By Tom Sims and John O'Donnell
FRANKFURT (Reuters) -An investor-turned-short seller in Germany's embattled Pfandbriefbank on Friday told the company to come clean on the extent of its problem real-estate loans or risk being sucked into a "downward spiral".
Petrus Advisers went from holding a nearly 3% stake in PBB a year ago to becoming one of a number of financial firms now betting against it. Public filings show short sellers are increasing their positions against the bank, one of Germany's biggest property financiers.
Till Hufnagel, partner with Petrus, told Reuters PBB needs to raise capital and get rid of non-performing loans by "facing this outright".
PBB declined to comment on Petrus and other short sellers, which are cumulatively making bets against more than 8% of PBB's stock, aiming to make a profit as its shares drop sharply.
But the company, which has lent billions, including for offices in the United States or Germany, rebuffed criticism on Friday that it was dragging its feet in facing up to the turn in the property market.
Banks in Europe have about 1.4 trillion euros in loans to the commercial property industry, with lenders in Germany, France and the Netherlands the most exposed to the sector.
The attention from short sellers will increase public pressure on PBB, which this week had its stock and bonds pummelled and its credit rating downgraded to near "junk", showing how investors are concerned about weakness in real-estate markets on both sides of the Atlantic.
PBB, created after the financial crisis more than a decade ago, has become the most visible sign yet of weakness in the financial industry stemming from Germany's widening property crisis.
The bank last week sought to reassure investors that it had enough funds to cope with a property slump that has cast a shadow over numerous lenders.
"PBB has chosen a typical German approach to kick the can down the road and hope for improvement," Hufnagel said.
A "wait and hope" stance risks "that eventually you get into a downward spiral", he said.
A 40% fall in the PBB's shares since the start of the year highlights investor worries about its exposure to the United States, which makes up 15% of its portfolio, amid growing concerns about defaults.
The bank's German domestic market is also in its worst real estate slump in decades - characterised by insolvencies, halted construction and a freeze in property deals. Commercial property prices fell 10% in 2023, in a sharp acceleration of their decline this decade.
Petrus estimated PBB's 3.5 billion euro ($3.76 billion) portfolio of loans to property developers is taking a hit from a wave of insolvencies in Germany.
PBB declined to comment on potential exposure to the failed developers but said its capital buffers were strong and its business profitable.
PBB's shares plunged more than 11% on Thursday, and the price of its debt tumbled to a record low, after S&P cut the bank's credit rating on worries about its property lending and gave it a negative outlook.
PBB's shares were 4.4% lower Friday afternoon. The price of its 300 million euro ($322.86 million) AT1 bond fell further.
Figures in Germany's official Federal Gazette on Friday showed short sellers held positions against 8.08% of the bank's shares, up from 7.57% earlier in the week.
The figure may underreport the positions because only bets of 0.5% and above are required to be publicly disclosed.
($1 = 0.9311 euros)