JC Flowers, Grove face losses after Hypo nationalisation vote

JC Flowers, Grove International Partners and a consortium of investors face potentially significant losses on their investment in the troubled lender Hypo Real Estate after shareholders approved plans to allow the German government to increase its capital share to around 90 percent.

At an extraordinary general meeting today, Hypo shareholders backed a government capital increase that will pave the way for Germany’s first bank nationalisation since the 1930s.

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

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

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

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

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

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