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Saturday, 2 February 2013

Endgame for SNS Reaal pt III: “Alea iacta est”!

“Alea iacta est” – ‘The die has been cast’
Julius Caesar, when crossing the Rubicon (49 B.C.)

Today, the Dutch Finance Minister and rookie chairman of the Euro-group Jeroen Dijsselbloem had his Caesaric moment, when he announced the (expected) nationalization of SNS Reaal NV (SR). What seemed to have been inevitable for quite a while already, became indeed effectuated today.

My prediction of last Monday, 28 January, that A. the bank would be nationalized and B. the taxpayer would foot the bill, was spot on… but with a twist:

With ABN Amro / Fortis-bank and ASR (formerly Fortis insurance, now also in hands of the state), the Dutch government has ample experience with a nationalization proces in the financial world. Probably, the Finance Ministry has – in combination with the Dutch national bank DNB - the scenarios already written down and ready for action.

Whatever happens, this will be a costly solution for the Dutch taxpayer. In this case, the taxpayer is on the hook for all the losses at SNS Property Finance.

In the process he might lose at least €2-€4 billion in real estate write-downs, plus the €750 mln in state support. To keep the bank and insurer running, an additional €2-€3 billion might be necessary, bringing the total bill for the taxpayers to €5-€6 bln.

In exchange, the Dutch taxpayer receives a bank/insurer with a few healthy parts and a lot of dead bodies. This solution seems possible and very plausible.

The twist was that the Minister did some partial burden-sharing on behalf of the shareholders and holders of subordinated bonds, but saved the normal bondholders (the former I didn’t expect, the latter I did, of course).

The real amounts that this operation will cost for the tax-payer differ slightly from my assumptions, but in general I was quite close.  One thing surprised me today: I didn’t think in advance that the Minister would have the guts to send the other banks a bill of €1 bln, but he did after all.

Here are the pertinent snips from the speech by Finance Minister Jeroen Dijsselbloem. Readers who understand Dutch can find the integral speech behind the link:

“SNS is fully in hands of the Dutch state, as a consequence from the effectuation of the Dutch Bank Intervention law. Yesterday evening nationalization was inevitable in order to prevent from fundamental problems for the bank, the bank customers, the whole banking industry and the Dutch economy.

Yesterday, at 18.00 hrs (6 P.M. CET), a deadline passed for the time-box, in which SNS by itself could have found a solution for its problems. This deadline had been set by the De Nederlandsche Bank (i.e. DNB - Dutch national bank) for SNS to raise its capital ratio. The deadline passed without SNS increasing this capital ratio. Without the intervention by the Dutch state, SNS Reaal would have certainly defaulted soon. By nationalization, the daily business and services of the bank could be secured for savers, customers with an insurance and/or bank customers.

Shareholders, holders of subordinate bonds and the large Dutch banks do a considerable part of burden sharing. Private parties pay for this solution within the boundaries that DNB considers to be responsible and appropriate. 

This burden sharing means in reality that shareholders and subordinate bondholders have been expropriated. Their claims on SNS Reaal have lost their full value.

The financial data for the Dutch state and the other stakeholders are:
  • Shareholders and subordinated bond holders share totally €1 bln in the burden; 
  • The Dutch state pays directly €3.7 bln for SNS Reaal:
    • A capital injection of €2.2 bln 
    • €0.8 bln in write-offs on the 2008 state support 
    • €0.7 bln to isolate the CRE-branch from the remainder of the bank-insurer; 
  • The Dutch state also supplies a roll-over credit of €1.1 bln and €5 bln in additional guarantees. 
  • In 2014, the large Dutch banks pay €1 bln to the Dutch state as a kind of burden-sharing. This is justified by the fact that the deposit guarantee fund, that must be maintained and replenished by the large Dutch banks,  now will remain without claims; this would be different in case of a default at SNS Reaal NV. 
All personnel will share in the burden through a policy of wage restraint. The new CEO will be paid a much lower compensation and there will be no bonuses for the whole executive management.

The new management has the task to sell or privatize (parts of) the bank, as soon as the company is stable again and the financial markets enable such operations.

