[FONT="]ING carve up gives hope to hybrid investors[/FONT][FONT="]
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[FONT="]EURMCM0020091118e5au0000e[/FONT][FONT="]
1163 Words
30 October 2009
Euroweek
eurmcm
English
© Copyright 2009 Euromoney Institutional Investor plc.
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[FONT="]The plan will see ING give up on its bancassurance model, sell-off some of its banking operations, raise Eu7.5bn through a rights issue (see separate story) and pay a larger fee to the Dutch state for insurance under its illiquid assets back-up facility (IABF). The bank has given itself until 2013 to complete its restructuring.[/FONT]
[FONT="]One of the positive outcomes of the restructuring is that the bank expects to be able to pay coupons on its hybrid securities — something which the market had doubted to some extent.[/FONT]
[FONT="]While ING refused to comment on what part of the plan had been imposed by the European Commission in order to give the green light to the state aid, some analysts believe that the EC had a strong hand in the carve-up of the group.[/FONT]
[FONT="]"ING is trying to present its enforced break-up as the next step in its Back to Basics strategy but it is nothing of the sort," said analysts at CreditSights. "It is a humiliating climb-down forced on it by the EC, with the sale of ING Direct USA probably as distressing to management as the divestment of its insurance business."[/FONT]
[FONT="]Market participants had been keenly awaiting the ING news as they believe it could be the template for other banks that are still waiting for their state aid to be approved.[/FONT]
[FONT="]"While the scale of ING’s dismemberment is greater than we had expected, the enforced reduction in its balance sheet (minus 45%) is similar to that inflicted on banks such as Commerzbank and WestLB, which does not bode well for other banks awaiting state aid approval, notably Lloyds and Royal Bank of Scotland."[/FONT]
[FONT="]Others, however, were reluctant to draw any conclusions from the carve-up and whether a similar fate can be expected for other banks which also include Dexia and KBC.[/FONT]
[FONT="]"I don’t know to what extent the European Commission was behind all the measures and I am not entirely sure whether the disinvestment from the insurance business was pushed by the EC," said one bank analyst.[/FONT]
[FONT="]"The insurance split doesn’t sound like it was mandatory like the ING Direct USA sell-off. It seems that it could have been strategic, but maybe encouraged to an extent by the EC."[/FONT]
[FONT="]The management team refused to be drawn as to how much ING had had its arm twisted on various aspects of the plan during a conference call to discuss the restructuring.[/FONT]
[FONT="]Talking about the split between the bank and the insurance business, Jan Hommen, ING’s chief executive said "this is a decision which we, as a board, felt was the right move to make, given that the bank/insurance model is not a necessary-to-have to be able to distribute insurance products through the networks."[/FONT]
[FONT="]"Furthermore, in the financial crisis, it has been shown that it is a model that you need to be careful with and where there could be hits in both. We are one of the few left with this model, especially of our size. This will be a good way to create value."[/FONT]
[FONT="]In April, as part of its "back to basics" plan, the bank had said that it would reduce the complexity of the group by operating the bank and insurance businesses separately under one group umbrella.[/FONT]
[FONT="]"This is the second phase of our back to basics plan on which we issued guidelines earlier on in the year," said Hommen.[/FONT]
[FONT="]"We indicated at the time that our plans would have a significant impact on us going forward. We have now taken all these measures at the same time, supported by a rights issue and this is really what we want to do and what is necessary to be done. Of this, I cannot say what was done by us and what was done by the EU."[/FONT]
[FONT="]The EC will decide on 18 November whether to approve the plan.[/FONT]
[FONT="]Hybrids safe-ish[/FONT]
[FONT="]The news of the restructuring was welcomed by the bond market, in particular hybrid bondholders because the bank expects to be able to pay coupons on its existing securities, pending a successful rights issue. The bonds were up a few points on the news, according to bankers.[/FONT]
[FONT="]"ING does not expect to be subjected by the European Commission to a mandatory deferral of coupon payments on hybrid securities," the bank said. "ING will consult the EC before taking any further repayment or calling decisions for tier one and tier two capital."[/FONT]
[FONT="]There had been doubts as to whether ING would be able to continue to pay coupons on its subordinated debt in mid-September when the state aid package was still under scrutiny.[/FONT]
[FONT="]One of the points of contention at the time had been how much ING had agreed to pay the Dutch state to use the IABF and the valuations of the securities within the Alt-A RMBS portfolio of ING Direct USA and ING Americas.[/FONT]
[FONT="]"In order to get approval from the EC on ING’s restructuring plan, ING has agreed to make additional payments to the Dutch state corresponding to a reduction of 50bp on the funding fee monthly received by ING and an increase of 82.6bp on the guarantee fee annually paid by ING," it said.[/FONT]
[FONT="]ING said that in total, the net present value of the extra payments would amount to Eu1.3bn.[/FONT]
[FONT="]"Now that could be a stay of execution but I rather think that this pro-action and the fact the group is proving itself profitable once again could provide a long-term lifeline to hybrid coupons," said an analyst at RBS. "I do believe that there will be EC pushback against further cash tenders in line with the 7 October EC statement."[/FONT]
[FONT="]The RBS analyst went on to note "the statement is important vis-à-vis what happens with Lloyds and others, but the difference here between ING and for example Lloyds is that ING will only have Eu5bn of state aid via prefs and be profitable, not Lloyds’ 43% ownership and loss-making, so I remain sceptical whether the EC will rule so favourably."[/FONT]
[FONT="]While the coupons payments seem safe, there is some uncertainty that remains in relation to whether ING will be able to call its deals given that the bank indicated it would consult the EC before calling tier one and tier two capital.[/FONT]
[FONT="]"Management said at this stage it understood that government-injected capital should not used to redeem capital instruments so calls are uncertain at least until the government securities have been fully repaid," said analysts at BNP Paribas. ING expects this to happen in 2011.[/FONT]
[FONT="]"Furthermore,
management mentioned on the call that economic incentives might play a role in their future call decisions, hinting that refinancing costs would be an important decision factor," said the BNP Paribas analysts.[/FONT]
[FONT="]Delay causes rights issue rumpus, see Equity Capital Markets section[/FONT]