Sunday, August 23, 2009

Mandatory Payment-Mandatory Deferral

I am engaged in a number of email discussions with readers on this Aegon hybrid situation. A question was raised about whether the Stopper would be triggered in the event the deferral was mandatory. The AEB prospectus contains this language:

(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.

This says clearly that the Mandatory Payment Event is triggered even for a Mandatorily Deferred Payment.

Also, since Aegon claims to have excess capital, I would find it impossible to accept myself that the B.S. "burden sharing" social policy is a "Capital Adequacy Regulation" involving solvency. I would hope that there would be some lawsuits about any such claim if it was ever made. But, this entire discussion that we are having may be just another indication that you money is only really safe in the United States.

Anyone can make an argument in bad faith. I can think of a few arguments that could be made to try to get around the Stopper provisions after Aegon purchases securities junior to the hybrids. I just don't see how I could classify any of them as arguments made in good faith. Even if there was a valid mandatory deferral, a payment to the holder of a junior security and/or the purchase of a junior or parity security would trigger the Mandatory payment provisions, even if it violated a regulatory order, or so it would seem. If anyone has a contrary view, please leave a comment.

There is a section in the prospectus, dealing with remedy for non-payment, that I could conceivably construct a contrary argument, but I would not buy it, who knows about the Europeans:

"In the case of a Mandatory Payment Event or Mandatory Partial Payment Event, requiring payment of Interest on a succeeding Interest Payment Date or dates, if we fail to make such payment of Interest as a result of:

the existence of a Required Deferral Condition ....

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."

Page S-7 

Now, I am not going to lose my comfort level so easy on the AEGON hybrids. Ya'll are going to have to do better than that to break me into a sweat on Aegon, let me just worry about ING until tomorrow.

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