Unless something dramatic happens very soon, SNS bank will remain in state hands for the next 5-10 years to come: first on the agenda is probably the privatization of ABN Amro, but I don’t see this happen soon. 

As I wrote in my Monday issue (see the first link), I see assimilation of SNS Reaal by ABN Amro (bank) and ASR (insurance) as a plausible option for the coming 2-3 years, but that is everything that is going to happen within this amount of time, I presume. 

The circumstances at the financial markets will remain too unfavorable within the next 5-10 years to take the risk of bringing two privatized (or even one) bank(s) up for an IPO. That is just impossible. 

Summarized, this means that the Dutch tax-payer is again on the hook for  €9-odd billion in order to save a bank. That is sad, but inevitable, it seems.

From this position, I want to say that I respect Dijsselbloem’s decision concerning the nationalization of SNS Reaal and I applaude his guts to let shareholders, subordinate bondholders and the other banks do burden-sharing. Letting the normal bondholders do burden-sharing was obviously one bridge too far for the DNB, like I already predicted.

DNB-director Jan Sijbrand shared in his speech (directly after Dijsselbloem's speech) some information about the acquisition process for a private investor that could take over SNS. This process ran until yesterday evening, but it failed eventually.

Sijbrand (and Dijsselbloem earlier) confirmed that these private investors asked for guarantees and involvement from the state that were unacceptable: too much risk for the state vs too little ownership and possible revenues.

Like I stated last Monday: “No group of investors in their right minds would invest a few billion in a [commercial real estate ] bubble without a state-guarantee or another kind of financial parachute. […]

If the SNS CRE is not top-notch, which it probably isn’t, it will be very hard to sell. This makes the risk for losses a very large one, unless the bad bank property is sold to investors with an enormous discount AND a state-guarantee.

This guarantee and enormous discount was probably exactly what made the deal impossible.

The shareholders, represented by Jan Maarten Slagter of the Shareholder’s association (i.e. VEB) were not amused with the expropriation of the bank, to say the least:

“We are flabbergasted. For the first time since the expropriation of Dutch-owned shares in the Russian state railroad, shareholders are fully expropriated. We have serious doubts whether this was necessary and proportionally. We are looking into our legal position, from two points of view:
  • We will ask the business branch (i.e. ‘Ondernemingskamer’) at the Amsterdam Court of Justice to investigate a case for mismanagement at SNS, since the time that the bank did an IPO (Initial Public Offering) in May, 2006;
  • We will ask in Court whether the bank intervention law has been applicated appropriately or not.”;
How about that for risk awareness by the shareholders!

Slagter totally victimizes the shareholders and almost makes it seem like they had been obliged to buy shares of SNS Reaal in 2006 and beyond. Well, they haven’t. 

Besides that, every investor with half a brain, who had just read the daily (financial) newspapers, knew since the take-over of Bouwfonds in 2006(!) that SNS Reaal would be bad news. Nobody has been obliged to KEEP his shares until yesterday-evening?!

Perhaps a trial for mismanagement on behalf of SNS has a slight chance, but further it seems that Jan Maarten Slagter rather lets the taxpayers foot the SNS bill than the 'poor' shareholders themselves. It’s truly disgusting…

The final bombshell for the day came (of course) from the mouth of Kees de Kort, the obstinate, but savvy commentator of BNR Radio (link in Dutch):

Abn Amro, ING Groep NV (ING) and Rabobank also own very large Commercial Real Estate portfolios. 

Currently, we know that SNS has to write off at least 30% on its current CRE portfolio after an earlier series of write-offs. However, you don’t hear anything about write-offs at ABN Amro, ING or Rabo! How reliable are their annual data?! Do these banks already reckon with write-offs?

You don’t know whether these banks have better CRE portfolios than SNS or not. SNS was not the only owner of bad CRE in The Netherlands. Ergo: there must be enormous potential losses at the other banks too. Did they create reserves to handle possible write-offs in the future? Or are they just keeping up appearances?! You can put some serious question-marks at the data of these large banks.

We do, Kees! This should only be news for the ignorant and the unaware: people that should simply not invest!

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