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FMS Wertmanagement – ‘424B1’ on 11/16/12

On:  Friday, 11/16/12, at 12:34pm ET   ·   Accession #:  1193125-12-473722   ·   File #:  333-184318

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  As Of                Filer                Filing    For·On·As Docs:Size              Issuer               Agent

11/16/12  FMS Wertmanagement                424B1                  1:3.6M                                   RR Donnelley/FA

Document/Exhibit                   Description                      Pages   Size 

 1: 424B1       $2,000,000,000 1.00% Notes Due 2017                 HTML   2.38M 

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Filed pursuant to Rule 424(b)(1)
Registration Statement No. 333-184318

FMS WERTMANAGEMENT

$2,000,000,000

1.00% NOTES DUE 2017

FMS Wertmanagement (“FMS-WM”) will pay interest on the notes on May 21 and November 21 of each year. Interest will accrue on the notes from and including November 21, 2012, and the first interest payment date will be May 21, 2013. FMS-WM may not redeem the notes prior to their maturity on November 21, 2017. There is no sinking fund for these notes.

FMS-WM intends to apply for the notes to be admitted to the Euro MTF Market of the Luxembourg Stock Exchange.

FMS is wholly owned by the German Financial Market Stabilization Fund known as SoFFin, which is obligated to provide FMS with liquidity support and to compensate it for losses. The Federal Republic of Germany (the “Federal Republic”) is directly liable for all of SoFFin’s obligations. Accordingly, FMS’s obligations, including the notes offered hereby, are effectively backed by the full faith and credit of the Federal Republic. See “Responsibility of the Federal Republic for FMS-WM.”

PRICE 99.981% AND ACCRUED INTEREST

Neither the Securities and Exchange Commission, any state securities commission, the Luxembourg Stock Exchange or any foreign governmental agencies has approved or disapproved of these securities or determined whether this prospectus is accurate and complete. Any representation to the contrary is a criminal offense.

The underwriters named in this prospectus expect to deliver the notes to purchasers in book-entry form only through The Depository Trust Company and through facilities of other clearing systems that participate in the Depository Trust Company, including Clearstream Banking, société anonyme, Luxembourg, and Euroclear Bank SA/NV, on November 21, 2012.

The date of this prospectus is November 14, 2012

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You should rely on the information contained in this prospectus. FMS-WM has not, and the underwriters have not, authorized any other person to provide you with different information. If anyone provides you with different or inconsistent information, you should not rely on it. You should assume that the information appearing in this prospectus is accurate and did not omit to state any material fact required to be stated herein or necessary to make the statements herein not misleading as of the date on the front cover of this prospectus only. FMS-WM’s activities, financial condition, results of operations and prospects may have changed since that date.

A portion of the notes offered hereby may be offered and sold outside of the United States in transactions not subject to the registration requirements of the U.S. Securities Act of 1933.

This prospectus does not constitute an offer to sell, or a solicitation of an offer to buy, any of the notes offered hereby by any person in any jurisdiction in which it is unlawful for such person to make such an offering or solicitation. The offer or sale of the notes and the distribution of this prospectus may be restricted by law in certain jurisdictions, and you should inform yourself about, and observe, any such restrictions.

This prospectus may only be used for the purposes for which it has been published.

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ADDITIONAL INFORMATION

FMS-WM has filed with the Securities and Exchange Commission (the “Commission”) a registration statement (which term shall include any amendments thereto) under Schedule B of the Securities Act of 1933, as amended (the “Securities Act”), with respect to the securities offered hereby. This prospectus does not contain all the information set forth in the registration statement, certain parts of which are omitted in accordance with the rules and regulations of the Commission and to which reference is hereby made. Statements made in this prospectus as to the contents of any contract, agreement or other document referred to are not necessarily complete. With respect to each such contract, agreement or other document filed as an exhibit to the registration statement, reference is made to the exhibit for a more complete description of the matter involved, and each such statement shall be deemed qualified in its entirety by such reference.

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RECENT DEVELOPMENTS

FMS-WM

FMS-WM’s Results for the Six Months Ended June 30, 2012

FMS-WM is not required to publish interim financial statements in conformity with German GAAP. Nevertheless, FMS-WM does prepare selected interim financial information in accordance with German GAAP applicable to interim financial reporting. The following information is based on this selected unaudited interim financial information. This information is not necessarily indicative of FMS-WM’s figures for the full year ending December 31, 2012.

In the six months ended June 30, 2012, FMS-WM further reduced the nominal value of its portfolio from EUR 160.7 billion as of December 31, 2011 to EUR 151.4 billion as of June 30, 2012. The portfolio reduction of EUR 10.9 billion in the six months ended June 30, 2012 was partially offset by countervailing currency effects of EUR 1.6 billion.

FMS-WM’s loss from ordinary activities improved from a loss of EUR 690 million in the six months ended June 30, 2011 to a loss of EUR 50 million in the six months ended June 30, 2012, primarily due to lower writedowns. In addition, net interest income increased from EUR 157 million in the six months ended June 30, 2011 to EUR 382 million in the six months ended June 30, 2012 due to improvements in FMS-WM’s refinancing structure and refinancing cost. Net commission income increased slightly from EUR 24 million in the six months ended June 30, 2011 to EUR 25 million in the six months ended June 30, 2012.

General and administrative expenses increased from EUR 165 million in the six months ended June 30, 2011 to EUR 183 million in the six months ended June 30, 2012. Additions to risk provisions for the lending business and net loss from investments in the securities business accounted for total charges of EUR 280 million in the six months ended June 30, 2012 (six months ended June 30, 2011: total charges of EUR 788 million).

FMS-WM’s total assets decreased by 13.6% from EUR 341.8 billion as of December 31, 2011 to EUR 295.3 billion as of June 30, 2012. The main reason for this decrease was a reduction in own issues repurchased from EUR 129.2 billion as of December 31, 2011 to EUR 94.0 billion as of June 30, 2012.

The volume of funding raised in the capital markets for the six months ended June 30, 2012 was EUR 19.7 billion. In July 2012, FMS-WM exceeded its total targeted capital markets funding volume for 2012 of EUR 25 billion.

The Federal Republic of Germany

Overview of Key Economic Indicators

The following economic information regarding the Federal Republic is derived from the public official documents cited below. Certain of the information is preliminary.

Gross Domestic Product (GDP)

GROSS DOMESTIC PRODUCT

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The German gross domestic product increased 0.3% after price, seasonal and calendar adjustment in the second quarter of 2012 compared with the first quarter of 2012. Positive contributions to economic growth were made by final consumption expenditure and the balance of exports and imports.

In the second quarter of 2012, exports adjusted for price, seasonal and calendar variations increased by 2.5% compared to the first quarter of 2012, while imports adjusted for price, seasonal and calendar variations increased by 2.1% compared to the first quarter of 2012. The balance of exports and imports thus contributed 0.3 percentage points to GDP growth. In the second quarter of 2012, the contributions made by domestic uses varied. In the second quarter of 2012, the final consumption expenditure of households increased by 0.4% and final consumption expenditure of government increased by 0.2% compared to the first quarter of 2012. These increases were more than offset by a decline in capital formation. Gross fixed capital formation in machinery and equipment decreased by 2.3%, while gross fixed capital formation in construction decreased 0.3% compared to the first quarter of 2012. The decline in inventories also had a negative impact of 0.1 percentage points on economic growth in the second quarter of 2012. Overall, domestic uses had a slightly negative effect of 0.1 percentage points on the growth of gross domestic product.

