Priority of Aegon Hybrids

Added 8/23/09: Another part of the Stopper provision may come into play: More on the Aegon Stopper:

The best discussions on this topic are: Summary of Arguments To Stop EC from Causing Deferral of Payments on the Aegon Hybrids Nail on the Head for Aegon Mandatory Payment Event? Pay Back Dutch Government=Buying Junior Security=Mandatory Payment Event/Bond Investing Process More on ING and AEGON Stoppers

Impact of Any Payment to Dutch State in May

8/31/09 The most recent discussions are Summary of Arguments To Stop EC from Causing Deferral of Payments on the Aegon Hybrids and More On Deferral Issues: Aegon & ING Hybrids-Investors are not Helpless before the All Powerful and Knowing EC.

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I was asked about the priority of the AEGON hybrids compared to securities received by the Dutch government. I would incorporate my earlier discussion about priority and stopper provisions. Priority of ING Hybrids vs. Shares Issued to Dutch Government This one is more complicated than the deal between ING and the Dutch government. The Dutch government loaned money to Aegon's largest shareholder who then used the proceeds to buy capital securities, ranking at the same level as common shares, from Aegon:

"

Financial details

The support transaction was structured in such a way that it would not affect AEGON’s ownership. The new core capital was made available through a loan to the company’s major shareholder, Vereniging AEGON, which enabled the Vereniging to purchase capital securities from the company at a corresponding amount and terms and conditions similar to the loan. AEGON issued 750 million convertible core capital securities at EUR 4.00 per security to Vereniging AEGON. These securities rank equal to common shares (pari passu), but carry no voting rights. Payment of interest on the securities as well as on the state loan provided to Vereniging AEGON is conditional upon the payment of dividends (cash or stock) on the AEGON common shares. For the first year the coupon is fixed at 8.5% (EUR 0.34 per security). For consecutive years the coupon will be the higher of either 8.5% or an amount linked to the cash dividend paid on the common shares in the preceding year: in the second year 110% of the dividend paid per share, rising to 120% in the third year, 125% in the fourth and subsequent years. The coupon is not deductible for corporate income tax. As regards repurchase of the securities and subsequent repayment of the loan the following arrangements have been made: until December 1, 2009, AEGON may repurchase up to 250 million of the securities at nominal value plus accrued interest and a repurchase compensation dependent on the repurchase date and AEGON’s actual share price but maximized at EUR 130 million. This, in effect, gives AEGON the right to repay EUR 1 billion of the loan in the first year should financial market conditions improve sufficiently. After the first year the securities may be repurchased at any time at 150% (= EUR 6.00 per security) plus accrued interest. Alternatively, after three years, AEGON may choose to convert all or some of the securities into common shares on a one-for-one basis, subject to adjustment of the conversion price under certain circumstances. In the event of AEGON exercising its conversion right however, Vereniging AEGON and the Dutch State may opt to receive repayment in cash at the original issue price of EUR 4.00 per security plus accrued interest."

page 159: Form 20-F

So, it appears that the Dutch government will not be paid if the majority shareholder is not paid by Aegon. And, that raises the issue of how Aegon can pay the majority shareholder and defer payment on a hybrid security.

This is the Stopper provision contained in AEB:

We will be required to make payments on the Capital Securities in the following circumstances.

(a) If a Mandatory Payment Event or Mandatory Partial Payment Event (each as described below) occurs then all Mandatorily Deferred Payments and Optionally Deferred Payments will become mandatorily due and payable in full on the date of the event. Notwithstanding any provision to the contrary herein, we will only satisfy our obligations to pay such Mandatorily Deferred Payments and Optionally Deferred Payments in accordance with the provisions of the Alternative Interest Satisfaction Mechanism.

(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;

• s-22: http://www.sec.gov/Archives/edgar/data/769218/000104746905027219/a2165248z424b5.htm

So, the question that I have, if Aegon has to cease paying its majority shareholder who then quits paying the Dutch government before it can defer payments on its hybrid securities, why would the Dutch government go along with that scenario, unless they had no choice?

If anyone has the answer, please leave a comment.