Tuesday February 24, 06:13 PM
UPDATE 2-German dud investments put Flowers on the rack
By Jonathan Gould
FRANKFURT, Feb 24 (Reuters) - U.S. investor JC Flowers struggled to cope with the collapse of its two German investments as ship financier HSH Nordbank scrambled for cash and Berlin prepared to take control of investment bank Hypo Real Estate (Xetra: 802770 - news) .
The setback is an embarrassment to the private equity investor, which two years ago made its debut in Europe's biggest economy with a stake of roughly 25 percent in HSH.
Hailed at the time as a daring move by a private investor to get into bed with HSH's local government owners, the deal has left JC Flowers in hot water.
A politician from the state of Schleswig-Holstein, which owns 30 percent HSH, said on Tuesday that the Hamburg-based bank may need up to 9 billion euros in fresh capital over the next four to five years.
An extra 3 billion euros in equity from HSH's owners would only be enough to keep the business ticking over this year, said Wolfgang Kubicki, who heads the Free Democrats' faction in state parliament.
'With its current business model, the bank will need 8 to 9 billion euros in the next four to five years,' Kubicki told Reuters.
Schleswig-Holstein and the city of Hamburg, which also has about 30 percent of the lender, approved 3 billion euros in extra capital for HSH and 10 billion euros in guarantees.
Flowers could also take part in the capital increase, a source familiar with the matter said.
At the same time, JC Flowers continued to negotiate compensation for its stake in stricken Hypo Real Estate , one of Germany's biggest casualties of the financial crisis.
Flowers' stock in the Munich-based group is practically worthless but it wants Berlin to pay for the shares when it takes control of the bank as part of a state-backed rescue.
Hypo is being propped up with more than 100 billion euros of loans and guarantees, the lion's share of which is from the federal government.
Berlin now intends to take control of Hypo, something which will most likely sideline Flowers and co-investors that have about 25 percent.
It is not the first setback for the Wall Street investor in the financial crisis.
In 2007, the firm was among a group of investors that tried to buy SLM Corp (NYSE: ISM - news) , the student lender known as Sallie Mae, for $25 billion, in a deal that ended up cratering.
(Additional reporting by Jan Schwartz, Patricia Uhlig and Peter Maushagen; writing by John O'Donnell; editing by Karen Foster) Keywords: HSH/
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