In a year-on-year comparison, GDP in the second quarter of 2012 increased by 1.0% in calendar adjusted terms compared to the second quarter of 2011.

Source: Statistisches Bundesamt, Detailed results on the gross domestic product for the 2 quarter of 2012, press release of August 23, 2012 (https://www.destatis.de/EN/PressServices/Press/pr/2012/08/PE12_287_811.html).

Inflation Rate

INFLATION RATE

Consumer prices in Germany were 2.0% higher in September 2012 compared to September 2011. The inflation rate decreased slightly compared to the year-over-year inflation rate of 2.1% in August 2012.

In September 2012, the inflation rate was mainly driven by increases in energy prices, which increased by a total of 7.0% compared with September 2011. In particular, prices of mineral oil products, which increased by 9.3%, and charges for central and district heating, which increased by 8.7%, were significantly higher than in September 2011. Without the impact of the increases in energy prices, the year-on-year inflation rate would have been constant at 1.4% from June 2012 through September 2012. Food prices increased by 2.9% from September 2011 to September 2012.

Prices for goods overall increased by 3.0% from September 2011 to September 2012, while prices of services increased by only 1.0% in the same period.

Compared to August 2012, the consumer price index remained unchanged in September 2012, as price increases, such as increases in energy prices and clothing and footwear prices, were offset by seasonal price decreases, such as decreases in prices of accommodation services and package holidays (-8.8% and -8.3%, respectively).

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Source: Statistisches Bundesamt, Consumer prices in September 2012: +2.0% on September 2011, press release of October 11, 2012 (https://www.destatis.de/EN/PressServices/Press/pr/2012/10/PE12_353_611.html).

Unemployment Rate

UNEMPLOYMENT RATE

The number of employed persons increased by approximately 324,000 persons, or 0.8%, from September 2011 to September 2012. Compared to August 2012, the number of employed persons in September 2012 increased by approximately 4,000 after elimination of seasonal fluctuations.

In September 2012, the number of unemployed persons decreased by approximately 48,000, or 2.2%, compared to September 2011. When adjusted for seasonal and irregular effects (trend cycle component), the number of unemployed persons in September 2012 decreased by 19,700, or 0.9%, compared to August 2012.

Sources: Statistisches Bundesamt, September 2012: Dynamik des Beschäftigungsaufbaus lässt nach, press release of October 30, 2012 (https://www.destatis.de/DE/PresseService/Presse/Pressemitteilungen/2012/10/PD12_377_132.html); Statistisches Bundesamt, Genesis-Online Datenbank, Tabelle 13231-0001, Erwerbslose, Erwerbstätige, Erwerbspersonen, Erwerbslosenquote: Deutschland, Monate, Original- und bereinigte Daten (https://www-genesis.destatis.de/genesis/online/logon?sequenz=tabelleErgebnis&selectionname=13231-0001&zeitscheiben=2&leerzeilen=false2).

Current Account and Foreign Trade

CURRENT ACCOUNT AND FOREIGN TRADE

Source: Statistisches Bundesamt, German exports in August 2012: +5.8% on August 2011, press release of October 8, 2012 (https://www.destatis.de/EN/PressServices/Press/pr/2012/10/PE12_347_51.html).

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Germany’s General Government Deficit, General Government Gross Debt and the Excessive Deficit Procedure

According to the excessive deficit procedure (“EDP”) notification table published by Eurostat in October 2012, the Federal Government forecasts that the German general government deficit for full year 2012 will be 0.5% of GDP. The general government gross debt ratio is forecast to be 82.2% in 2012, an increase from 80.5% in 2011.

Sources: Eurostat, EDP Notification Tables, October 2012, Germany (http://epp.eurostat.ec.europa.eu/portal/page/portal/government_finance_statistics/documents/DE_2012-10.pdf).

Other Recent Developments

In June 2012, the Spanish government requested financial assistance for the recapitalization of financial institutions from the Euro Area Member States. On July 20, 2012, ministers of the Euro Area Member States unanimously agreed to grant such financial assistance, concurring with the assessment of the Commission, in liaison with the European Central Bank, the European Banking Authority and the IMF, that providing a loan to Spain for the purpose of the recapitalization of Spanish financial institutions is warranted to safeguard financial stability in the euro area as a whole. Ministers of the Euro Area Member States agreed that the Fund for Orderly Bank Restructuring (F.R.O.B.), acting as agent of the Spanish government, will receive the funds and direct them to the financial institutions concerned. The Spanish government will retain the full responsibility of the financial assistance. The financial assistance will be accompanied by policy conditionality, to be enshrined in a memorandum of understanding, focusing on the financial sector. This conditionality consists of bank-specific measures, including in-depth bank restructuring plans in line with EU state aid rules and sector-wide structural reforms that embrace segregation of problematic assets, as well as the governance, regulation and supervision of the banking sector. The financial assistance will be provided by the European Financial Stability Facility (“EFSF”) until the European Stability Mechanism (“ESM”) becomes available, and then will be transferred to the ESM, without gaining senior ranking status. It will cover financing needs of up to EUR 100 billion. As required by EFSF/ESM procedures, the specific amount will be determined based on a thorough bottom-up assessment of capital needs for individual banks, which has been launched and is expected to be finalized in September. The loans to be used for bank recapitalizations will have an average maturity of up to 12.5 years, with any individual disbursement having a maximum maturity of up to 15 years. The EFSF will set aside EUR 30 billion at the start of the financial assistance program, which can be used in case of urgent unexpected financing needs.

Also in June 2012, Cyprus requested financial assistance from the Euro Area Member States and the IMF in view of the challenges that Cyprus is facing, in particular due to distress in the banking sector and macroeconomic imbalances. Negotiations for an assistance program for Cyprus are currently ongoing.

Sources: Statement by the Eurogroup, press release of July 20, 2012 (http://eurozone.europa.eu/media/776104/eg_statement_spain_20_july.pdf); Statement by the Eurogroup, press release of June 27, 2012 (http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ecofin/131308.pdf).

In June 2012, the Heads of State and Government of the Euro Area Member States stated they expect the European Commission to present a proposal for a single banking supervisory mechanism shortly. Once established for banks in the euro area and following a regular decision, the ESM may be granted the ability to recapitalize banks directly. In October 2012, the Heads of State and Government committed to seek an agreement on legislative proposals for the single supervisory mechanism by January 1, 2013.

Source: Euro Area Summit Statement, June 29, 2012 (http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ec/131359.pdf); Statement by President Barroso at the post-European Council press conference, press release of October 19, 2012 (http://europa.eu/rapid/press-release_SPEECH-12-747_en.htm?locale=en).

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In June 2012, the Heads of State and Government agreed on a compact for growth and jobs. At the EU level, among other measures, EUR 120 billion are being mobilized for fast-acting growth measures, including by increasing the European Investment Bank’s paid-in capital by EUR 10 billion, with the aim of strengthening its capital basis as well as increasing its overall lending capacity by EUR 60 billion.

Source: European Council 28/29 June 2012, Conclusions, June 29, 2012 (http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ec/131388.pdf).

