valuation was established before the rating downgrade of HSH of 6 May 2009. The impact of the downgrading on the value of HSH was not taken into account in the valuation, but was considered during the pricing discussion. The valuation was based on the assumption that an upgrade to the previous A rating would be achieved in 2013.

(40) For the EUR 3 billion in newly injected capital Hamburg and Schleswig-Holstein intended to achieve a yearly remuneration of 10 % (EUR 300 million per year). Given that HSH’s business plan did not project sufficient profits for the period 2009-2012 to pay a 10 % dividend on all ordinary shares, the issue price of the new ordinary shares was reduced by a discounted 10 % dividend payment for the period 2009-2012. The present value of the 10 % dividend payment for the period 2009-2012 amounts to EUR [650-800] million (EUR [3-6] per share). The price for the new shares was fixed at EUR 19 per share (EUR [19-28] minus EUR [3-6]). HSH Finanzfonds AöR acquired 157 894 737 new ordinary shares.

(41) The savings bank associations and Flowers did not participate in the recapitalisation. Consequently, following the recapitalisation, their shareholdings were diluted from 13,20 %, 1,62 % and 25,67 % to 4,73 %, 0,58 % and 9,19 % respectively, and the joint direct and indirect shareholdings of Hamburg and Schleswig-Holstein (including the shares held via HSH Finanzfonds AöR) increased from 59,51 % to 85,49 %.

3.2. THE RISK SHIELD

(42) The risk shield was put in place at the same time as the recapitalisation in June 2009. It was also provided directly by HSH Finanzfonds AöR. Neither the savings bank associations nor Flowers participated. The risk shield consists of a second-loss guarantee in the amount of EUR 10 billion, which shelters HSH from losses stemming from total assets of about EUR 172 billion (EUR 187 billion exposure at default) as of a cut-off date in March 2009. The first-loss tranche of EUR 3,2 billion is to be covered by HSH. The second-loss tranche of up to EUR 10 billion is to be covered by HSH Finanzfonds AöR. Losses beyond EUR 13,2 billion (first- and second-loss tranches together) are to be covered by HSH. The transfer value of the shielded portfolio is [around EUR 168] billion ([around EUR 172] billion total assets value minus EUR 3,2 billion).

(43) In principle, HSH can cancel the guarantee at any time, but until 31 December 2013 the cancellation is limited to EUR [2-5] billion in total and at most to EUR [1-4] billion per year. HSH cancelled EUR 1 billion of the guarantee as of 9 March 2011. On 18 June and again on 6 September 2011, HSH cancelled another EUR 1 billion of the guarantee, thus reducing the remaining guarantee to EUR 7 billion. BaFin was informed of the cancellations. BaFin indicated that it would not object to the termination.

(44) Impaired assets such as assets-backed securities (‘ABS’) represent around [3-6] % of the approximately EUR [172] billion portfolio covered by the risk shield. The majority of the shielded assets consist of customer loans, HSH’s core activity. The shielded portfolio is denominated in various currencies including EUR, USD and GBP. Table 2 Breakdown of the shielded EUR [172] billion approximately of assets Category of assets Assets on balance sheet (in EUR billion) % of the portfolio Customer loans [115 approx] […] Fixed income securities [30 approx] […] Secured tradable loans (23) [15 approx] […] Assets-backed securities [10 approx] […] Guarantees on payments [5 approx] […] Total [172 approx] 100,0

(45) HSH did not have a valuation of the whole portfolio conducted by external experts before the implementation of the risk shield, except for the ABS portfolio and part of the CIP portfolio, which were valued by Blackrock and by Cambridge Place. At the Commission’s request, HSH conducted a valuation of the shielded portfolio in the period November 2009 to January 2010 based on the Commission’s severe stress assumptions. The valuation was conducted in cooperation with the Commission’s experts. The valuation assumptions were in line with the severe stress scenarios applied by the Commission in other cases. The valuation was based on the in-depth analysis of a sample of 40 deals representing a notional amount of EUR 1 billion, i.e. 0,6 % of the total exposure, and a tranche valuation on a large representative part of the portfolio using Moody’s CDOROM (24) tool. The underlying assumptions were discussed with the Commission’s experts. HSH was assisted by its external expert Morgan Stanley, who confirmed the technical accuracy of the calculations. The capital relief effect of the risk shield at the time of its implementation was determined to be [around EUR 3,5] billion. The accuracy of the method and the underlying calculations used to determine the capital relief effect was confirmed by BaFin in February 2010.

(46) According to the contract on the provision of a guarantee concluded between HSH Finanzfonds AöR and HSH on 2 June 2009, HSH Finanzfonds AöR receives a premium for providing the second-loss guarantee in the amount of 400 bps p.a. on the nominal amount of the guarantee (EUR 10 billion) (hereinafter the ‘basic premium’). Drawings and cancellations reduce the amount on which the remuneration of 400 bps is paid. Table 3 below represents the total amount of the cumulative payment in three scenarios: (a) Scenario 1: HSH’s base case, which assumes that the guarantee will not be drawn and will be fully cancelled by HSH by the end of 2015; (b) Scenario 2: an intermediate scenario, which assumes a drawing of the guarantee to the tune of EUR 5 billion; and (c) Scenario 3: the underlying case of the assets’ valuation, which assumes that the guarantee will be fully drawn by [2015-2020] (no cancellations). Table 3 Remuneration of risk shield as proposed by Germany in different scenarios (In EUR million) Scenario 1 (EUR 0 drawing of guarantee) Scenario 2 (EUR 5 billion drawing of guarantee) Scenario 3 (EUR 10 billion drawing of guarantee) Basic premium (400 bps on outstanding nominal amount of the guarantee) [> 1,5] [> 2,5] [> 4]

(47) Over the restructuring period the payments of the basic premium would represent between EUR [100-150] million and EUR 405 million per year depending on the drawing of the guarantee as described in Table 4 below. Table 4 Projected basic premium (400 bps) payment of HSH to HSH Finanzfonds AöR in EUR million over the restructuring period (In EUR million) 2009 actual 2010 actual 2011 2012 2013 2014 Scenario 1 (EUR 0 drawing) – 300 – 405 – [300-350] – [200-250] – [150-200] – [100-150] Scenario 2 (EUR 5 billion drawing) – 300 – 405 – [300-350] – [200-250] – [180-230] – [150-200] Scenario 3 (EUR 10 billion drawing) – 300 – 405 – [300-400] – [300-400] – [300-400] – [300-400]

3.3. LIQUIDITY GUARANTEES

(48) Additionally, HSH had applied for SoFFin guarantees covering new issuances of debt up to an amount of EUR 30 billion. SoFFin approved the issuance of a first tranche of EUR 10 billion at the beginning of December 2008. The guarantees were approved within the framework of the German rescue scheme (25). The remaining EUR 20 billion were to be activated after the submission of a restructuring plan. The second tranche of EUR 20 billion was activated after submission of the restructuring plan by HSH to SoFFin on 7 March 2009. As of 30 September 2009, a total of EUR 17 billion had been drawn. As of 1 January 2010, SoFFin reduced the guarantee limit from EUR 30 to EUR 17 million. The limit was not extended again.

4. THE RESTRUCTURING PLAN

4.1. INITIAL RESTRUCTURING PLAN AND SUBSEQUENT REVISION OF THE FINANCIAL PROJECTIONS

(49) The initial restructuring plan submitted on 1 September 2009 (hereinafter ‘the initial restructuring plan’) was described in the Decision initiating the procedure (recitals 23 to 28). Additional information on the restructuring model contained in the initial restructuring plan was provided in subsequent submissions during the period from October 2009 to June 2011. The modified version of the restructuring plan was submitted on 11 July 2011 (hereinafter ‘modified restructuring plan’). The financial projections contained in the initial restructuring plan with the related updates are briefly described below.

(50) The initial restructuring plan projected a decrease of [around 20 %] in the net interest income for the period 2009 to 2014, from EUR [1,4] billion approximately to EUR [1,1] billion approximately. In respect of the components of the financial results, HSH projected an increase in net income before restructuring (and after loan loss provisions) for the core bank (26) of more than 200 % between 2009 and 2014, from approximately EUR [350] million to approximately EUR [1,1] billion. The projected net income before restructuring of approximately EUR [1,1] billion in 2014 included a positive effect of approximately EUR [100] million from reversing loan loss provisions. The net fee income and the trading result each represented [some 20 %] of the net income before restructuring costs of the core bank in 2014. In the modified restructuring plan the projected net income before restructuring for 2014 was revised to EUR [350-450] million, with net fee income and trading result representing [10-15] %.

