As officials at HM Treasury burn the midnight oil on the Asset Protection Scheme, the centrepiece of last week’s Bank Rescue Plan (part II), the Dutch government has come up with a plan to deal with some of the toxic assets festering in its banking system.
While the UK scheme is expected to modelled on a credit default swap, the Dutch have chosen a different route, using what is effectively a total return swap.
The guinea pig is ING, which is dumping placing 80 per cent of its €27.7bn Alt-A mortgage portfolio into a Illiquid Assets Back-up Facility.
And the terms look pretty generous, with the Dutch paying 90 cents on the dollar for assets which are probably trading at around 65 cent.
Here’s how the scheme, which was unveiled on Monday morning, will work (emphasis ours).
Under the terms of the Back-up Facility, a full risk transfer to the Dutch State will be realized on 80% of ING’s EUR 27.7 billion portfolio of Alt-A RMBS at ING Direct USA and ING Insurance Americas. The Dutch State therefore will participate in 80% of any results of the portfolio. This risk transfer will take place at a discount of 10% of par value. ING will remain the legal owner of 100% of the securities and will remain exposed to 20% of any results on the portfolio.
As a consequence of the transaction, the Dutch State will be entitled to receive 80% of the cash flows of the total portfolio. ING will pay to the Dutch state an annual Guarantee Fee consisting of a fixed amount plus a percentage of the payments received on the securities. The net present value of this fee is EUR -0.6 billion. ING will receive from the Dutch State payments representing a net present value of EUR 0.5 billion. In addition ING will receive from the Dutch State a management fee with a net present value of EUR 0.7 billion. As a consequence of the factors above, the transaction will have a limited impact on ING’s first quarter profit & loss.
In addition, a large chunk of the capital released by the Back-up Facility will be used to support corporate lending in the Netherlands.
ING will earmark part of the capital released by the Back-up Facility to support the growth of the Dutch lending business for an amount of EUR 25 billion at market conforming conditions. Under the terms of the agreement, ING commits itself to pro-actively use EUR 10 billion of the Credit Guarantee Scheme of the State of the Netherlands to support the scheme.
Executives have also agreed to waive bonuses.
For the duration of the Back-up Facility, ING will maintain the corporate governance measures agreed upon issuing core Tier-1 securities to the State in November 2008. In addition, the government-nominated members of the ING Supervisory Board will have approval rights on certain executive appointments. The Executive Board of ING has agreed to forego all bonuses until a reviewed remuneration policy will be completed. This policy will include criteria on sustainability for the Executive Board and is expected to be proposed to the annual General Meeting of Shareholders in 2010. Of course, the backdrop to the creation of the Back-up Facility, is a dire trading update from ING, which has cost chief executive Michael Tilmant his job.
Here are some of the lowlights:
In the fourth quarter market conditions deteriorated sharply, making it the worst quarter for equity and credit markets in over half a century. This led to an underlying net result of EUR -3.3 billion for the fourth quarter, based on preliminary and unaudited figures. Results were impacted by impairments and losses on pressurized assets (subprime RMBS, Alt-A RMBS and CDOs/CLOs) of EUR -2.0 billion, on equity securities of EUR -0.7 billion and on debt securities of EUR -0.3 billion, all on a pre-tax basis. Revaluations on real estate amounted to EUR -0.6 billion and on private equity to EUR -0.3 billion.
Other market impact included equity capital gains and equity hedges of EUR -0.2 billion, equity related DAC (deferred acquisition costs) unlocking of EUR -0.3 billion and the result of FX hedges and other mark-to-market valuations of EUR -0.7 billion. Loan loss provisions increased to EUR -0.6 billion for the quarter as economic conditions worsened.
So far the market likes what it sees – shares in ING, which admittedly were beaten down last week, are up 15% at just over €6.
Related Link:
ING trading update – company website