On June 29, 2012, the German Bundestag and Bundesrat enacted laws approving the fiscal compact and the ESM. Several complaints were filed with the German Federal Constitutional Court against these laws with a view to preventing the president of the Federal Republic from signing the laws, which is a pre-condition for their entry into force. In September 2012, the German Federal Constitutional Court approved the ratification of the ESM treaty and the fiscal compact. The approval by the Federal Constitutional Court is subject to a legally binding clarification under international law to the effect that the maximum liability of the Federal Republic in the amount of EUR 190 million may only be increased if the representative of the Federal Republic in the relevant bodies of the ESM approves such an increase. In late September 2012, the parties to the ESM issued a statement conforming compliance with the condition imposed by the German Federal Constitutional Court. Accordingly, the president of the Federal Republic signed the laws approving the fiscal compact and the ESM. The ESM was launched on October 8, 2012.

Sources: Bundesregierung, Zustimmung zu Fiskalvertrag und ESM, statement of June 29, 2012 (http:/www.bundesregierung.de/Content/DE/Artikel/2012/06/2012-06-29-ratifizierung-esm-fiskalvertrag.html ?nn=454930); Bundesregierung, Bundesregierung tritt für Fiskalpakt ein, statement of July 4, 2012 (http://www.bundesregierung.de/Content/DE/Artikel/2012/07/2012-07-04-kabinett-bverfg.html?nn=454930); Bundesverfassungsgericht, Urteilsverkündung in Sachen “ESM/Fiskalpakt – Anträge auf Erlass einer einstweiligen Anordnung,” press release of July 16, 2012 (http://www.bundesverfassungsgericht.de/pressemitteilungen/bvg12-055); Bundesministerium der Finanzen, Fragen und Antworten zum Europäischen Stabilitätsmechanismus (ESM) (http://www.bundesfinanzministerium.de/Content/DE/FAQ/2012-08-16-esm-faq.html); Bundesregierung, Euro-Rettungsschirm ESM gestartet, statement of October 9, 2012 (http://www.bundesregierung.de/Content/DE/Artikel/2012/09/2012-09-12--bundesverfassungsgericht-zu-esm-und-fiskalvertrag.html); European Stability Mechanism, European Stability Mechanism (ESM) is inaugurated, press release of October 8, 2012 (http://www.esm.europa.eu/press/releases/20121008_esm-is-inaugurated.htm).

On September 6, 2012, the president of the European Central Bank (“ECB”) stated that the ECB decided on the modalities for undertaking Outright Monetary Transactions (OMTs) in secondary markets for sovereign bonds in the euro area. Within its mandate to maintain price stability over the medium term and in observance of its independence in determining monetary policy, the ECB intends to preserve the singleness of its monetary policy and to ensure the proper transmission of its policy stance to the real economy throughout the euro area. OMTs are aimed at enabling the ECB to address severe distortions in government bond markets.

Source: Introductory statement to the press conference (with Q&A), Mario Draghi, President of the ECB, Vítor Constâncio, Vice-President of the ECB, September 6, 2012 (http://www.ecb.int/press/pressconf/2012/html/is120906.en.html).

In October 2012, the German Government introduced a draft law, the third Financial Market Stabilization Act, that would allow the SoFFin to extend new guarantees and incur loans to stabilize German banks through the end of 2014 in order to bridge the period until a European directive on recovery and resolution of credit institutions has been implemented by the member states. According to the draft law, SoFFin and the restructuring fund, which have previously been separate systems, will be more closely integrated. In particular, the financial resources that are funded by the bank levy and accumulate in the restructuring fund will be used to cover possible losses arising from future SoFFin measures when the accounts of the SoFFin will be finally closed. In addition, the group of institutions eligible to apply to SoFFin and the group of institutions required to pay the bank levy will be harmonized.

Source: Bundesregierung, Extension of protection against systemic banking crises, statement of October 17, 2012

(http://www.bundesfinanzministerium.de/Content/EN/Standardartikel/Topics/Financial_markets/Articles/2012-10-23-extension-of-protection-against-systemic-banking-crises.html).

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USE OF PROCEEDS

FMS-WM estimates that the net proceeds from the sale of the notes will be approximately $1,997,120,000 (after deduction of underwriting discounts and commissions). The net proceeds from the sale of the notes will be primarily used to refinance existing liabilities in order to replace short term with longer term funding. In particular, FMS-WM intends to use the net proceeds to refinance existing floating rate liabilities issued under FMS-WM’s debt issuance program with an aggregate principal amount of USD 1,440 million, with coupons ranging from 3 month USD Libor plus 7 basis points to 3 month USD Libor plus 15 basis points (0.54% to 0.62% as of June 30, 2012) and with maturities ranging from November 20, 2012 to October 25, 2013. Any remainder will be used for general business purposes.

PRESENTATION OF FINANCIAL INFORMATION

FMS-WM’s accounts are kept, and the economic data on the Federal Republic is expressed, in euro.

As used herein, the terms “euro,” “EUR” and the euro sign (€) refer to euro, and the terms “dollars,” “U.S. dollars,” “USD” and the dollar sign ($) refer to United States dollars.

Any discrepancies in the tables included in this prospectus between the amounts and the totals thereof are due to rounding.

EXCHANGE RATE INFORMATION

The following table shows noon buying rates for euro, expressed as U.S. dollars per EUR 1.00, for the periods and dates indicated, as reported by the Federal Reserve Bank of New York. On January 1, 2009, the Federal Reserve Bank of New York discontinued daily publication of noon buying rates. As of this date, noon buying rates are as published on a weekly basis by the Federal Reserve Bank of New York.

The following table shows the high and low noon buying rates for euro, expressed as U.S. dollars per EUR 1.00, for each month from May 2012 through November 2012 (through November 9, 2012), as reported by the Federal Reserve Bank of New York.

No representation is made that the euro or U.S. dollar amounts referred to herein could have been or could be converted into U.S. dollars or euro, as the case may be, at any particular rate.

There are, except in limited embargo circumstances, no legal restrictions in the Federal Republic on international capital movements and foreign exchange transactions. However, for statistical purposes only, every individual or corporation residing in the Federal Republic must report to the Deutsche Bundesbank, the German Central Bank, subject to a number of exceptions, any payment received from or made to an individual or a corporation resident outside of the Federal Republic if such payment exceeds EUR 12,500 (or the equivalent in a foreign currency).

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CAPITALIZATION AND INDEBTEDNESS

The following table sets forth FMS-WM’s actual capitalization and indebtedness as of December 31, 2011, and its capitalization and indebtedness as of December 31, 2011 as adjusted for the receipt of the net proceeds of the offering. It does not otherwise give effect to any transaction since that date.

Since December 31, 2011, there has been no material change in the capitalization of FMS-WM, except for (1) the issuance in benchmark format of AUD 500 million (approximately EUR 402 million) 5% Notes due 2017, AUD 250 million (approximately EUR 211 million) 3.5% Notes due 2015 under FMS-WM’s AUD Note Issuance Programme in March 2012 and in July 2012; CHF 200 million (approximately EUR 166 million) Floating-Rate-Notes due 2014 under FMS-WM’s Debt Issuance Programme in January 2012; EUR 3 billion 1.375% Notes due 2015, EUR 3 billion 1.625% Notes due 2017, EUR 3 billion 1.875% Notes due 2019, EUR 3 billion 1% Notes due 2017 and EUR 2.5 billion 1.375% Notes due 2020 under FMS-WM’s Debt Issuance Programme in January 2012, February 2012, May 2012, July 2012 and September 2012; GBP 500 million (approximately EUR 619 million) 1.375% Notes due 2014 and GBP 750 million (approximately EUR 955 million) 1% Notes due 2015 under FMS-WM’s Debt Issuance Programme in April 2012, May 2012, July 2012 and August 2012 as well as (2) issuances in other public and private placement format in different currencies of approximately EUR 16.4 billion under FMS-WM’s Debt Issuance Programme. EUR equivalent amounts have been determined on the basis of the exchange rates as of the relevant trade date.