(51) The initial restructuring plan projected a total asset reduction for HSH from approximately EUR [175] billion in 2009 to approximately EUR [150] billion in 2014. The initial restructuring plan projected an increase in the assets of the core bank from approximately EUR [100] billion in 2009 to approximately EUR [110] billion in 2014. The 2014 projected total assets for HSH and for the core bank were revised to EUR 120 billion and EUR 82 billion respectively in the modified restructuring plan.

(52) According to the initial restructuring plan the segment assets of the sector bank comprising shipping, energy and transport were projected to increase from around EUR [30] billion in 2009 to around EUR [35] billion in 2014, of which some EUR [20] billion would be mainly US dollar-financed shipping assets. In the modified restructuring plan the projected segment assets of the sector bank and the shipping assets in 2014 were revised to EUR [20-25] billion and EUR 15 billion respectively. As compared with the initial restructuring plan the aviation business line was discontinued in the modified restructuring plan.

(53) The projected Tier 1 capital ratio in the initial restructuring plan was [around 10] % in 2014 and was revised to a projected level of [10-15] % in the modified restructuring plan.

(54) In the initial restructuring plan the bank provided a breakdown per projected source of funding for some EUR [100] billion in 2014 of funded balance sheet (of which [around EUR 25 billion] of unsecured wholesale funding), leaving a gap of some EUR [50] billion as against the projected total assets of EUR around [150] billion. In the modified restructuring plan, the gap between the projected total assets and the projected total liabilities was reduced and HSH provided information on sources of funding to be used to cover the funding needs resulting from the gap.

(55) The growth assumptions in the main segments of activity of HSH as presented in the initial restructuring plan and the assumptions adjusted in the modified restructuring plan are presented in the table below. Table 5 Comparison growth rates shipping and corporate Segment Initial restructuring plan (1 September 2009) Modified restructuring plan (11 July 2011) Comment on growth assumption in modified restructuring plan Shipping Growth rate of new business around [250] % from 2010 IST - 2014 (some [40] % CAGR) Growth rate of new business [90-130] % from 2010 IST - 2014 ([…] % CAGR) The growth rate is based on an annual absolute volume of new business of EUR […] billion on average from 2011 to 2014. It compares to a total market volume of around EUR [25] billion of new business on average over the period Corporate Growth in loan volume [around 100] % (2010 IST – 2014) Growth in loan volume […] % (2010 IST – 2014) That growth corresponds to an absolute volume amount of new business of EUR […] billion over four years and compares to total assets in that segment of EUR 25,7 billion as of 31 December 2008

4.2. GENERAL DESCRIPTION OF THE MODIFIED RESTRUCTURING PLAN

(56) The modified restructuring plan was submitted on 11 July 2011. It comprises substantial changes to HSH’s business model. The new business model is characterised by reduced risk, a stronger focus on regional business, and sustainability on the funding and lending sides. The planned and already initiated restructuring measures include, besides the focus on core business activities and consequently the divestment or cessation of various activities and major holdings, the adaptation of the branch network and optimisation of the cost structure. The modified restructuring plan includes the establishment of an internal restructuring unit in which activities that will not be continued will be concentrated for accounting and organisational purposes. The key points of the new business model are: (a) a reorientation towards a viable core bank by way of a substantial assets reduction, a strengthening of regional business (corporates in Germany, real estate business in Germany and private banking) and the retention of core competencies in selected international business activities with a strong regional connection (shipping and renewable energies, with a focus on Europe); (b) the exclusive focusing of the capital market business on treasury activities and customer-related business, especially in the role of a supplier of products to other business units (cross-selling); proprietary trading has been discontinued; (c) the cessation of activities that are not in line with the strategic refocusing of HSH, i.e. the international Leverage Buy Out (LBO) business, foreign real estate business, asset-based aircraft financing and other credit business without a clear connection to the core competency; (d) the divestment of all subsidiaries that are not in line with the strategic refocusing of HSH; the modified restructuring plan entails the divestment of [100-120] holdings in total; HSH has already reduced the number of holdings by 25; all sales are expected to happen by […] at the latest; (e) a clear separation of the discontinued businesses to be reduced or sold in the internal restructuring unit; the restructuring unit will not engage in any new business; (f) a significant adaptation of the national and international branches. The run-off of non-strategic activities will result in the closure of 15 out of 21 international branches. The branches or representation offices in Helsinki, Shanghai, Mumbai, Stockholm, Naples, Oslo, Riga, Tallinn, Warsaw, San Francisco and Hanoi have already been closed. The branches or representations in Copenhagen, Paris, Amsterdam and Moscow are to be closed by 2012. After the restructuring period HSH will keep six branches or representations in London, Hong Kong, New York, Singapore, Luxembourg and Athens. However, the branches in London, Luxembourg and New York will be reduced and the branch in Hong Kong transformed into a representative office.

(57) The regional focus comprises in particular the northern German corporate business and private banking, the real estate business and the savings bank business. In addition, HSH will concentrate on selected areas of international ship financing as well as on project financing in renewable energy with a focus on Europe as well as certain investments in infrastructure. HSH will close the office in Lübeck by the end of 2011.

(58) Overall, the balance sheet total of the new core bank will be reduced substantially, in particular through transfer of assets from the core bank to the internal RU. At the end of the restructuring period on 31 December 2014 HSH (core bank) will have a balance sheet total of EUR 82 billion. Compared to the balance sheet total of EUR 208 billion in 2008, this amounts to a reduction of EUR 126 billion, i.e. almost 61 %.

(59) The modified restructuring plan is based on general assumptions about the evolution of the German, euro area, US and global GDP, short-term and long-term interest rates changes, euro area and US inflation, oil prices and the EUR/USD exchange rate. The projections of the individual business units are based on assumptions about the growth rates of the relevant market, volumes and margins on new production per segment and cross-selling capacity. Given the importance of the shipping unit in the overall financial results of HSH, HSH has provided sector-specific assumptions on the evolution of the shipping market. The projections on the evolution of the size of the market in terms of global new business (aggregated for the bulk, container and tanker segments), the size of the new business of HSH and the market share of HSH are presented in the table below. Table 6 Assumptions on ship financing 2011–2014 Average 2005–2008 2009 2010 2011 2012 2013 2014 Total global new business shipping (in EUR billion) 109,4 25,9 48,3 [10-15] [15-25] [25-35] [40-50] New business HSH (in EUR billion) 6,7 0,2 1 [0,5-1,5] [0,5-1,5] [1-2] [2-3] Market share HSH (%) 6,1 0,8 2,1 About [4] About [5] About [5] About [5]

(60) HSH is assuming an average EUR/USD exchange rate of [1,30-1,50]. It has provided sensitivity data on the impact of changes in the assumptions on profit and loss and its net liquidity position, and in particular a sensitivity analysis for changes in the interest rates and for changes in the EUR/USD exchange rate. The outcome of the sensitivity analysis is that HSH would not suffer losses beyond what it can absorb in the event of significant differences in interest rates and EUR/USD exchange rate assumptions. Moreover, HSH’s liquidity position would not be negative if the EUR/USD exchange rate were to vary considerably compared to the base case assumption.

(61) HSH furthermore provided an adverse and worst case scenario for the group based on less favourable market assumptions. The financial projections in the adverse and worst case scenario show that the impact of stress on the solvency of HSH is buffered through the structure of the risk shield. In an adverse scenario HSH would delay the partial cancellations of the guarantee and thus limit the RWA increase due to the negative economic environment. In both scenarios, the resulting Tier 1 capital ratio of HSH would remain at around 10 % during the restructuring period.

4.3. DESCRIPTION OF THE RESTRUCTURING OF THE INDIVIDUAL BUSINESS UNITS OF HSH

(62) The balance sheet total of the core bank’s corporates business unit will be reduced from EUR 26,3 billion in 2008 to EUR [10-20] billion in 2014. In total, the unit will be reduced by about [45-55] % during that period.

(63) In the corporates business unit HSH will offer financing to larger medium-sized undertakings, most notably in the core region of northern Germany.

(64) HSH has ceased its activities in the refinancing of leasing companies and the international LBO business and will discontinue its relationship-driven business with corporate customers in Asia and Scandinavia. The corporates business unit will not provide asset-based financing of aircraft or ships. However, the ability of HSH to support regional business in the core region will not be curtailed.

