This is a quote from the term sheet that I found at the ING's site: "1. EUR 0.85 per Security, payable annually in arrear (short first coupon of EUR 0.425 per Security on 12 May 2009) (unadjusted);" Transactions with Dutch State - ING (look under "Term Sheet").
The reader pointed out that this was a Mandatory Payment Event (and I would add-assuming it was paid) , and argued that those May payments triggered the Mandatory Payment Event for a semi-annual period, which required both ING and AEG to pay hybrid dividends due and payable on June 15 and September 15. I do not have any hard information that this payment was actually made. I would agree that any such payment in May would have triggered the Mandatory Payment Event. I would be interested in any hearing an argument that the payments triggered more than a 6 month obligation. For those new to the discussion, here is the relevant language from Aegon's AEB prospectus:
"(b) If a Mandatory Payment Event occurs, then the Interest Payments payable on the next four consecutive Interest Payment Dates, the next two consecutive Interest Payment Dates or the next Interest Payment Date, as the case may be, following the Mandatory Payment Event, depending on whether the Junior Security, the Parity Security or the security benefiting from a Junior Guarantee or a Parity Guarantee pays dividends or income distributions on an annual basis, a semi-annual basis or a quarterly basis, as the case may be, will be mandatorily due and payable in full on the relevant Interest Payment Dates. We may, but will not be required, to satisfy our obligation to make the Interest Payment payable on such Interest Payment Date in accordance with the Alternative Interest Satisfaction Mechanism.
A Mandatory Payment Event occurs if:
•we declare, pay or distribute a dividend or make a payment (other than a dividend in the form of Common Shares) on any of our Junior Securities or make a payment on a Junior Guarantee;
My argument, and it is just an argument, is that the Junior Securities referenced above are set up to pay annual dividends. The annual period would include 4 quarterly payments as the equivalent for the hybrids. The payments in March was for a short period, to align the annual payments to May, but the Junior Securities are still annual based dividend securities. So a partial payment on an annual based junior security would possibly (in the sense of an arguable good faith position to take) be sufficient to trigger four quarterly payments. This is just a thought, and possibly some European Lawyer Jock may want to pursue this line of reasoning when and if there is a deferral. What happens if there is a deferral in defiance of Mandatory Payment Event.? Does that trigger a default?
2. Alternative Interest Payment Satisfaction Mechanism: A reader pointed out this provision in the Aegon hybrid prospectuses a few days ago, and I did not see at the time how it would come into play if the EC was forcing a solvent firm to defer debt payments. While listening to the Fitch call yesterday, the credit analyst suggested that the EC would look more kindly on paying the hybrid dividend using this mechanism than using cash on hand. This is the relevant provision in AEB's prospectus (each prospectus for the others needs to be checked if you own another one):
ALTERNATIVE INTEREST SATISFACTION MECHANISM
We will satisfy any Mandatorily Deferred Payments and any Optionally Deferred Payments (with any interest accrued thereon, as applicable) using proceeds raised by the Alternative Interest Satisfaction Mechanism. In addition, we may elect at any time to satisfy our obligation to make any Payment (other than Deferred Payments and a payment of principal) to holders of Capital Securities by using the Alternative Interest Satisfaction Mechanism. Applying this mechanism means that we will issue Common Shares for cash in an amount as required to provide enough cash for us to make full payments on the Capital Securities in respect of the relevant Payment. We will calculate the number of Common Shares that we must issue to raise the full amount of money due on the Capital Securities on the relevant payment date plus the claims for the costs and expenses to be borne by us in connection with using the Alternative Interest Satisfaction Mechanism. You will always receive Payments made in respect of the Capital Securities in cash.
If we use the Alternative Interest Satisfaction Mechanism, we will notify the trustee and the Calculation Agent, not less than 16 Business Days prior to the relevant Interest Payment Date. Unless there is a required or an optional deferral of payment in accordance with the provisions described in this prospectus supplement under "—Deferral of Payments," Payments must be satisfied in accordance with the provisions described in this prospectus supplement under "—Payments on the Global Securities—Method of Payment." (page S-23: http://www.sec.gov)
This makes me more comfortable about the Aegon dividends (most of the time I refer to the payments as dividends since they are classified for tax purposes in the U.S. as qualified dividends). I did not recall seeing one of these in the ING prospectuses, but I will check again. Again, I am thinking out loud in these Posts. I am just an individual investor trying to come to grips for the first time with a complex provision in prospectuses written by European firms as they relate to deferral events and trying to learn more about the EC at the same time. I was struck yesterday when the Fitch analyst mentioned that it was hard to find the EC burden sharing policy at the EC website even for him. I know that I am not going to start hunting and pecking around the EC website daily looking for bombs that the EC plans to drop on me. That is just way too much trouble for securities that I never liked anyway, due to their lack of maturity dates and other adverse provisions for lenders.
This came from AEGON's Investor relations in response to a question.
ReplyDeleteFitch took action on AEGON's preferred stock, downgrading it to BB (from
BBB). The actions taking by Fitch are in line with actions taken by
Fitch on other European financial institutions that have received
support from their local government.