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FMS-WM

Overview

FMS-WM is a wind-up institution (Abwicklungsanstalt) organized as a public law entity (Anstalt öffentlichen Rechts) under public law of the Federal Republic with partial legal capacity pursuant to Section 8a para 1 of the FMStFG. Partial legal capacity, under German administrative law, means that FMS-WM does not have the right to bring an administrative proceeding against FMSA under its charter. FMS-WM has, however, full power and legal capacity to contract with third parties and sue and be sued in court. FMS-WM is fully owned by the SoFFin, which is a special pool of assets (Sondervermögen) of the Federal Republic. FMS-WM is charged with liquidating a portfolio of risk positions and non-strategic assets/businesses in an original amount of EUR 175.7 billion (nominal volume) that it assumed from the HRE Group on October 1, 2010. As of 2007, the HRE Group was one of the largest commercial property lenders, issuers of covered bonds and providers of public finance in Germany. It encountered severe financial difficulties in 2008/09 in the course of the global financial markets crisis. Given the systemic importance of the HRE Group and the resulting public interest in stabilizing the HRE Group, the Federal Republic initiated support measures for this financial institution, including the transfer of risk positions and non-strategic assets/businesses to FMS-WM.

FMS-WM pursues its objective of managing and winding up its portfolio according to a strategic management framework known as the winding-up plan (Abwicklungsplan), which is updated and adapted on a regular basis. FMS-WM aims to maximize the value of its portfolio by managing and liquidating it in a value-preserving manner over an extended period of time. For any given part of the portfolio, the plan requires an assessment of whether FMS-WM should sell, hold, or restructure its holdings. As of December 31, 2011, FMS-WM had liquidated approximately EUR 19.6 billion of its initial portfolio of EUR 175.7 billion.

FMS-WM’s portfolio is currently serviced by the HRE Group, pursuant to a cooperation agreement between FMS-WM and PBB, the core financial institution of the HRE Group. According to existing EU requirements, the cooperation agreement with PBB must be terminated by September 30, 2013 at the latest. FMS-WM has launched a project to make alternative arrangements for its portfolio servicing.

FMS-WM engages in funding activities, including the issuance of debt securities and/or obtaining financing from financial institutions, in order to refinance funding instruments associated with the portfolio it has assumed as they expire. FMS-WM will have to engage in refinancing activities on the capital markets until its portfolio has been liquidated. As of December 31, 2011, FMS-WM had subscribed capital of EUR 200,000, the total amount of which had been paid in.

FMS-WM’s obligations are effectively backed by the full faith and credit of the Federal Republic because SoFFin is obligated under FMS-WM’s charter to cover all losses sustained by FMS-WM and to ensure that FMS-WM is able to pay all its liabilities at any time when due and in full. According to Section 5 of the FMStFG, the Federal Republic, in turn, is directly liable for all of SoFFin’s obligations.

FMS-WM is governed by two corporate bodies: the Supervisory Board (Verwaltungsrat) and the Executive Board (Vorstand). The six-member Supervisory Board is appointed by SoFFin and is responsible for the composition and oversight of the Executive Board as well as for major strategic decisions of FMS-WM. The Executive Board has a minimum of two members and is appointed by the Supervisory Board. It is responsible for representing FMS-WM externally and for managing its business. In addition, a General Manager (Generalbevollmächtigter) was appointed by the Executive Board, who functions as Chief Operating Officer. The Executive Board members, along with the General Manager, form the Management Board (Geschäftsleitung), which is responsible for the operational management of FMS-WM.

FMS-WM is registered with the commercial register (Handelsregister) of the local court (Amtsgericht) of Munich under HRA 96076. Its registered office and business address is at Prinzregentenstrasse 56, 80538 Munich, Federal Republic of Germany. Its telephone number is +49 89 9547627-0. As of the date of this prospectus, FMS-WM does not maintain, and does not intend to open, any branches.

Creation and Legal Status

FMS-WM’s creation and legal status are a direct result of the German Federal Government’s response to the recent global financial markets crisis. In October 2008, the German Federal Government enacted a comprehensive package of measures to support key German strategic financial institutions, most notably the HRE Group. This comprehensive package included the FMStFG, which provided for the implementation of

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SoFFin and established the FMSA, a federal agency under public law with legal personality (rechtsfähige Anstalt öffentlichen Rechts) supervised by the German Federal Ministry of Finance (Bundesfinanzministerium). Section 8a of the FMStFG grants the FMSA the power to create wind-up institutions. The purpose of these institutions is to assume distressed and non-strategic assets from systemically important financial institutions and to eventually dispose of or liquidate the risk positions transferred to them.

As of 2007, the HRE Group was one of the largest commercial property lenders and providers of public finance in Germany. Most of the commercial property loans were refinanced by the issuance of covered bonds, making the HRE Group the leading German issuer of covered bonds. In the course of the liquidity crisis in September 2008, the HRE Group encountered financial difficulties primarily caused by the heavy debt burden held by one of its subsidiaries, Depfa Bank plc (“Depfa”). Depfa had borrowed short-term money to fund higher interest bearing long-term positions in public sector finance on a large scale. When the interbank lending market collapsed in September 2008, Depfa faced substantial refinancing problems. Within a short period of time, the entire HRE Group faced solvency issues as well. Due to the HRE Group’s importance for the German financial system, the Federal Republic initiated various support measures, which led to the SoFFin becoming the sole owner of Hypo Real Estate Holding AG (“HRE”) in October 2009. The government support measures also included the extension of liquidity guarantees by SoFFin and the creation of FMS-WM as a wind-up institution under Section 8a of the FMStFG on July 8, 2010. Risk positions and non-strategic assets/businesses of the HRE Group were then transferred to FMS-WM on October 1, 2010.

FMS-WM is a public law institution with partial legal capacity (teilrechtsfähige Anstalt des öffentlichen Rechts) created pursuant to German administrative law. It is fully-owned by the SoFFin and is subject to the supervision and control of the FMSA. FMS-WM may act in its own name, and may be subject to court proceedings. In order to achieve its mandate of winding up the portfolio of risk positions and non-strategic assets/businesses assumed from the HRE Group, FMS-WM may engage in all kinds of banking and financial services transactions and all other transactions that directly or indirectly serve its purposes. FMS-WM is, however, neither a financial institution nor a financial services institution within the meaning of the German Banking Act (Kreditwesengesetz, “KWG”), nor a financial service provider within the meaning of the German Securities Trading Act (Wertpapierhandelsgesetz, “WpHG”), nor an insurance company within the meaning of the German Insurance Supervision Act (Versicherungsaufsichtsgesetz, “VAG”) nor regulated as such. As a consequence, FMS-WM is prohibited from engaging in transactions that would require a license under the EU Banking Directive (2006/48/EC) or the EU Directive on markets for financial instruments (2004/39/EC). Nonetheless, pursuant to its charter and the FMStFG, FMS-WM is subject to certain provisions of the KWG and the WpHG. In particular, FMS-WM is subject to banking supervision by the German Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht, “BaFin”) and must comply with the organizational obligations and restrictions on certain activities imposed by the KWG applicable to banks and financial institutions. FMS-WM is, however, exempted from the regulatory capital and liquidity requirements and the licensing requirements under the KWG. FMS-WM is also deemed to be a financial institution for purposes of the German Money Laundering Act (Geldwäschegesetz), and is therefore subject to the provisions thereof.