(65) HSH will focus primarily on larger medium-sized businesses in the region of northern Germany as well as German companies within defined core industries. It will have a clear focus on profitable business as well as on customers with a good credit standing and a demand for multiple products. HSH will strive to achieve ‘first’ bank status with those customers.

(66) To support the funding situation the business unit will increasingly aim to acquire deposits and to use financing structures that enable syndications, are eligible as ECB collateral or can be passed on to investors.

(67) The balance sheet of the core bank’s real estate business unit will be reduced from EUR 30,5 billion in 2008 to EUR [9-18] billion in 2014. This amounts to a reduction of [50-70] %.

(68) HSH will offer all types of loan products and any other bank products that are relevant for real estate companies. The bank will focus on business in northern Germany and in German metropolitan regions. The main emphasis will be put on financing solutions for […] and project financing with a manageable degree of risk. In the real-estate line of business, HSH will concentrate on the financing of […]. Special property classes will be financed only selectively.

(69) Activities in other countries – including the international real-estate business, which consists of supporting German clients in European metropolitan regions – will be discontinued. In these areas, HSH will not carry out any new business and the existing business will expire.

(70) HSH will focus mainly on professional real estate investors with a focus on existing clients and on selected real estate developers and customers with a sustainable real-estate track record and a high potential for cross-selling, as well as customers connected to northern Germany with a need for complex financing structures. HSH will continue to use structures and products that reduce the funding need, e.g. business eligible for covered bonds, ECB-eligible loans, or funding and sureties provided by the Kreditanstalt für Wiederaufbau (KfW).

(71) The balance sheet of the core bank’s savings banks business unit will be reduced from EUR 8,7 billion in 2008 to EUR [< 3] billion in 2014, in particular by reducing refinancing activities for savings banks.

(72) This business unit’s customer base is composed primarily of savings banks and public-sector customers in northern Germany and secondarily of savings banks and public-sector customers outside northern Germany (secondary bank relationship).

(73) HSH provides a large range of products which focus on the core business areas of savings banks. This includes in particular the private and corporate customers business, treasury business, own securities management and credit portfolio management.

(74) In the private banking business unit the core bank’s balance sheet total will be reduced from EUR 1,7 billion (in 2008) to EUR [0,5-1,5] billion (in 2014).

(75) HSH will focus on providing services to wealthy private customers in the core region of northern Germany. In addition, it will offer private banking services at supra-regional distribution branches belonging to the other market segments. The range of services is to include […].

(76) HSH will concentrate on the acquisition and support of wealthy and very wealthy private customers as well as foundations. As part of cross-selling, private banking services will also be provided to customers/natural persons of the other business units of the core bank.

(77) In the shipping business unit the balance sheet will be reduced from a balance sheet total in 2008 of EUR 28,3 billion to about EUR 15 billion in the core bank in 2014, i.e. a reduction of 46 %.

(78) Until 31 December 2014 the market share of HSH in relation to new business in global ship financing will not exceed [< 8] % on an annual basis. In addition, HSH will ensure that up to 31 December 2014 it will not be among the top three ship-financing providers with the highest annual volume of new business worldwide, according to the market rankings determined on an annual basis.

(79) HSH’s portfolio will be diversified both in relation to ship types and countries. In relation to asset classes an emphasis will remain on […] as well as several […]. Conventional long-term mortgage loans for new constructions and financing of second-hand ships will be important products. Furthermore, HSH will selectively operate as a supplier of structured financial services.

(80) HSH will reduce its business activities by ceasing to finance roll-on/roll-off and cruise ships as well as […].

(81) HSH will focus on medium-sized and larger worldwide shipping companies, small profitable customers and customers selected by reference to their overall revenue potential and aspects of risk. Furthermore, the readiness of the customer regarding syndications will be considered, as well as the fulfilment of syndication (e.g. transparency) and refinancing requirements.

(82) The shipping business unit will mainly offer plain vanilla (27) and, to a limited extent, structural financing and will act as a mandated lead arranger and bookrunner.

(83) The transport/aviation business unit of the core bank will cease to exist. The EUR 11,7 billion balance sheet (in 2008) will expire within the restructuring unit or be assigned to other business units. In the future, HSH will not carry out any new asset-based financing of aircraft. The corresponding existing business will expire, be sold or be transferred to the restructuring unit for the purpose of reduction. As a part of the restructuring, HSH has already partially redesigned the business unit and assigned the divisions of rail and infrastructure, which are still strategically relevant, to the energy and infrastructure business unit.

(84) Due to the realignment of the energy and infrastructure business unit in the course of the restructuring process, the balance sheet total of the energy and infrastructure unit in the core bank in 2014 will be increased from EUR 4,6 billion in 2008 (which refers to the former energy business unit) to EUR [5-10] billion. The energy and infrastructure business unit includes both the renewable energy segment and the infrastructure and rail segments, which had previously been assigned to the transport business unit.

(85) In the energy segment, HSH will act as a provider of project financing in the areas of wind and solar energy projects. They include the asset categories of wind (on- and offshore), solar (photovoltaic and thermal) and, as a supplementary business, networks in conjunction with wind and solar projects. The target region for those activities is mainly Europe. HSH’s business relating to conventional energy sources and the entire North American energy business will be discontinued.

(86) The adjustments in the business units, in particular the cessation of the aviation business unit and the reduction in the international real estate and the shipping segments, will automatically lead to a reduction of the ‘miscellaneous segment’.

(87) The ‘miscellaneous segment’ includes – besides the corporate centre – the capital markets business, in which HSH manages its treasury and which serves as a supplier of products for the business units.

(88) HSH will continuously improve the stability and quality of its funding. Starting from the end of 2012, it will ensure that its net stable funding ratio (NSFR) and its liquidity coverage ratio (LCR) (28) […]. The share of the core bank’s USD business that is refinanced by means of USD-denominated funding (and not through swaps) will increase to at least […] % by the end of 2012 and to at least […] % by the end of 2014.

(89) HSH will consistently reduce capital market business with a high risk potential and has already reduced its product catalogue significantly. Proprietary trading has already been discontinued.

4.4. DESCRIPTION OF THE FINANCIAL PLANNING IN THE MODIFIED RESTRUCTURING PLAN

(90) HSH presented a detailed business plan for the period 2011 to 2014 including profit and loss calculations and balance sheet, profitability and production indicators broken down per business unit and consolidated for the group. HSH furthermore provided a sensitivity analysis in the form of an adverse and worst case scenario for the group. According to the profit and loss projections the HSH group will suffer an additional loss of around EUR [100-200] million in 2011 and continuously increase its profits to around EUR [400-500] million after tax in 2014. The return on equity will be negative in 2011 and increase to around [7-8] % in 2014. The Tier 1 ratio will reach around [13-16] % in the period 2012 to 2014. At the request of the Commission, the financial projections contained in the modified restructuring plan include a one-off payment of EUR 500 million in 2011 which has been deducted from net income before tax. The total assets are projected to decrease from EUR 208 billion (in 2008) to EUR 120 billion (in 2014).

(91) The most important figures of the modified restructuring plan for HSH and the core bank are shown in the following tables. Table 7 Financial planning HSH 2011–2014 2008 actual 2009 actual 2010 actual 2011 plan 2012 plan 2013 plan 2014 plan Total income (in EUR million) 157 2 876 1 603 [1 300-1 800] [1 300-1 800] [1 300-1 800] [1 300-1 800] Net income before restructuring expenses (in EUR million) (2 796) (718) 545 [500-1 000] [500-1 000] [500-1 000] [500-1 000] Net income before tax (in EUR million) (2 968) (1 325) 17 [– 200-300] [0-500] [100-600] [200-700] Net income (in EUR million) (3 195) (902) 48 [– 400-100] [0-500] [0-500] [0-500] Cost income ratio (CIR) (%) 573 29 54 [45-55] [45-55] [45-55] [40-50] Return on equity after tax (RoE) (%) < 0 < 0 < 0 [– 5-+ 5] [5-10] [5-10] [5-10] Total assets (in EUR billion) 208 175 151 [130-150] [125-145] [120-140] [115-135] Table 8 Financial planning core bank 2011–2014 2008 actual 2009 actual 2010 actual 2011 plan 2012 plan 2013 plan 2014 plan Total income (in EUR million) 1 582 1 756 1 103 [750-1 250] [750-1 250] [750-1 250] [750-1 250] Net income before restructuring (in EUR million) 418 354 574 [300-600] [300-600] [300-600] [300-600] Net income before tax (in EUR million) 295 18 318 [200-500] [200-500] [200-500] [200-500] Cost income ratio (CIR) (%) 39 32 52 [40-60] [40-60] [40-60] [40-60] Segment assets (EUR billion) 113 97 88 [60-90] [60-90] [60-90] 82