The downgrade reflects Fitch's view on the risk on coupon deferral on
our hybrid securities which was mainly prompted by the European
Commission publishing comments lately on the concept of 'burden sharing'
for state-aided financial institutions.
Refraining from payment on our preferred stock is not part of our plan.
In addition, we believe that as an insurance company we are in a
different position than most of the banks that have received government
support. We have not received any request to defer payments of coupons.
Kind regards,
Renske Stoker
AEGON N.V.
Investor Relations
I agree with your interpretation that if they paid the May 2009 Junior Security payment, that would mandate the next 4 interest payments on the quarterly-scheduled preferred hybrid securities.
ReplyDeleteI didn't understand michaelandfred's interpretation. He thought the Mandatory Payment Event would only require the next 2 quarterly payments to be made.
Even if his interpretation were to prevail (in the event of an unlikely deferral), then in May 2010 if they were to pay the Junior dividends again, the deferred Dec 2009 and Mar 2010 coupons would be payable as well at that time, plus the succeeding Jun 2010 and Sept 2010 payments when due.
The language in the prospectus on this point is unclear, so it is subject to different interpretations. I doubt if they anticipated a situation quite like this ever developing.
The market continues to reflect uncertainty on these issues, with the prices dropping again today.
I share your view that Aegon will survive, get out from under the burden of state aid soon, pay the interest on its hybrid preferreds on time, and this too shall pass.
Cathie: I think that a good faith argument could be made that a payment, if made, in May will trigger 4 quarterly payments even if the payment was only for a semi-annual period because the Junior Security is an annual paying security. That is just an argument. But the key then becomes what is the potential repercussion to Aegon if it defers the next payment for December, and a suit follows arguing a breach of the covenants on Mandatory payment events, and then what happens? Now, if the remedy is just payment of that dividend after a successful lawsuit, then Aegon acting on instructions from the EC, could just give the finger to the hybrid owners. But, what if the remedy for the default is payment of the par value plus accrued interest. Then, under that scenario, Aegon would have to be more careful about a deferral now and so would the EC. Personally, I think AEGON would pay if left alone. The issue is what will the Hugo Chavez leaning politicians do at the EC.
ReplyDeleteI may need to read again the prospectus language about remedies for a default triggered by a violation of the Mandatory payment event requirements.
I agree that a good faith argument for 4 mandatory coupon payments can be made. I just don't think that such an argument would hold in a court of law. My conclusion that the interest payment to the Dutch state in May only triggered mandatory coupon payments for the succeeding two quarterly interest payment dates (not: for a whole year) is based on the finding that the Junior Securities have to be considered as semi-annually paying until May 2009, and as annually paying thereafter.
ReplyDeleteThis finding is based on the agreement with the Dutch state, according to which the securities are semi-annually paying for the first (short) interest period (ending in May 2009) and, thereafter, they are annually paying securities (beginning with the interest period that started in May 2010). The agreement with the Dutch state is pretty clear on this issue. This means that a Mandatory Payment Event that occurs in the first (short) interest period, triggers only two succeeding quarterly coupon payments.
Anyway, the fact that the prospectus language is not 100% clear on this issue leads me to the conclusion that AEGON will try to avoid a controversy (or lawsuit)on this issue and, as a result, refrain from exercising its optional deferral right for the December and March payment dates. If a partial repayment to the Dutch state takes place before December, the four following coupon payments will have to be made anyway as the repayment would constitute a new Mandatory Payment Event.
The fact that Aegon only had to submit a viability plan (and not, like ING, a restructuring plan) indicates that the Dutch regulator and the Dutch government regard AEGON as a sound financial institution. I do not think that the European Commission will differ from this assumption. It is my opinion that AEGON will be allowed to make a repayment to the Dutch state this year and that the coupons on the hybrids will be paid at least for the remainder of this and next year due to the Mandatory Payment Event. The EC might ask AEGON to defer coupon payments. Such request, however, will not apply to coupon payments which AEGON is legally obliged to make (e.g. in case of a Mandatory Payment Event). In the cases in which the EC approved state aid this year on the condition that coupon payments on hybrids be deferred, such condition did not apply to coupon payments which the financial institution was legally obliged to make.
For interested readers I have copied the provisions in the AEH prospectus relating to the remedies arising from non-payments, payment defaults etc. Part 1 of these provisions reads:
ReplyDeleteNON-PAYMENT WHEN DUE; LIMITATION OF REMEDIES
Notwithstanding any of the provisions below, the right to institute winding-up proceedings is limited to
circumstances where payment has become due. The Indenture contains provisions entitling the trustee to
claim from us, among other things, the fees, expenses and liabilities incurred by it in carrying out its duties
under the Indenture. The restrictions on commencing proceedings described below will not apply to any such
claim.
The Events of Default and rights to accelerate described, and certain remedies provided for, in the
accompanying prospectus under ‘‘Description of Debt Securities—Events of Default’’ do not apply to
the Capital Securities. The only defaults and remedies are as provided below.