Relationship with the Federal Republic of Germany

The following chart provides an overview of the ownership and supervision of FMS-WM.

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Relationship with SoFFin

FMS-WM is fully-owned by SoFFin, which is administered by FMSA. SoFFin is a special pool of assets (Sondervermögen) of the Federal Republic, established by law and designated to fulfill specific tasks of the German Federal Government assigned to it under the FMStFG.

SoFFin’s purpose is to stabilize the German financial sector by extending liquidity guarantees, providing equity capital, assuming risk positions, and setting up wind-up institutions. To this end, SoFFin has been authorized by the German legislature under Section 6 of the FMStFG to extend liquidity guarantees in a total aggregate amount of up to EUR 400 billion. In addition, Section 9 of the FMStFG authorizes the German Federal Ministry of Finance to incur debt in a total aggregate amount of up to EUR 80 billion to cover the cost of measures taken by SoFFin in connection with the provision of equity capital, the assumption of risk positions and the compensation of losses of wind-up institutions. Specifically, the authorization permits the German Federal Ministry of Finance to incur debt up to an amount of EUR 40 billion. Subject to the approval of the parliamentary control panel for financial market stabilization which is comprised of nine members of the budget committee of the German Bundestag, this amount can be increased by up to another EUR 30 billion and, subject to the approval of the budget committee of the German Bundestag, by up to another EUR 10 billion. Any financing required by SoFFin is obtained in the manner used by the Federal Republic to finance itself, i.e., through the issuance of debt instruments by the Federal Republic of Germany – Finance Agency (Bundesrepublik Deutschland – Finanzagentur GmbH). When the Federal Republic incurs debt for SoFFin it results in an increase in the net borrowings and debt of the Federal Republic. Applications for stabilization measures extended by SoFFin could initially be made only until the end of 2010. As a consequence of developments in the euro area in late 2011, the German Federal Government in December 2011 re-opened SoFFin for new applications until the end of 2012.

Under FMS-WM’s charter, SoFFin is obligated to cover all losses sustained by FMS-WM and to ensure that FMS-WM is able to pay all its liabilities at all times when due and in full. Section 5 of the FMStFG provides that the Federal Republic is directly liable for the obligations of SoFFin. Creditors, including holders of the notes, do not have direct recourse against SoFFin or the Federal Republic. SoFFin’s loss compensation and liquidity support obligations, however, enable FMS-WM to pursue its operations and effectively mean that FMS-WM’s obligations are backed by the full faith and credit of the Federal Republic. For more detailed information on FMS-WM’s backing by the Federal Republic, see “Responsibility of the Federal Republic for FMS-WM.”

For the year ended December 31, 2011, SoFFin recorded a loss of EUR 13.1 billion, which was mainly driven by expenses of EUR 11.4 billion recorded in connection with the accrual of provisions for loss compensation obligations of SoFFin vis-à-vis FMS-WM. As of June 30, 2012, the total outstanding stabilization measures provided by SoFFin amounted to EUR 30.8 billion, of which EUR 11.0 billion related to liquidity guarantees and EUR 19.8 billion related to equity capital.

Relationship with FMSA

FMS-WM operates under the supervision and control of the Federal Republic, which is exercised through the FMSA. The FMSA was established to manage SoFFin and to implement and monitor the stabilization measures extended by SoFFin. The FMSA has the power to create wind-up institutions under Section 8a of FMStFG. FMSA is supervised by the German Federal Ministry of Finance (Bundesfinanzministerium), which ensures that FMSA acts in the public interest. In particular, the German Federal Ministry of Finance supervises FMSA’s activities, nominates the members of FMSA’s management committee (Leitungsausschuss) and delegates decision-making powers to the management committee.

The FMSA appoints the members of FMS-WM’s Supervisory Board. The Supervisory Board members, in turn, appoint the members of FMS-WM’s Executive Board. Both the Supervisory Board and the FMSA may dismiss a member of the Executive Board for good cause.

The FMSA is responsible for the regulatory and legal supervision of FMS-WM. In particular, the FMSA has to approve and supervise FMS-WM’s implementation of the winding-up plan as well as any deviations from, or amendments to, the winding-up plan. The FMSA may give instructions to FMS-WM’s Executive Board and Supervisory Board in order to ensure that FMS-WM complies with applicable law and the requirements of its charter. Comprehensive reporting obligations by FMS-WM ensure that the FMSA has a solid basis for exercising its control and instruction rights.

In keeping with its supervisory role, FMSA action is required for the dissolution of FMS-WM. While there is no set maximum duration for FMS-WM’s existence, FMS-WM’s charter provides that FMS-WM shall exist

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only until the transferred risk positions and non-strategic assets/businesses have been liquidated in full, at which point it is obligated to notify FMSA. FMSA may initiate the final dissolution process for FMS-WM if it has no remaining liabilities or if SoFFin has assumed any remaining liabilities. Any assets or profits remaining at the time of dissolution will be transferred to SoFFin.

Business and Operations

Introduction

FMS-WM is tasked with unwinding the portfolio of risk positions and non-strategic assets/businesses that it assumed on October 1, 2010 from the HRE Group in ways that maximize its value. As described in more detail under “– Outsourced Portfolio Administration,” the HRE Group functions as the external service provider that is in charge of administering the portfolio assumed by FMS-WM.

FMS-WM’s activities are characterized by the following strategic goals:

In order to achieve its mandate of winding up the portfolio of risk positions and non-strategic assets/businesses assumed from the HRE Group, FMS-WM may engage in all kinds of banking and financial services transactions and all other transactions that directly or indirectly serve its purposes. FMS-WM is, however, neither a financial institution nor a financial services institution within the meaning of the KWG, nor a financial service provider within the meaning of the WpHG, nor an insurance company within the meaning of the VAG. FMS-WM is also prohibited from engaging in transactions that would require a license under the EU Banking Directive (2006/48/EC).

The Portfolio

FMS-WM assumed a portfolio of risk positions and non-strategic assets/businesses in an original amount of EUR 175.7 billion (nominal volume) from the HRE Group on October 1, 2010. As of December 31, 2011, FMS-WM had liquidated approximately EUR 19.6 billion of its initial portfolio of EUR 175.7 billion. As of the same date, FMS-WM’s portfolio encompassed more than 5,000 individual exposures with about 2,500 different counterparties and more than 6,000 derivatives. The individual exposures are located in 65 countries and denominated in 17 currencies. Geographically, the greatest concentrations are in the United States, Italy, the United Kingdom, Germany and Spain. About half of the exposures in the portfolio are denominated in euro, nearly a quarter in U.S. dollars, approximately 12% in GBP and approximately 7% in JPY. The portfolio is highly complex and diverse and consists of a particularly high proportion of illiquid exposures with extremely

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long maturities. Approximately 40% of the assets will not mature until 2030 or later. To the extent that a legal transfer of risk assets could not be effected as of October 1, 2010 (for example, due to outstanding consent requirements), economic ownership of such risk positions was transferred synthetically to FMS-WM (for example, through subparticipations or guarantees). FMS is currently working on the physical and legal transfer of these risk positions that to date have only been transferred synthetically from the HRE Group to FMS-WM.

For purposes of risk management and the wind-up reports that FMS-WM submits to FMSA on a monthly basis in accordance with the winding-up plan, FMS-WM has classified the portfolio into five segments – Commercial Real Estate, Workout, Infrastructure, Public Sector and Structured Products. The segments in turn are broken down into 38 wind-up clusters. The assets of all five segments include syndicated loans.