(92) HSH’s funding plan in respect of the overall funding strategy and in respect of the USD funding strategy are shown in the following tables. Table 9 HSH funding plan 2010–2014 (in EUR billion) Volumes per funding channel 2010 actual 2011 2012 2013 2014 Covered bonds […] […] […] […] […] State guaranteed long-term bonds […] […] […] […] […] Senior unsecured long-term […] […] […] […] […] Short-term wholesale funding […] […] […] […] […] Wholesale funding other […] […] […] […] […] Commercial and retail deposits (until 2010)/Residual deposits (permanent average balances from 2011) […] […] […] […] […] Development banks and commercial lending […] […] […] […] […] Hybrids (Tier 1 and Tier 2) […] […] […] […] […] Total […] […] […] […] […] Derivatives […] […] […] […] […] Total assets […] […] […] […] […] Total assets – (total liabilities + derivatives) to be financed by short-term secured funding, excess deposits and equity […] […] […] […]

(93) The state-guaranteed long-term bonds will decrease from EUR 44 billion at the end of 2010 to EUR [13-18] billion at the end of 2014. At the same time HSH’s total assets will decrease by EUR [25-35] billion. The difference between total assets and total liabilities (adjusted for the effect of derivatives) represents a gap in the funding plan which has to be covered by short-term unsecured and secured funding as well as an excess of deposits and equity. HSH’s planning in respect of deposits factors in only a proportion of total deposits considered as stable (residual deposits (permanent average balances — Bodensatz) although the actual volume of deposits is expected to be higher and to cover a proportion of the funding gap. Although a proportion of the funding gap between funded assets and liabilities could be covered by short-term wholesale funding, HSH’s reliance on short-term wholesale funding decreases in absolute terms over the restructuring period. In respect of the funding strategy in EUR, HSH will in relative terms rely more on covered bonds. Table 10 Funding strategy in USD 2010–2014 (in USD billion) Volumes 2010 actual 2011 2012 2013 2014 USD denominated funding […] […] […] […] […] USD funding through swaps […] […] […] […] […] Total assets USD […] […] […] […] […] Total assets USD shipping […] […] […] […] […]

(94) Whereas in 2010 HSH funded 75 % of its US dollar assets through cross currency swaps, the reliance on swaps will decrease to […] % of total US assets (including assets in the restructuring unit). The decreased reliance in relative terms on financing through swaps will be achieved through a decrease of US dollar denominated assets and therefore a decrease in the absolute amounts of US dollar funding.

(95) Over the year 2010, the saving banks provided EUR [2,5-3,5] billion of long-term unsecured funding for HSH and EUR [200-500] million of long-term secured funding. That total amount of EUR [2,7-4] billion compares to EUR [150-250] million of total funding provided by other Landesbanks and EUR [1-2] billion provided by other financial institutions (private and public other than saving banks and Landesbanks).

(96) The modified restructuring plan shows an increase in the capital positions and ratios of HSH over the restructuring period with a projected common equity ratio of [10-13] % at the end of 2014. At the request of the Commission HSH included in its financial projections an increase in share capital of EUR 500 million in 2013. Table 11 HSH capital position 2009–2015 2009 actual 2010 actual 2011 2012 2013 2014 2015 Risk-weighted assets after guarantee (EUR billion) 71 41 [40-60] [40-60] [45-65] [50-70] [50-70] Guarantee outstanding (EUR billion) 10 10 7,0 [< 7,0] [< 7,0] [< 5,0] [< 5,0] Capital evolution (EUR billion) Common equity Tier I capital (EUR billion) 5,080 4,433 [4 000-6 000] [4 500-6 500] [5 000-7 000] [5 500-7 500] [6 000-8 000] Tier I capital (EUR billion) 7,491 6,274 [5 000-7 000] [5 500-7 500] [6 000-8 000] [6 500-8 500] [7 000-9 000] Total capital (EUR billion) 11,523 9,400 [8 000-12 000] [8 000-12 000] [8 000-12 000] [8 000-12 000] [8 000-12 000] Capital ratios Common equity/RWA (%) 7,1 10,7 [> 7,0] [> 8,0] [> 9,0] [> 10,0] [> 10,0] Tier 1 capital/RWA (%) 10,5 15,2 [> 10,0] [> 10,0] [> 10,0] [> 10,0] [> 10,0]

4.5. COMMITMENTS MADE BY GERMANY

(97) Germany has given an undertaking that HSH will implement the modified restructuring plan and has submitted the commitments set out in Annex I and III to this Decision.

4.6. MONITORING

(98) Germany has given an undertaking that a monitoring trustee will provide the Commission with detailed quarterly reports. The reports will in particular contain information on the remuneration of the impaired asset measure (in line with Annex V to the Communication from the Commission on the treatment of impaired assets in the Community banking sector, hereinafter the ‘Impaired Assets Communication’ (29)), and on the implementation of the modified restructuring plan (in line with paragraph 46 of the Commission communication on the return to viability and the assessment of restructuring measures in the financial sector in the current crisis, hereinafter the ‘Restructuring Communication’ (30)).

5. GROUNDS FOR INITIATING THE FORMAL INVESTIGATION PROCEDURE IN RESPECT OF THE AID MEASURES FOR HSH

(99) On 30 October 2009 the Commission opened the formal investigation procedure in order to verify whether the risk shield complied with the conditions of the Impaired Assets Communication regarding the definition of the eligible assets, the valuation (including the valuation methodology), the remuneration and the management of the impaired assets. Furthermore the Commission wanted to investigate the conditions of the recapitalisation measure, the burden sharing, and the measures to limit distortions of competition.

(100) Regarding the eligibility of the assets covered by the risk shield, the Commission expressed doubts (recital 40 of the Decision initiating the procedure) as to whether they met the eligibility criteria laid down in the Impaired Assets Communication, since only a small fraction of the shielded portfolio fell directly into the definition of impaired assets provided for in the Communication.

(101) Regarding transparency and disclosure, the Commission stated in recital 42 of the Decision initiating the procedure that HSH had provided valuation reports by independent experts which covered only a residual fraction of the shielded portfolio, namely a large proportion of the structured credit securities. Furthermore at that time Germany had not provided a validation of the valuation process and outcome by BaFin.

(102) Regarding asset management, the Commission expressed doubts in recital 44 of the Decision initiating the procedure as to whether HSH’s planned arrangements fulfilled the requirements laid down in the Impaired Assets Communication, since all assets would remain on HSH’s balance sheet.

(103) Regarding the valuation, the Commission stated in recital 46 of the Decision initiating the procedure that only the valuation of the structured credit portfolio had been carried out by independent experts, and that at the time the Commission did not have sufficient information for the assessment of the real economic value of the whole shielded portfolio. The Commission sought to verify the correlation assumptions used for the shielded assets.

(104) Regarding remuneration, in recital 49 of the Decision initiating the procedure the Commission expressed doubts about the adequacy of the burden sharing, as the Impaired Assets Communication would require HSH to contribute to the loss or risk coverage in the form of first-loss clauses (typically with a minimum of 10 %). In addition, in recital 51 et seq. of the Decision initiating the procedure, the Commission expressed doubts that the fee of 400 bps adequately remunerated the risk taken by the public-sector owners.

(105) Regarding a return to viability, in recital 59 of the Decision initiating the procedure the Commission expressed doubts as to whether HSH would be able to restore its long-term viability. In particular, in view of HSH’s strong reliance on wholesale funding, the Commission questioned whether the funding strategy presented would be sustainable on a stand-alone basis in the medium and longer term once public guarantees were phased out.

(106) In recitals 60 and 61 of the Decision initiating the procedure the Commission queried the underlying assumptions of the initial restructuring plan in regard to growth rates and asset margins. The Commission questioned in particular the increased margins in the private banking segment and the growth assumptions in the shipping and transport segments, where HSH already had proportionally high market shares.

(107) In recital 62 of the Decision initiating the procedure the Commission questioned HSH’s plan to continue its international capital market activities at a significant level while declaring at the same time that it intended to refocus its business model towards regional activities. In recital 63 of the Decision initiating the procedure the Commission expressed scepticism as to whether it was realistic to assume that an upgrade to the previous A rating would be achieved in 2013.

