Sunday, October 19, 2008

ING Receives 13 Billion from Dutch Government

ING, the large Dutch insurance company and bank, operating in the United States the online bank, will receive 13 billion from the Dutch government.  MarketWatchING to strengthen core capital by EUR 10 billion - ING The securities will be non-voting and "are pari passu with ordinary common equity meaning the Dutch State will rank exactly the same as common shareholders."  The Dutch government will receive 8.5% when ING starts paying common dividends again, a better deal for that government than the U.S. struck with our banks which gave the banks money at 5% for five years. ING can buy back the shares for 150% of their original value. ING said it would not pay a common dividend later this year.  

The WSJ said in its article that  the Dutch government would receive dividends only if ING's common shareholders are paid first.

I do not own the common stock.  I have mentioned in these posts that I had just bought 100 shares of a preferred issue (ticker symbol INZ) which has a 7.2% cumulative dividend. I noted a sale of the of the first 50 share lot, purchased at $10.11 on 10/08 and sold on 10/14 at $14.49, and that I was keeping the 50 share lot purchased on 10/10 at 7.84 (see Post= Partial sell on INZ COMPLETED)  

Even after buying a preferred stock issue, it is imperative that one continue monitoring the financial health of the issuer.  I knew on Friday that ING stock took a big hit due to concerns about its financial health, down almost 28% to 10.65. MarketWatch This caused me to be alert for events over the weekend, with my only interest being ING's financial solvency and its ability to pay the preferred stock dividends.

 While I can not be sure with the limited information available to me now, this deal with the Dutch government does not appear to require, or to likely,  cause a suspension of the preferred dividend and would strengthen ING's ability to pay the preferred dividend. If that is correct, the preferred shares should rally tomorrow. If INZ falls, then I need to acquire more information. But, as of now, I have realized a very short term gain of over $200 on 50 shares in a few days and I am currently up almost 100% in a few days on the other 50 which I intend to keep for at least 1 year. Even if a dividend is skipped on the preferred, it is not forgiven but merely deferred with interest accruing on the missed payment at 7.2%. This is from the prospectus:

"Subject to the payment restriction described below, we may elect 
to defer any payment (other than principal) on the ING 
Perpetual Debt Securities for any period of time. However, if we 
make this election, the deferred payment will bear interest at a 
rate of 7.20%. "

ING can avoid paying interest on a missed payment only if it is insolvent and that is not the case now. Missed interest payments and interest on them become due- mandatorily- in the event a common stock dividend is declared. Since the common dividend has at least been temporarily suspended, ING could elect to defer paying the preferred dividend if it chooses to do so but this would make it more difficult to raise capital by selling preferred stock in the future. 

These events provide a real life lesson on a reason to invest in preferred securities. ING is omitting it last common stock dividend for 2008 and that payment will be forever lost by the common shareholders.  I would anticipate the preferred shareholders will continue to receive dividends, and, even if one is skipped, it still has to be paid later with interest.  And all missed interest payments, plus accrued interest on those payments, would need to be paid before making a payment of a common share dividend.

Aegon, another Dutch company under increased stock market scrutiny, is not yet mentioned as seeking help from the Dutch government, but merely studying it. I own one of its floating rate preferred securities, AEB, discussed in prior posts. I will be looking to see how the events this weekend relating to ING may impact the pricing of Aegon common stock, symbol AEG, as well as the very distressed preferred issue that I own, AEB,  with a current 300 share position.

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