Outsourced Portfolio Administration

In accordance with FMS-WM’s charter and in order to maintain its organization as streamlined as possible, the HRE Group serves as an outside administrator of the portfolio transferred to FMS-WM. The work outsourced to the HRE Group pursuant to a cooperation agreement between FMS-WM and the HRE Group comprises many of the administrative activities associated with the portfolio assumed. The scope of the outsourcing is described in service level agreements between FMS-WM and the HRE Group. Among other things, the HRE Group prepares FMS-WM’s annual financial statements, carries out all settlement and clearing processes and delivers both data and documentation that serve as the basis for making decisions relevant to the portfolio. FMS-WM has the sole decision-making power and responsibility for the assets under management. As of December 31, 2011, approximately 500 to 600 employees of the HRE Group were working for FMS-WM in connection with portfolio servicing at a cost of about EUR 22 million per month.

The cooperation agreement provides extensive information and inspection rights, designed to enable FMS-WM to monitor and control the HRE Group’s administration of the risk assets. It may be terminated at the earliest effective September 30, 2013 by giving prior notice of twelve months. As the transfer of risk positions and non-strategic assets/businesses from the HRE Group to FMS-WM could be viewed as state aid, the transfer had to be approved by the European Commission. In this context, the Federal Republic committed to ensure that, after September 30, 2013, the HRE Group will provide neither asset management services nor refinancing services for FMS-WM and that, from an organizational point of view, those services can be assumed by third parties. Pursuant to this commitment, the cooperation agreement with PBB must be terminated by September 30, 2013.

FMS-WM currently expects that such replacement will be achieved through a combination of outsourcing commoditized services (such as information technology, regulatory reporting) to one or more third parties and separating those employees from the HRE Group who are tasked with portfolio servicing for FMS-WM. Such employees will be transferred to a separate service entity, which FMS-WM established in April 2012. On November 6, FMS-WM publicly announced that the separate service entity will – in addition to portfolio services – be tasked with operations services including collateral management, settlement functions and credit operations. Medium-term plans call for the complete outsourcing of all servicing functions, including the separation of FMS-WM from the service entity. With respect to commoditized services, FMS-WM has commenced the search for one or more external partners through public tender processes. On November 2, 2012, FMS-WM entered into a framework agreement with IBM Deutschland GmbH, which will take over the provision of comprehensive information technology services as of October 1, 2013 at the latest. With respect to operations services, FMS-WM decided to halt the public tender process, following its decision to transfer these services to the separate service entity as described above.

FMS-WM’s Segments

As described above, FMS-WM’s portfolio is grouped into five segments – Commercial Real Estate, Workout, Infrastructure, Public Sector and Structured Products. The Commercial Real Estate and Workout segments are managed together and therefore described together in the following.

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Structured Products

As of December 31, 2011, the Structured Products segment comprised assets with a nominal value of EUR 42.2 billion, which accounted for about 26% of FMS-WM’s overall portfolio. The Structured Products segment includes practically all types of structured credit instruments from asset-backed securities, commercial and residential mortgage-backed securities or collateralized debt obligations to exotic interest, inflation and credit derivatives. The following chart reflects the proportion of the various asset classes in the segment.

Many of the underlying assets of these structured products originated in the United States. Reports of rising defaults on US student loans, credit insurers that are in trouble or an increasing number of insolvencies among US municipalities as well as the ongoing weakness of the US real estate market may affect the value of these financial instruments and thus the assets of FMS-WM.

The Structured Products segment made only a very small contribution to the unwinding of the portfolio in 2011 as forced sales of the exposures would have been possible only at substantial discounts, due to, among other reasons, changed market conditions, sharp cuts in external ratings and the poor quality of the assets that serve as collateral for these securities.

A hold strategy is often the only option for preventing losses on sales because most structured products are highly illiquid securities, i.e., they are rarely traded in the market. In some cases it is possible to boost the value of a few assets by restructuring the transactions. Customer derivatives that were entered into with municipalities and cities in Europe and America present a particular challenge in this respect. Many of these derivatives must be restructured to maintain their value and minimize losses. In addition, any increase in non-performing exposures could trigger considerable workout efforts.

Infrastructure

As of December 31, 2011, the Infrastructure segment held 659 exposures with an aggregate nominal value of EUR 17.1 billion (roughly 11% of FMS-WM’s total portfolio), including corporate loans (approximately 40%), project financing (approximately 40%), acquisition funding (approximately 16%) and a smaller portion of asset-based loans. These exposures are spread across all five continents and encompass loans (approximately 60%) and securities (approximately 40%) which were used to finance seaports, airports, schools, hospitals and projects in the energy, transportation, water and waste removal as well as telecommunications sectors. Most of the loans in this segment have long maturities and were closed at low margins because many borrowers were either government or government-sponsored entities or are structures to which the public sector is a party in some other way, for instance as the entity that procures products and services.

The portfolio held by this segment was reduced by 73 exposures in 2011, corresponding to a reduction of about EUR 1 billion, or roughly 5.5%. It is very difficult to sell individual exposures or entire sub-portfolios because the initial assumptions that were made in many of these projects with respect to the degree of utilization or occupancy have in the meantime turned out to be too optimistic. Accordingly, FMS-WM has been focusing on restructuring individual transactions with the aim of improving the outlook for future sales. Envisioned restructuring measures may include injections of fresh equity capital by the debtors and / or the sponsors, the conversion of borrowings into equity capital or margin improvements and the reduction of contract maturities. Similarly, FMS-WM may try to negotiate an increase in procurement prices or usage fees with operators or municipalities in order to improve the profitability of such loans and thus the outlook for future sales. Other options include cash sweep mechanisms where the borrowers reduce dividend payouts in order to achieve early partial redemption.

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Public Sector

As of December 31, 2011, the Public Sector segment held assets with an aggregate nominal value of EUR 80.9 billion, accounting for approximately 50% of FMS-WM’s total portfolio. The assets held by the Public Sector segment are managed by two separate units: asset & public finance, which is in charge of assets relating to political subdivisions of states and governmental agencies, and sovereign finance, which manages the portfolio of bonds and loans issued directly by states.

As of December 31, 2011, asset & public finance managed a total of 1,245 exposures related to loans and securities with an aggregate outstanding amount of EUR 37.4 billion (approximately 23% of FMS-WM’s total portfolio). Borrowers include regions, cities, public-law institutions and government-sponsored entities, mainly in Europe. Asset & public finance focuses on identifying and measuring portfolio risks and on unwinding the portfolio in ways that maximize its value. Exposures with a recoverable market price that generate a positive return relative to book value may be sold.

Asset & public finance also actively engages in the restructuring of lending structures. Such restructurings often require long and complex negotiations with a diverse range of contracting parties in the public sector in order to avert defaults or to improve the liquidity of the portfolio.

The nervousness and volatility in the markets intensified at the end of 2011 on account of the European sovereign debt crisis and the crisis in Greece and made it more difficult to rapidly unwind the portfolio. The growing indebtedness of states, regions and local authorities along with market players’ increasing risk aversion have had a negative effect on debt servicing, requiring FMS-WM to set up risk provisions in individual cases.

As of December 31, 2011, sovereign finance managed securities and loans with an aggregate nominal value of approximately EUR 43.5 billion (approximately 27% of FMS-WM’s total portfolio). Sovereign finance deals with bonds and loans issued directly by state and federal governments. Highly indebted states of the European Union as well as Japan account for the majority of the portfolio.