(108) Regarding the recipient’s own contribution, the Commission stated that no far-reaching proposals had been made in the initial restructuring plan. The scope of the own contribution in the form of divestments remained vague. As to the burden sharing of the minority shareholders, the Commission expressed doubts about the valuation of HSH and consequently the price of the newly issued shares. In recitals 10 and 32 of the Decision initiating the procedure, the Commission questioned whether the savings bank associations and Flowers, who had not participated in the recapitalisation, might not have benefited from the capital injection by maintaining excessively high shareholdings in HSH.

6. COMMENTS FROM GERMANY

(109) On 17 December 2009 Germany submitted joint comments by the public-sector owners and HSH on the Decision initiating the procedure.

6.1. COMMENTS ON THE RISK SHIELD

(110) Germany took the view that the Commission’s legal assessment of the risk shield was erroneous, because it was based on the application of the Impaired Assets Communication, which, according to Germany, was not applicable in the present case.

(111) Germany disagreed with the Commission’s assessment that the Impaired Assets Communication had to be applied and that the Commission was obliged to apply laws and guidelines in force at the time of the adoption of the Decision, irrespective of the time at which the aid measures were designed or notified (31). According to Germany, that view would be correct only if the assessed measure fell within the scope of application of the relevant legal provision or Communication, which was not the case here. Germany further argued that the Impaired Assets Communication could not be read as covering all kinds of support measures targeting impaired assets. The Impaired Assets Communication should be regarded as an administrative instruction only, designed solely to ensure consistent administrative practice and binding on the Commission alone. The compatibility of the risk shield with the internal market should be assessed directly under the TFEU. According to Germany, the fact that the objective of the second-loss guarantee and the composition of the shielded portfolio were outside the terms of the Impaired Assets Communication was evidence that the Communication was not applicable in the HSH case.

(112) Germany stated that applying the Impaired Assets Communication led to an erroneous assessment framework, which was unfavourable to HSH as regards the aid element, the value of the portfolio, the remuneration of the measure and the scope of restructuring.

(113) Germany referred to recital 38 of the Decision initiating the procedure, where the Commission mentioned the difficulties in assessing the market value of the portfolio, which consisted mainly of loans to corporate customers. Germany regarded those difficulties as evidence that the second-loss guarantee should not be assessed under the Impaired Assets Communication. It pointed out that the Commission had by extrapolation arrived at an aid amount equal to the nominal value of the guarantee. Germany further argued that such an outcome was evidence that the chosen method must be wrong, since the Commission estimated the aid element of a guarantee as being the same as the aid element of a recapitalisation, although the two measures were different in nature. Whereas the recapitalisation was a permanent capital injection, the guarantee was only a regulatory stability measure limited to the maturity of the covered assets.

(114) Germany pointed out that the estimation of the aid element on the basis of the market value showed that the Commission had misunderstood the nature of the risk shield, which did not cover market fluctuations. Germany considered that the Commission should determine the aid element of the second-loss guarantee according to the general state aid rules and in particular the Commission Notice on the application of Article 87 and 88 of the EC Treaty to state aid in the form of guarantees (32) (hereinafter the ‘Guarantees Notice’). According to Germany, in so far as it was recognised that the remuneration for the risk shield was market-oriented, applying the Guarantees Notice would lead to a marginal aid element.

(115) Even assuming it was correct to apply the Impaired Assets Communication, Germany took the view that the Commission had applied it erroneously as regards the quantification of the aid element and the remuneration, burden sharing and the management of assets by the restructuring unit. The aid element involved in the second-loss guarantee was incorrect because incorrect assumptions had been made in regard to the transfer and market value of the portfolio. As regards the remuneration of the capital relief effect, Germany pointed out that the estimation of the capital relief effect in the Decision initiating the procedure was based on old data. According to more recently submitted data, the capital relief effect would be significantly lower. The Commission’s preliminary assessment of the burden sharing was incorrect and too limited, since the Commission referred only to the first-loss tranche of the guarantee, which was considerably below the 10 % of the shielded portfolio required by the Impaired Assets Communication. There was no link between the burden sharing and the first-loss tranche measured in absolute numbers. Furthermore HSH was to bear all losses going beyond the second-loss tranche. As regards the management of assets, the principles of the Impaired Assets Communication did not apply to the risk shield and it would be unreasonable to manage all shielded assets separately. HSH might create a restructuring unit and ensure a clear accounting and organisational division between the core bank and the restructuring unit up to management board level.

(116) Germany disagreed with the asset valuation referred to in recital 47 of the Decision initiating the procedure. The shielded portfolio contained mostly customer loans, which were difficult to value in a cash flow-based valuation. Valuation methods which used flat-rate haircuts to simulate market uncertainties and which were designed for the valuation of ‘complex’ assets were inappropriate for the valuation of the shielded portfolio in the current case. Whereas the CIP portfolio had been valued by external experts on a cash-flow-based valuation method, the assets in the much larger credit portfolio had been valued by applying a standard credit analysis in line with the regulatory rules. The key point of such analysis was the creditworthiness of the borrower.

(117) Germany argued that it was inappropriate to apply to the second-loss guarantee the calculation methods laid down in the Impaired Assets Communication (as described in the Decision initiating the procedure) and concluded that the Guarantees Notice should be applied in order to determine the remuneration. In several meetings, teleconferences and other information exchanges between January and August 2010 Germany provided information demonstrating that a full claw-back of the […] would impede HSH’s capacity to restore viability.

6.2. COMMENTS ON THE RECAPITALISATION

(118) Germany took the view that the Commission’s assessment of the recapitalisation measure was incorrect as regards the valuation of HSH and the legal assessment of the possible benefits to the minority shareholders who did not participate in the recapitalisation.

(119) The Commission’s doubts about the valuation of HSH were based on incorrect facts. It was unimportant that the downgrading of HSH by S&P was not taken into account in the valuation conducted by PwC, and there were good reasons to believe that HSH would return to an A rating in 2013.

(120) As regards the issue price of the new shares, discounts in a range of 30 % to 60 % were usual for listed banks. The valuation of HSH was an appropriate basis for the setting of the price of the newly issued shares and the ‘old’ shareholders of HSH did not benefit from the aid measures by maintaining too high a share in HSH.

6.3. COMMENTS ON THE RISK SHIELD AND THE RECAPITALISATION IN THE LIGHT OF THE UNLIMITED STATE GUARANTEE PROVIDED BY THE PUBLIC-SECTOR OWNERS (GEWÄHRTRÄGERHAFTUNG)

(121) Germany argued that without the rescue measures HSH would have gone bankrupt and the public-sector owners would have been liable for much higher losses under the unlimited state guarantee (Gewährträgerhaftung). The possible claims under Gewährträgerhaftung were estimated at around EUR 30 billion or higher. Germany pointed out that a private investor in the situation of the public-sector owners would have taken the same rescue measures to avoid higher losses.

(122) Germany took the view that the rescue measures met the private investor test and therefore did not constitute state aid. The private investor test was fulfilled if it could be reasonably argued that the company would return to viability and if the liquidation costs of the company were higher than the capital measures (33). According to Germany, the initial restructuring plan submitted on 1 September 2009 was sufficient proof of the capacity of HSH to return to viability. As for the estimation of the liquidation costs, Germany stated that a distinction should be made between the obligations of the public-sector owners as HSH’s owners and as public bodies. Their obligations as public bodies (unemployment benefit, social insurance contributions) could not be taken into account when estimating the liquidation costs. Only their obligations as HSH’s owners were to be counted towards the liquidation costs. Germany cited the Linde judgment (34) to argue that liabilities originating from state aid that had already been properly granted had to be taken into account when conducting the private investor test. Gewährträgerhaftung was approved by the Commission and was therefore compatible state aid. In addition, the liabilities covered by Gewährträgerhaftung pertained to the obligations of the Länder in their capacity as HSH’s owners, not as public bodies. Gewährträgerhaftung was in its nature comparable to a ‘letter of responsibility’(Patronatserklärung). Therefore the liabilities of the public-sector owners under Gewährträgerhaftung amounting to at least EUR 30 billion, should be taken into account when estimating the liquidation costs. Finally, Germany concluded that the liquidation costs would be much higher than the capital measures provided to HSH by the public-sector owners. Therefore the conditions of the private investor test were fulfilled and the rescue measures did not constitute state aid.

6.4. COMMENTS ON HSH’S VIABILITY

(123) Although Germany initially viewed the Commission’s preliminary assessment of HSH’s business model as expressed in recital 62 of the Decision initiating the procedure as too negative, it subsequently updated HSH’s initial restructuring plan in order to alleviate the Commission’s concerns.