(a) A ‘‘Payment Default’’ will occur with respect to the Capital Securities if we fail to pay or
set aside for payment the amount due to satisfy any payment on the Capital Securities when due,
and such failure continues for 14 days; provided that a Payment Event will not constitute a
Payment Default.
If a Payment Default occurs and is continuing with respect to the Capital Securities, the
trustee may pursue all legal remedies available to it including proceedings in the Netherlands (but
not elsewhere) for the collection of the sums due and unpaid or our winding-up (faillissement or
vereffening na ontbinding), but the trustee may not declare the principal amount of any outstanding
Capital Security to be due and payable.
(b) A ‘‘Payment Event’’ (and not a Payment Default) will occur if at the end of the 14-day
grace period we fail to make such payment as a result of the existence of a Required Deferral
Condition.
If a Payment Event occurs and is continuing, the trustee may institute winding-up proceedings
(faillissement or vereffening na ontbinding) exclusively in the Netherlands, but may not pursue any
other legal remedy, including a judicial proceeding for the collection of the sums due and unpaid.
In the case of a Mandatory Payment Event or Mandatory Partial Payment Event, requiring
payment of Interest on a succeeding Interest Payment Date, if we fail to make such mandatory
payment of Interest as a result of:
• the existence of a Required Deferral Condition; or
• a deferral of an Interest Payment as permitted under the terms of the Indenture,
the relevant Interest Payment due on the Capital Securities will constitute an Outstanding Payment
and will accumulate with any other Outstanding Payments until paid and will constitute neither a
Payment Default nor a Payment Event.
Part 2 of the provisions "non-payment when due, limitations of remedies" reads as follows:
ReplyDelete(c) Subject to the provisions of this section, the trustee may at its discretion and without
further notice institute such proceedings against us as it may think fit to enforce any term or
S-29
condition binding on us under the Indenture, the Capital Securities (other than for the payment of
any principal or satisfaction of any Payments in respect of the Capital Securities); provided that we
will not by virtue of the institution of any such proceedings be obliged to pay any sum or sums, in
cash or otherwise, sooner than we would otherwise have been obligated to pay.
(d) The trustee will not be bound to take any of the foregoing actions against us to enforce
the terms of the Indenture or the Capital Securities unless (i) it will have been so requested by an
extraordinary resolution or in writing by the holders of at least 25% in principal amount of the
Capital Securities then outstanding and (ii) it will have been offered reasonable security or
indemnity satisfactory to it against the costs, expenses and liabilities which might be incurred by it
in compliance with such request.
(e) Notwithstanding the foregoing, holders of the Capital Securities have the absolute and
unconditional right to institute suit for the enforcement of any payment when due and such right
may not be impaired without the consent of the holder.
michaelandfred: I was going to look at the remedy section again tonight. Clause (e) does allow for suits by the individual holders. The provision on non-acceleration of the principal amount is the key provision. This cuts down considerably the amount of leverage that can be obtained by making a good faith argument that the payment, if made, in May requires four coupons rather than two. I would actually give that much better odds of success than you, unless there is already an existing decision interpreting the clause as you suggest. My argument is the Junior Security can be fairly interpreted to be an annual coupon security with a semi-annual payment made solely to align the annual coupon period to a start in May. So, in that analysis, the annual payment period starts in May, and the first payment was just a partial payment on that annual payment due the time differential between the execution of the agreement and May. But, when the remedy is payment of the coupon, and not acceleration of the principal amount after a default, then there is more leeway to give the finger to the owners of the hybrid. If the remedy was acceleration of payment of principal after a default, the borrower has to tread much more carefully.
ReplyDeleteSometimes the lack of a good remedy can dictate the course of events.
The Aegon hybrid owners, and I am one, are in a better position than ING hybrid owners.
There is also an Alternative Payment Mechanism that could be triggered for example in the Aegon prospectus. Most likely, such an option would come into being with the approval of the EC as a way to pay the interest without dipping into cash.
Time will tell whether Aegon will be allowed to make a partial repayment by buying the Junior Security issued to its majority shareholder, who then pays the State. If this is done before 12/15, then it would not catch all of the coupons for 2010. I am not giving odds on this happening, viewing the situation as too fluid. I would not give it 100% odds of happening, but I would not give it less than 50% either. My inclination is too hold what I own until I know one way or the other with 100% certainty. I own AEB and AEH.
There may be ways to get around the limitation of remedy section but I have not looked into it, nor do I intend to. I am 99.9% retired from all of that kind of stuff. Besides, all of my work in the contract area was negotiating entertainment contracts so I have no expertise whatsoever in these security contracts. I can read them however like anybody else.
michaelandfred: I quoted from the Aegon agreement with its majority shareholder in my most recent blog. http://tennesseeindependent.blogspot.com/2009/08/bought-50-lndc-at-62-lottery.html
ReplyDeleteIt seems clear to me that the coupon period is an annual one, even for the first payment.