The following chart presents the breakdown of the credit portfolio managed by sovereign finance based on internal rating classes that have been mapped to an S&P rating scale.

In 2011, the primary focus was to minimize loss on Greek bonds and loans. In the first quarter of 2012, FMS-WM participated with bonds with an aggregate nominal amount of EUR 8.91 billion in the exchange of the Greek bonds subject to private sector involvement (PSI) at a rate of more than 90% of the portfolio. FMS-WM succeeded in selling exposures in a nominal value of EUR 654 million prior to the exchange with a present value benefit of more than EUR 65 million compared with the present value that would have been achieved in the exchange offer. Following the exchange, FMS-WM received new Greek bonds with a nominal value of EUR 2.6 billion as well as bonds issued by the EFSF with a nominal value of about EUR 1.4 billion. A total of EUR 8.9 billion in write-downs had to be taken on the Greece portfolio and related derivatives in 2011. For more information on these write-downs, see “Financial Report – Net Assets, Financial Position and Results of Operations – Results of Operations – Risk Provisions and Net Income from Securities.”

Inflation-indexed government bonds that accounted for about 25% of the sovereign finance portfolio as of December 31, 2011 are another challenging component of the portfolio. In general, these are public sector bonds or loans with very long maturities where the redemption amount is linked to the inflation rate, potentially causing

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the nominal values of these bonds and loans to rise substantially over time. The nominal redemption amounts are not yet known because they are linked to future inflation rates, which means that this portfolio is exposed to considerable unknown risks. In most cases, such structures are characterized by low current interest payments and complex interest swap transactions, some of which substantially increase the risk of default over time. FMS-WM aims to reduce the risks associated with inflation-indexed government bonds, for example by negotiating with the debt agencies of the individual governments in question.

FMS-WM is working to improve its position in the medium and long term. To that end, FMS-WM negotiates directly with the issuers of the bonds or the counterparties of hedging transactions with the aim of unwinding, simplifying or untangling complex coupon or derivatives structures.

Identifying options for unwinding portfolio positions is another main tasks. With the exception of Japan, only a few active portfolio wind-up successes have been achieved with respect to sovereign finance’s roughly 250 exposures. This was due to the fact that the achievable sales proceeds of nearly all bonds were below the book value such that the exposures could have only been unwound at a loss. The strategy of holding exposures to maturity has turned out to be effective in the case of bonds with shorter maturities. Sovereign finance’s portfolio generated a total of EUR 1.1 billion in redemption payments during 2011.

Commercial Real Estate, Workout

As of December 31, 2011, the Commercial Real Estate segment held assets with an aggregate nominal value of EUR 14.4 billion, accounting for approximately 9% of FMS-WM’s total portfolio, and the Workout segment held assets with an aggregate nominal value of EUR 6.1 billion, accounting for approximately 4% of FMS-WM’s total portfolio.

FMS-WM’s Commercial Real Estate and Workout segments are managed together by FMS-WM’s commercial real estate units. The combined portfolio of the two segments had a volume of about EUR 27.2 billion when it was transferred in October 2010. It was reduced to approximately 1,100 counterparties and a volume of EUR 20.5 billion as of December 31, 2011, corresponding to a net reduction of approximately EUR 6.7 billion.

Mortgage-backed commercial real estate loans account for most of the global portfolio. Among other items, this portfolio encompasses loans for office properties in European metropolitan areas, Asia or the United States; loans for shopping centers, hotels and nursing homes; or residential portfolios in Europe, both in Germany and other European countries. It also includes a number of exotic financing packages such as the financing for a vacation resort requiring renovations or the partial funding of a yacht harbor.

As of December 31, 2011, there was no imminent need to act on many of these loan exposures because interest payments were generally being made, as were some principal payments. The portfolio, however, contains a number of at-risk loans. The complexity of the existing funding structures is one of the major challenges of this portfolio aside from the fact that the commercial real estate market (and its financing structures) was weak in many countries as of the date of this prospectus. Many of the major exposures entail syndicated loans where FMS-WM is acting as a junior lender. In general, the other parties to the consortium are not winding-up institutions and thus have different interests, for instance because they want to continue engaging in new business with the relevant borrower. Some of the loan exposures comprise complex hedges (e.g., interest, currency or inflation-linked swaps), which, in some cases, would have to be unwound before the exposure could be sold.

FMS-WM aims to stabilize exposures in order to enable (i) redemptions at a later date, (ii) the sale of loans or collateral or (iii) their restructuring. Another key element of the wind-up activities is the identification of market opportunities as well as the development and assessment of exit options in order to contribute to the unwinding of the portfolio.

In some cases, FMS-WM carries out foreclosures. In rare cases, so-called rescue acquisitions are made, where FMS-WM takes over the property concerned with the aim of selling it in a timely manner after suitable restructuring measures. In all of these cases, loss minimization is the guiding principle.

Due to the challenging situation in the global real estate markets in particular in the second half of 2011, it was difficult if not impossible to fund exposures in FMS-WM’s portfolio through other lenders; in some cases FMS-WM thus had to grant extensions of the initial loan maturities in order to avert large losses. Given the high

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discounts that currently apply to the sale of loans, the focus was on hold and restructure strategies as of the date of this prospectus. This focus could change as soon as the market environment improves. Market conditions are, however, expected to remain difficult throughout 2012 and will pose major challenges for borrowers to refinance their debt as it comes due.

Winding-Up the Portfolio

The portfolio assumed by FMS-WM is managed and liquidated in accordance with a winding-up plan (Abwicklungsplan), which describes the wind-up measures FMS-WM intends to take and includes a timeline for liquidation measures relating to the risk positions and non-strategic assets/businesses. The winding-up plan is proposed by FMS-WM’s Executive Board and adopted by the Supervisory Board. In accordance with its charter, FMS-WM submits monthly reports to the FMSA, which include information on the process of recovery and liquidation under the winding-up plan. In its supervisory capacity, the FMSA has the right to request changes to the winding-up plan and approves and supervises FMS-WM’s implementation of the winding-up plan as well as any deviations from, or amendments to, the winding-up plan. FMS-WM monitors prevailing market conditions on an ongoing basis to determine whether the winding-up plan needs to be adapted.

During the course of 2011, FMS-WM reviewed and amended its winding-up plan. The original winding-up plan that was designed by HRE sought a reduction in the portfolio by approximately 70% prior to 2020. It was based on the assumption that the remaining assets could then be sold at their then current book value. In-depth analysis of the portfolio has, however, shown that a fixed wind-up horizon might lead to unnecessary losses. For this reason, the Management Board of FMS-WM has agreed with both the Supervisory Board and FMSA that the following principle shall apply to the unwinding of the portfolio: “Value maximization has precedence over a fixed wind-up horizon.” It is FMS-WM’s stated goal therefore to achieve the largest possible wind-up volume in ways that maximize value. Based on this goal, FMS-WM may hold assets, sell assets or engage in restructuring, wind-up and reorganization measures.

The winding-up plan has been designed with a view to ensuring that FMS-WM at all times has sufficient liquidity to cover its three-month liquidity requirements under stress scenario assumptions over the entire wind-up period, independently of SoFFin’s duty to provide liquidity to FMS-WM and to offset losses incurred by it. It also provides that, in principle, FMS-WM may not engage in new business with the exception of refinancing and hedging transactions and selected new business that reduces portfolio risks in a cost efficient manner (e.g., prolongations as well as selective restructuring measures).