6.5. COMMENTS ON OWN CONTRIBUTION AND COMPENSATORY MEASURES

(124) Germany argued that the own contribution measures included in the initial restructuring plan, which consisted of the remuneration of the measures, the release of capital reserves, the sale of subsidiaries and cost reductions, added up to EUR 5,9 billion and should be sufficient.

(125) Moreover, while Germany initially considered the proposed compensatory measures, consisting of the balance sheet reduction, the cessation of profitable business portfolios, the closure of 12 (35) out of 21 international locations and the sale of sizeable subsidiaries (REAG and DAL (36)), to be sufficient, it later reconsidered them in the modified restructuring plan.

7. COMMENTS FROM THIRD PARTIES

(126) The Commission also received comments from interested third parties. Comments were submitted on 30 November and 11 December 2009 by the savings bank associations and on 17 December 2009 by Flowers.

7.1. COMMENTS FROM SGVSH AND SVB

(127) The savings bank associations disagreed with the Commission’s preliminary view that they had disproportionately benefited from the recapitalisation granted to HSH by the public-sector shareholders as they considered that the share price of the newly issued shares was rather low.

(128) Splitting the proceedings in the HSH case, with the aid measures being authorised in one set of proceedings and the issue of indirect aid to the minority shareholders being dealt with in another, would breach Article 7 of Regulation (EC) No 659/1999 (37) (‘the Procedural Regulation’). The aid measure could not at the same time be compatible with the internal market in respect of HSH, and incompatible in respect of HSH’s owners. A negative decision on the recapitalisation in respect of the savings bank associations and Flowers would render the recapitalisation incompatible aid. According to the savings bank associations, the Commission should address the issue of burden sharing by the minority shareholders in the general context of the burden sharing assessment of the recapitalisation.

(129) As regards the Commission’s consideration that there was insufficient dilution of the minority shareholdings, the savings bank associations did not see how this could constitute state aid. They considered a dilution to be a secondary effect of a recapitalisation. Moreover, the conditions of Article 107(1) TFEU were not fulfilled, in so far as the savings bank associations were not an undertaking within the meaning of the state aid rules. SGVSH and SVB were not active on any market; they only held shareholdings on behalf of their members (the public savings banks in Hamburg and Schleswig-Holstein). The advantage to the savings banks could be seen only in the increase of the value of the HSH shares, which was inherent in all capital injections. Furthermore, the alleged advantage was not granted from state resources. The level of dilution depended on the number of the shares and the share price. The price was decided not by the State, but by the shareholders’ meeting. That decision was not imputable to the State and, in line with the Stardust Marine judgment (38), could not be considered aid. In any event, the alleged advantage had no impact on the competitive position of the savings banks in the markets in which they operated. Therefore the alleged advantage did not distort competition or affect trade between Member States.

(130) The savings bank associations also pointed out that the Commission had not investigated secondary effects in other recapitalisation cases. Nor had the Union courts endorsed such an approach in the WestLB judgment (39). Furthermore, the savings bank associations observed that the Commission had not investigated secondary effects in other cases where the issue price of the new shares appeared extremely high (40) and concluded that an investigation of the issue only in cases such as those of HSH and BayernLB would infringe the principle of equal treatment.

(131) The savings bank associations further explained that the shareholders in a public limited company Aktiengesellschaft had an option on new stock. It was, however, an option and not a purchase obligation. The savings bank associations considered the share price of the new shares appropriate but they were not able to participate in the recapitalisation for financial reasons.

(132) Furthermore, the savings bank associations argued that in 2008 they contributed significantly to capital measures in favour of HSH. In July 2008, the savings bank associations converted a silent participation in the amount of EUR 685 million into EUR 125 million equity and EUR 560 million capital reserves. In July 2008 the savings bank associations together with Flowers subscribed to a mandatory convertible silent capital contribution (hybrid instrument) of EUR 962 million (of which the savings banks took EUR 660,5 million). At the end of 2008, HSH released capital reserves of EUR 3,1 billion in order to compensate the balance sheet loss and avoid the loss absorption of the hybrid instruments. In that context the savings bank associations lost their EUR 560 million of the capital reserves. The mandatory convertible silent capital contribution was loss-absorbing. A coupon on that instrument had not been paid. The savings bank associations had not received dividends since 2008.

(133) In May 2009, the savings bank associations had been willing to sell their shares. A sale had, however, not been possible owing to a ‘holding agreement’ which had been concluded with the public-sector owners on 25 March 2003. The parties to that holding agreement had undertaken to exercise their voting rights in a manner allowing the public-sector owners and the savings bank associations to maintain the majority voting rights and not to sell certain percentages of their shares. The holding agreement could not be terminated before 31 December 2013.

(134) The savings bank associations pointed out that in the course of the recapitalisation their shareholdings had been considerably diluted, from 13,2 % and 1,62 % to 4,7 % and 0,6 % respectively. With 85,5 % of direct and indirect shareholdings, the public-sector owners had joint control over all strategic decisions in HSH. From the point of view of a private investor that joint control meant an additional decrease of the value of the shares held by the minority shareholders.

(135) The savings bank associations noted that the valuation of HSH by PwC was commissioned by HSH and not by the minority shareholders. PwC conducted the valuation in line with recognised valuation principles. The savings bank associations argued that specific values and a modified risk premium should have been taken into account, which would have given a share price of EUR 30 per share. The savings bank associations concluded that their holdings had been excessively diluted and estimated the loss at around EUR 200 million.

7.2. COMMENTS FROM FLOWERS

(136) Flowers put forward similar arguments to those of the savings bank associations. In addition, they argued that they had already made a considerable contribution of their own to the restructuring of HSH. They noted in particular that the capital measures taken in favour of HSH in July 2008 were closely connected to the capital injection in May 2009. In July 2008 Flowers had brought in EUR 300 million in cash. As regards the mandatory convertible silent capital contribution in the amount of EUR 962 million, Flowers had subscribed EUR 301,5 million. The mandatory convertible silent capital contribution had participated in losses; a coupon had not been paid. The investors provided 48 % of those capital measures, which went considerably beyond their shareholding of 25,67 % at the time.

(137) Flowers disagreed with the Commission’s preliminary assessment, in recitals 65 and 73 of the Decision initiating the procedure, regarding an insufficient own contribution and lack of genuine burden sharing measures. In 2009, they had taken a participation of EUR 794 million in the capital reserves of EUR 3,1 billion released by HSH. They referred to the Commerzbank (41) decision, arguing that there the Commission had considered the sale of subsidiaries and other assets as sufficient own contribution, and a ban on coupons and dividend payment as burden sharing. The investors considered that the capital measures provided in 2008 should be taken into account.

(138) The investors contended that their loss of the blocking minority due to the dilution should also be considered as own contribution. Despite their dilution to 9,19 % they would still be liable under Gewährträgerhaftung in line with their shareholding before the recapitalisation, i.e. 26,85 %. The investors also disputed the Commission’s doubts regarding the valuation of HSH and an excessive share price. They argued that a number of aspects that would increase the share value had not been sufficiently considered.

(139) Finally, the investors pointed out that German law did not provide for a transfer of shares, which would make a recovery of the indirect aid to the minority shareholders impossible. The investors considered that a split of the ongoing proceedings would not be possible, as there was only one aid measure granted in favour of HSH.

8. COMMENTS FROM GERMANY ON THIRD PARTIES’ COMMENTS

(140) Germany submitted comments on the arguments by the savings bank associations and Flowers. Germany maintained its opinion that the valuation of HSH was appropriate and that the minority shareholders had not benefited from any indirect state aid. Moreover, Germany favoured a split of proceedings if it would accelerate the conclusion of the case, which was expected by HSH and the markets. Germany questioned whether a recapitalisation was a homogeneous legal act and had to be assessed in one decision. Germany referred to the case law of the Union courts and argued that a split of the proceedings would be legally possible and that differing legal assessments of one aid measure in relation to different beneficiaries, i.e. HSH and the minority shareholders, would not put at risk the compatibility of the aid measure in favour of HSH. The proportionality of the aid measure in relation to HSH could be ensured through a set of measures in the restructuring plan, whereas any advantage granted to the minority shareholders via an excessively high issue price would have to be treated and corrected differently. Germany disagreed with Flowers that German law did not provide for a transfer of shares and thus rendered recovery of the indirect aid to the minority shareholders impossible. Germany argued that such transfer was possible under German law, and that even if it were not possible, Germany would not be able to cite a lack of means of enforcement to justify the non-implementation of a Commission recovery decision.