The process of selling individual assets follows detailed, fixed instructions. For instance, a sale has to be based on offers from several bidders and deviations from this process are only permitted under special circumstances. The sales process aims to ensure verification and documentation that bids reflect market prices.

Since taking over the portfolio from the HRE Group, the portfolio’s nominal value has been reduced from EUR 175.7 billion to EUR 160.7 billion by the end of 2011. This corresponds to a reduction of 8.5%. Of the cumulative reduction in the portfolio by EUR 19.6 billion by December 31, 2011, active sales accounted for EUR 2.4 billion and contractual redemptions and amortizations accounted for the remainder of EUR 17.2 billion. Countervailing currency effects of EUR 4.6 billion partially offset the cumulative portfolio reduction of EUR 19.6 billion.

The following table shows the reconciliation of the nominal value of the portfolio excluding derivatives from the transfer date (October 1, 2010) to total assets as of December 31, 2011 (translated at exchange rates as of December 31, 2011):

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Based on nominal values broken down by segment, the portfolio was reduced as follows from October 1, 2010 to December 31, 2011 (translated at exchange rates as of December 31, 2011):

The following table shows the remaining maturities of the assets broken down by segments as of December 31, 2011:

Exposure to Troubled Sovereigns and Concentration Risks

The portfolio of FMS-WM contains several significant concentration risks, including those in sovereign debt exposures. For more information on the breakdown of FMS-WM’s credit portfolio by countries and regions, see “Risk Report – Counterparty default risks – Breakdown of credit portfolio by countries and regions.”

The example of Greece shows that such concentration risks, which are vulnerable to macroeconomic or systemic risks, can cause significant losses in FMS-WM’s portfolio. Write-downs related to Greece burdened FMS-WM’s results of operations in 2011. The loss from ordinary activities of EUR 10 billion was mainly due to write-downs on the Greece portfolio, which amounted to EUR 8.9 billion in fiscal 2011. For more information on the impact of FMS-WM’s exposure to Greece, see “Financial Report – Net Assets, Financial Position and Results of Operations – Results of Operations – Risk provisions and net income from securities.”

In addition to Greece, there are major concentrations in the portfolio related to the other “PIIGS” countries (i.e., Portugal, Ireland, Italy, Greece, Spain), particularly in the Public Sector segment.

The following table shows a break-down of FMS-WM’s exposure at default by sector for bonds and loans concerning the PIIGS countries, including information on related microhedges, as of December 31, 2011.

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Apart from sovereign exposures, other segments of the portfolio, such as Infrastructure and Commercial Real Estate, are sensitive to macroeconomic fluctuations as well. A swift unwinding of concentration risks would, however, lead to the realization of substantial losses due to unrealized losses in FMS-WM’s portfolio that have not yet been reflected in the value of FMS-WM’s assets. Since the unwinding of the portfolio is to be carried out with a long-term perspective aimed at preserving as much value as possible, portfolio management has to solve the problem of the portfolio’s sensitivity to recessions and crises as part of a longer-term strategy. Among other things, foreseeable losses on sales of exposures are compared with estimated potential losses from possible future crises. FMS-WM bases its portfolio management decisions on analyses of the fundamentals of the corresponding credit and market risks, complemented by financial and statistical valuation models.

Treasury, Capital Markets Funding

FMS-WM engages in funding activities, including the issuing of debt securities and/or obtaining financing from financial institutions, in order to refinance funding instruments associated with the assumed portfolio as they expire. FMS-WM will have to engage in refinancing activities on the capital markets until its portfolio has been liquidated. FMS-WM monitors its financing needs and liquidity requirements by means of a liquidity management system similar to the ones used by financial institutions. FMS-WM seeks to ensure that it has sufficient liquidity to cover its three-month liquidity requirements under stress scenario assumptions at all times.

Treasury

Treasury core tasks are short-term liquidity management and the management of interest rate and foreign exchange risks.

As part of its short-term liquidity management, FMS-WM utilizes instruments with maturities of up to one year. In 2011, FMS-WM’s treasury operations instituted a number of money market programs. FMS-WM is focused on a broadly diversified funding structure. Examples of this approach include its European Commercial Paper / Certificates of Deposit program (ECP/CD program) having a volume of EUR 28.4 billion as of December 31, 2011 and the US Asset Backed Commercial Paper program (US ABCP program), used for funding the transferred USD portfolio, having a volume of EUR 14.5 billion as of December 31, 2011.

This expansion of money market funding substantially helped FMS-WM to return the SoFFin guarantees in the spring of 2011 and reduce central bank funding in the course of 2011 (from EUR 93 billion as of December 31, 2010 to EUR 35.2 billion as of December 31, 2011).

In addition, FMS-WM’s treasury group is responsible for improving FMS-WM’s funding structure on an ongoing basis with the aim of generating positive contributions to FMS-WM’s earnings. In 2011, FMS-WM’s treasury group took the lead in renegotiating the master agreements for derivatives and repos, achieving significant reductions in the need for liquidity and thus costs.

Interest rate and foreign exchange risks are managed in a centralized fashion on an income-oriented basis guided by a risk aversion policy within the limit system. The aim is to minimize the fluctuations in the fair value and profit / loss due to market risks. To this end, treasury enters into hedging transactions for individual exposures (micro hedges) or at the portfolio level (macro hedges).

Capital Markets Funding

Capital markets funding’s main task is to raise long-term funds in the international capital markets. Maturities generally range from one to ten years, with the majority of bonds having a three to five years’ tenor. FMS-WM aims to raise between EUR 20 billion and EUR 25 billion in capital market issues annually, seeking to achieve a balanced refinancing mix that contains a substantial portion of term funding within the next three years. In 2011, FMS-WM successfully placed about EUR 21 billion in issues with maturities of one to ten years.

FMS-WM issued three strategic benchmark bonds with a volume of up to EUR 3 billion in 2011. These benchmark offerings were supplemented by other non-benchmark public transactions (with a volume of up to EUR 1.5 billion) and private placements. FMS-WM’s bonds are being offered in a broader range of other currencies, e. g. USD and GBP, in order to fund the wind-up portfolio at matching currencies.

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SELECTED FINANCIAL INFORMATION

The following selected financial information has been derived from the financial statements prepared by FMS-WM for the year ended December 31, 2011. FMS-WM’s financial statements have been prepared in accordance with Section 8a (1) sentence 10 in conjunction with Section 3a (4) of the FMStFG and the supplementary provisions of its charter pursuant to the provisions of the HGB for large corporations, the supplementary provisions of the HGB for credit institutions and financial services institutions as well as the requirements of the RechKredV. These accounting principles apply to other types of German financial institutions that do not prepare their annual financial statements in accordance with U.S. GAAP or IFRS and have not been specifically designed for FMS-WM. German GAAP differs in certain significant respects from U.S. GAAP and IFRS, and, as a result, FMS-WM’s financial statements included in this prospectus may differ substantially from financial statements prepared in accordance with U.S. GAAP or IFRS.

FMS-WM’s financial statements included in this prospectus were audited by PricewaterhouseCoopers Aktiengesellschaft Wirtschaftsprüfungsgesellschaft. The audit was conducted in accordance with Section 317 of the German Commercial Code and the German generally accepted standards for the audit of financial statements promulgated by the IDW.

The selected financial information should be read in conjunction with FMS-WM’s audited financial statements and notes thereto and with the section entitled “Financial Report – Net Assets, Financial Position and Results of Operations” in this prospectus.

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