9. ASSESSMENT

9.1. EXISTENCE OF STATE AID

(141) According to Article 107(1) TFEU, ‘any aid granted by a Member State or through State resources in any form whatsoever which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods shall, in so far as it affects trade between Member States, be incompatible with the internal market’.

(142) The classification of a measure as state aid requires that the following conditions be met: (a) it must be financed by a Member State or through state resources; (b) it must grant an advantage liable to favour certain undertakings or the production of certain goods; (c) that advantage must be selective; and (d) the measure must distort or threaten to distort competition and have the potential to affect trade between Member States. Those conditions being cumulative, they must all be present before a measure is characterised as state aid. The Commission maintains its view that the conditions are met.

(143) First, the measures were granted by HSH Finanzfonds AöR. This is an institution governed by German public law that was established by the public-sector owners and is owned and controlled by them in equal shares. It was created on the basis of the State Agreement between theLänder of Hamburg and Schleswig-Holstein (42) signed on 3 April 2009 in Kiel and on 5 April 2009 in Hamburg. The object of HSH Finanzfonds AöR is the support of HSH on behalf of the public-sector owners. In order to fulfil its task, HSH Finanzfonds AöR is empowered to issue guarantees of up to EUR 10 billion, to acquire the shares of HSH and to obtain loans for such acquisitions. According to paragraph 3 of the State Agreement, the public-sector owners are responsible for the liabilities of HSH Finanzfonds AöR. The measures are thus clearly financed by the State.

(144) Second, the risk shield and the recapitalisation were put in place to avoid insolvency on the part of HSH (43) and consequently helped it to remain in business. Therefore, they constitute economic advantages within the meaning of Article 107(1) TFEU.

(145) Third, the measures are individually targeted at HSH, so they are selective.

(146) Lastly, to qualify as aid, the measures in question must distort or threaten to distort competition and have the potential to affect trade between Member States. Those effects can be assessed on the basis of the aid amount, the features of the aid measure and the aid beneficiary (44). The aid measures allowed HSH to avoid insolvency and remain active in a number of markets. HSH is an internationally active bank, competing with other banks in Germany and other countries. Furthermore, HSH is a bank of systemic importance for the banking system in Germany (45) and a major competitor in ship and aviation financing (HSH is the world’s largest provider of ship finance and has a significant market share in aviation financing). Finally it has received a relatively high amount of aid (see below): in particular, the risk shield covers around 75 % of its balance sheet. Taking into account the effect of the measure, the position of HSH in the banking sector and in shipping financing in particular, and the aid amount, the advantage granted to HSH was liable to affect trade between Member States.

(147) That assessment is not altered by the comments from Germany and third parties. The comments by Germany on the aid nature of the measures in favour of HSH are contradictory. On the one hand, Germany argues that the Commission should assess the risk shield under the Guarantees Notice instead of the Impaired Assets Communication, which seems to assume that the risk shield constitutes state aid. On the other hand, as summarised in section 6.3 of this Decision, Germany argues that, in the light of the unlimited state guarantee (Gewährträgerhaftung) covering estimated claims of at least EUR 30 billion, a private investor in the position of the public-sector owners would also have taken the measures in question to rescue HSH in order to avoid higher losses. Germany contends on that basis that the private investor test is fulfilled, and that the measures in question are therefore not state aid.

(148) Germany has misinterpreted the case-law cited by it. In the case at hand Germany argues that one state aid measure (an unlimited state guarantee, Gewährträgerhaftung) should be treated as a liquidation cost in order to declare other state aid measures (the recapitalisation and risk shield) to be in line with the private investor principle. In Linde the parties concluded, on market terms, a transaction involving a subsidy in order to cancel a supply contract which had previously been concluded, and which was also on market terms, because the performance of that supply contract had subsequently given rise to significant annual losses. The General Court stated that ‘[t]he comprehensive arrangement represents a normal commercial transaction in the course of which the [Treuhandanstalt] and LWG behaved as rational operators in a market economy. It is evident that they were motivated primarily by commercial considerations and did not have regard to any economic or social policy objectives’ (46). That situation is not comparable with the case in hand, as in Linde both transactions were concluded on market terms, while here neither of the transactions was concluded on market terms.

(149) Gewährträgerhaftung is defined as a direct liability, based on statute or by-laws, on the part of a regional authority or an association under public law with respect to the creditors of a public-law credit institution for all of its obligations. Gewährträgerhaftung therefore obliges the guarantor (‘Gewährträger’) to intervene in the case of insolvency or liquidation of the credit institution. It creates direct claims by the creditors of the credit institution against the guarantor, which can, however, only be called in if the assets of the credit institution are not sufficient to satisfy the creditors. Gewährträgerhaftung is unlimited in time and in amount. In addition, the credit institution pays no remuneration for the guarantee (47). In summary, Gewährträgerhaftung constitutes an unremunerated unlimited subsidiary liability of a public corporate body (municipality or Land) for creditor claims against a public institution (public bank) where that institution is insolvent. A private investor in the situation of the public-sector owners would not have granted a bank an unlimited unremunerated guarantee covering the entire balance sheet of that bank as the public-sector owners did with Gewährträgerhaftung.

(150) The Commission has in fact considered Gewährträgerhaftung to be state aid. It has called for the abolition of Gewährträgerhaftung by Germany.

(151) Gewährträgerhaftung is anchored in public law. The public-sector owners are liable under that guarantee as public bodies and not as private owners. In line with the Commission’s decision-making practice (48) and the case law (49), liquidation costs cover only liabilities that could have been paid by a private investor. As mentioned in recital 149, a private investor would not have granted a bank unlimited unremunerated guarantees covering its entire balance sheet. Therefore, the Linde judgment is of limited relevance for the assessment of the current case as the liabilities under Gewährträgerhaftung cannot be counted as liquidation costs.

(152) The aid element of the recapitalisation should be the nominal value of that recapitalisation, as no private investor would have provided such funds to a firm in difficulty. As established in recitals 27 and 28 of the Rescue Decision, the non-participation of the minority shareholders in the recapitalisation and the disproportionate share of the burden of the rescue measures borne by the public-sector owners indicate that the recapitalisation was motivated by public policy objectives, and not by private investor considerations. In line with its case practice (50) the Commission confirms its view that the aid element in the recapitalisation amounts to EUR 3 billion.

(153) Moreover, the aid element of the risk shield is confirmed to be EUR 10 billion. Despite Germany’s arguments, the Commission remains convinced that the measure must be assessed on the basis of the Impaired Assets Communication. In the Impaired Assets Communication, the Commission has provided guidance on the treatment under Article 107(3)(b) TFEU of asset relief measures adopted by Member States. Impaired assets correspond to categories of assets on which banks are likely to incur losses. The Commission considers that the Impaired Assets Communication must cover any kind of support measure targeting impaired assets and providing effective asset relief to the recipient institution because the Impaired Assets Communication defines asset relief as any measure whereby a bank is dispensed from the need for severe downward value adjustments of certain asset classes (51). The risk shield to HSH falls into that category of measure.

(154) The Commission does not agree with Germany that the Impaired Assets Communication is inapplicable and that the aid amount involved in the second-loss guarantee should be determined according to the general state aid rules and the Guarantees Notice in particular. The Guarantees Notice applies to aid measures that are designed to provide liquidity to a bank (52). The risk shield serves another purpose. It is designed to be implemented on the asset side in order to free up as much capital as possible, so that the bank can improve its capital ratio.

(155) As regards the ratione temporis objection of Germany, the Commission would point out that it has to apply the law and guidelines in force at the time of the adoption of a decision, irrespective of the time at which the aid measures were designed or notified (53). This is a general rule, and any departure from it has to be clearly mentioned in the legal act that would otherwise be applicable. The Union courts have confirmed that a notified measure should be assessed under the rules applicable at the date of the decision (54). Consequently, in the context of the current financial crisis, the Commission has previously applied the Impaired Assets Communication to measures notified before its publication (55).

(156) According to the Impaired Assets Communication, the amount of aid in an asset relief measure corresponds to the difference between the transfer value of the assets and their market price. The transfer value of the shielded portfolio amounts to [approximately EUR 168] billion, which corresponds to the nominal value of the portfolio of approximately EUR [172] billion minus the first loss of EUR 3,2 billion (first-loss tranche).

(157) Given the significant size and the composition of the shielded portfolio ([60-80] % of the assets covered are loans to customers), the quantification of its market value is difficult. In the absence of a market, the market value may effectively be as low as zero for some assets (56). In any case the market value of the shielded portfolio lies significantly below its real economic value (REV) (57), which reflects the underlying long-term economic value of the assets. Given that the aid amount involved in the guarantee cannot exceed its nominal value (EUR 10 billion) it is not necessary to determine the exact value. Therefore the Commission considers that the aid element involved in the risk shield is EUR 10 billion.

(158) Finally, the Commission would point out that the liquidity guarantees provided by Soffin for an amount of EUR 17 billion constitute aid granted under the German scheme.

(159) The Commission has come to the conclusion that the aid element in the risk shield and the recapitalisation amounts to EUR 13 billion. The Commission further considers that the aid element in the liquidity guarantees is up to EUR 17 billion.

9.2. COMPATIBILITY OF THE AID MEASURES

9.2.1. APPLICATION OF ARTICLE 107(3)(B) TFEU

(160) In accordance with Article 107(3)(b) TFEU, aid can be found compatible with the internal market if it serves to ‘remedy a serious disturbance in the economy of a Member State’. The Commission acknowledged in its approval of the German bank rescue scheme (58) that there is a threat of serious disturbance in the German economy and that state support of banks is a suitable way to remedy that disturbance. Despite a slow economic recovery having taken hold since the beginning of 2010, the Commission still considers that the requirements for state aid to be approved pursuant to Article 107(3)(b) TFEU are fulfilled, in view of the reappearance of stress in financial markets. The Commission has confirmed that view by adopting in December 2010 a Communication that prolongs until 31 December 2011 the application of state aid rules to support measures in favour of banks in the context of the financial crisis (59).

(161) The collapse of a bank such as HSH could directly affect the financial markets and thus the entire economy of a Member State. Given the current fragility of the financial markets, the Commission continues to base its assessment of state aid measures in the banking sector on Article 107(3)(b) TFEU.

9.2.2. COMPATIBILITY OF THE RISK SHIELD WITH THE IMPAIRED ASSETS COMMUNICATION

(162) The Commission should examine the compatibility of asset relief measures in the light of Article 107(3)(b) TFEU and on the basis of the Impaired Assets Communication. Contrary to what is argued by Germany, the Impaired Assets Communication does not serve merely to ensure consistent administrative practice (60). Rather, it sets out the state aid rules to be applied to asset relief measures. Taking account of their specific features, it translates the state aid rules into compatibility criteria to be applied to such measures. Applying the Impaired Assets Communication should ensure consistency between asset relief measures introduced by the Member States and compliance with state aid monitoring requirements. Paragraph 18 of the Impaired Assets Communication states that the Communication aims to establish coordinated principles and conditions to ensure the effectiveness of asset relief measures in the internal market as far as possible, taking account of the long-term objective of a return to normal market conditions. Thus the objectives of the Communication are broader than what is argued by Germany, and are not confined to administrative practice. To fulfil the above objectives the Commission has to apply the Impaired Assets Communication to all asset relief measures.

(163) The Commission therefore does not see any grounds to assess the measure directly under Article 107(3)(b) TFEU, as suggested by Germany.

(164) The Impaired Assets Communication lays down a set of conditions with which asset relief measures have to comply in order to be compatible with Article 107(3)(b) TFEU. The examination of their compatibility is carried out using a number of criteria including the eligibility of the assets, the management of the assets, the valuation of the shielded portfolio, the appropriate identification of the problem and full ex ante transparency and disclosure, the alignment of the measure with public policy objectives, the appropriateness of the remuneration and burden sharing, and the requirement of the assessment of a restructuring plan by the Commission.

9.2.2.1. Eligible assets

(165) Paragraphs 33 et seq. of the Impaired Assets Communication require identification of eligible assets and their organisation into categories of assets (baskets). Detailed guidance on the definitions of those categories is provided in Annex III to the Impaired Assets Communication. The variety of assets covered by the risk shield goes beyond the basket system covered by the Impaired Assets Communication. However, paragraph 35 of the Communication allows for additional flexibility in the identification of eligible assets. It allows banks to be relieved of impaired assets that are not covered by paragraph 33 without a specific justification, but only for a maximum of 10-20 % of the overall assets of a given bank. However, since [around 75] % of HSH’s balance sheet is covered by the risk shield, paragraph 35 of the Impaired Assets Communication does not provide a satisfactory solution here.

(166) Nevertheless, under paragraph 32 of the Impaired Assets Communication, which lays down the guiding principles on the eligibility of assets, a pragmatic approach should be adopted when assessing the nature of the assets involved in an impaired assets measure. The Commission notes that the range of asset classes affected by the financial crisis has become broader over time due to spill-over effects. In particular, securities related to shipping, aircraft and real estate in general face illiquid markets or are subject to severe downward adjustments. Asset relief for such assets can help to achieve the objectives of the Impaired Assets Communication, namely to increase transparency and to contribute to financial stability, even if they are not in the asset classes that initially triggered the financial crisis. Therefore the Commission has in previous cases accepted asset relief measures for these assets (61). The Commission considers it appropriate to do so again in the present case.

(167) Lastly, paragraph 36 of the Impaired Assets Communication allows for wider eligibility criteria if the measure is compensated by in-depth restructuring. The greater the proportion that guaranteed assets represent in the portfolio of a bank, the more thorough the restructuring that the bank will have to undergo. In the Decision initiating the procedure the Commission expressed its doubts regarding the eligibility of assets because the initial restructuring plan submitted to it at that time was not sufficiently far-reaching to adequately compensate for the flexible application of the eligibility criteria. HSH submitted the modified restructuring plan on 11 July 2011. The modified restructuring measures comprise a balance sheet reduction of around 61 %, divestment of […] shareholdings and closure of 15 out of 21 international locations. They allow the Commission to conclude that the depth of the restructuring compensates for the flexible application of the Impaired Assets Communication as regards the eligibility of assets. Consequently, the Commission’s doubts regarding the eligibility of assets have been allayed.

9.2.2.2. Management of assets

(168) In recital 45 of the Decision initiating the procedure, the Commission expressed doubts about the compatibility of the guarantee in relation to the management of assets on the basis that there was no evidence of a clear functional and organisational separation between HSH and the shielded assets as all assets would remain on HSH’s balance sheet; this applied in particular to management, staff and customers.

(169) Germany provided additional information, explaining that HSH had set up a restructuring unit which was an internal winding-down bank with separate management. HSH had introduced segment-based reporting, including separate management for the restructuring unit, so that no conflict of interest between the core bank and the restructuring unit could arise. The Commission agrees with the comments from Germany on management of assets as summarised in recital 115 of this Decision, and accepts the changes introduced by HSH in the management of assets. Consequently, the risk shield is in line with the requirements of the Impaired Assets Communication with regard to the management of assets.

9.2.2.3. Valuation of the shielded portfolio

(170) In recital 45 of the Decision initiating the procedure the Commission also raised doubts about the valuation of the shielded portfolio, because only a small portion of the portfolio had been valued by independent experts, and HSH had not provided enough information for the assessment of the REV of the entire portfolio. Prior to the implementation of the measure HSH had appointed two independent experts, Blackrock and Cambridge Place. They had valued only a small fraction of the shielded portfolio, namely the assets-backed securities (ABS) and parts of the CIP portfolio.

(171) The Commission does not share Germany’s view, set out in recital 116 above that customer loans are difficult to value given the number of assumptions involved in cash flow projections (such as those on future delinquencies, probabilities of default, the timing of default and recovery, and interest rates both in respect of the risk-free rate and the risk premium). Although the valuation is more complex in the case of loans with extendable maturities, which is typically the case of the shipping loans and commercial real estate loans that make up a large proportion of the shielded portfolio, the Commission’s decision-making practice demonstrates that cash-flow-based valuations of portfolios including similar assets have already been performed (62). In addition, Germany has failed to demonstrate that a valuation based on cash flow projections would result in a materially different outcome.

(172) Valuation should follow a general methodology established at Union level. At the Commission’s request, HSH and its external expert Morgan Stanley conducted a full valuation of the portfolio in close cooperation with the Commission’s experts. The underlying assumptions applied by HSH in the valuation were in line with the severe stress scenarios applied by the Commission in other cases. A consistent methodology has therefore been applied.

(173) The result of the valuation was that the expected losses would considerably exceed the EUR 3,2 billion first-loss tranche and exhaust the EUR 10 billion second-loss tranche […].