Friday, August 28, 2009

Sold 1/2 INZ (see disclaimer)/ING Paid the Dutch State in May 2009

One of readers, michaelandfred, pointed me to the ING quarterly report for the second quarter where ING made the following statement:

"As previously reported, since an interim dividend
on ordinary common shares was paid in August
2008, the first short coupon on the core Tier 1
securities issued to the Dutch State was paid in
May 2009. "

This document can be found at Quarterly Results - ING

You would click the PDF for the Quarterly Report rather than the PDF for the Press Release.

This payment was made on a security in pari passu with the common shares : "The securities are pari passu with ordinary common equity meaning the Dutch State will rank exactly the same as common shareholders."ING to strengthen core capital by EUR 10 billion - ING Any payment on a Junior Security to the ING hybrids triggers a Mandatory Payment Event. Is there anyone claiming that the shares issued to the Dutch state are not Junior Securities to the hybrids? If there is somebody, please state your reasons in the comment section.

The only issue becomes then whether such payment triggered four mandatory payments or two. Nail on the Head for Aegon Mandatory Payment Event? That resolution will depend on whether the Junior Securities are classified as paying distributions on an annual basis or a semi-annual basis.

My involvement in writing about this subject is due to reader interest, and I do not particularly care for the EC burden sharing policy. I view it as idiotic, counter-productive, and made in bad faith. I would like to do whatever I can to muck up their plans. And I think that I am making progress toward that goal.

My positions are: 200 IND, 350 AEB, 50 ISF, 100 IGK, 100 before today of INZ, and I forgot how much of AEH.

Since I have decided to pare back my small holding in European hybrids, due to my extremely negative view of current events layered on top of my negative opinion held for years about these securities (e.g. no maturity date), I sold late today 1/2 of my INZ at $14.60 (see Disclaimer) which were bought in the taxable account at $6.52 in February. Hartford Bond Sold/ Modoff: No Evidence of Trading/bought 50 INZ at 6.52/ It was ex today so that was a good profit on the shares of more than 100% plus some dividends.

My current thinking is hold the Aegon hybrids, and pare the ING hybrids only in the taxable account, keeping the ING hybrids held in the retirement account due to the avoidance of tax issues in a retirement account resulting from a deferral of a cumulative dividend. This of course may change with some new negative development.


  1. Hi Tennindependent,

    I am a resident of the Netherlands, the country where ING and Aegon reside - and where the EU competition commissioner Neelie Kroes was born!

    I am in awe of your thorough investigation of the ING and AEG perpetual loans (you in the US mostly call them preferreds as if the where stock, but I like to regard them as bonds).

    You seem to concentrate mostly on legal aspects on whether or not the EU can demand from ING etc. to defer interest payments. However, besides that there is of course also the image aspect, i.e. whether ING can even afford to postpone interest payment if they want to properly continue in the market place at all. On the one hand, they could refer to the EU commision and say that it required them to postpone, but on the other hand ING would seriously want to avoid such bad news as deferral because in the future they will certainly would want to accrue new capital via new hybrid loans. So even if the EU would demand interest deferral, ING might very well ignore that and perhaps raise capital via a new share emisssions.

    On a side trail, I have no idea why ING perps sank about 8 percent yesterday but recovered by about the same amount if not more today.

  2. I am always surprised about how well Europeans speak and write English. I had five years of French and rarely could form a coherent sentence in French.

    I sometimes refer to the hybrid securities as preferred stocks, a misnomer, because they trade on the stock exchange in the U.S. and have an equity component to them. For purposes of the balance sheet, they are debt. They are part of the equity capital for regulatory purposes-sort of pretend equity for a limited purpose. Another reason that U.S. residents call them stocks is that for us the distributions are labelled "dividends" rather than interest. This has an important impact on a U.S. taxpayer since the ING and AEG hybrids are viewed as paying "qualified dividends" which is subject to a maximum 15% tax rate rather than interest subject to the taxpayers highest tax rate, and that can make a big difference in the after tax return from the distributions. As hybrid securities, they are in effect both bonds and stocks. They have some characteristics of both classes of securities. In the U.S. our junior bonds have maturity dates. These hybrids do not, which is more of an equity characteristic like a common stock.

    I think that the EC has permanently damaged these hybrids. Before now, the hybrids were a cheap source of capital, mostly in the order of 6 to 7% with no promise to ever pay the principal back. I would question whether this instrument can ever be used again, no matter what happens. If someone like Allianz could raise capital with a new hybrid issuance, it will have to pay a significantly higher rate. The market is closed for years, maybe decades, for new hybrid issuances from other firms due to the EC policy. So the EC has already permanently raised the cost of capital in my opinion.

    If an insurance company selling products in the U.S. fails to pay interest on its debt, the repercussions will be serious if publicity is widespread. I agree with you that it will hurt your Dutch companies, particularly in the U.S. where I do not think Neelie Kroes would find a receptive and understanding audience.

    The impression given by the ratings agencies Moody's and Fitch is that the EC will get their way on any deferral requested by it. If there is a deferral by ING of the hybrid payments, further downgrades will come quickly, possibly moving the securities from the current "junk " classification to the "C" level. Both Moody's and Fitch downgraded ING and AEG hybrids to junk based on the EC policy and made it clear further downgrades would occur if there was an actual deferral. Many institutional investors can not own junk rated securities.

  3. I would add that there is a reason for focusing on the Mandatory Payment Event triggers. Even the EC has to realize how foolish it would be to cause one of the European firms to violate a loan covenant with its bondholders. To the extent that a payment is required due to a Mandatory Payment Event as provided in the loan covenants, this has to decrease the likelihood of a deferral for those payments. I, along with some help from my readers, have shown you the way.

  4. Thanks for the clarification on stocks/bonds/hybrids from the perspective on your side of the pond. As to the EU damaging those hybrids permanently, I wonder if you aren't too pessimistic. After all, the main objective of the Competition Commission is to ensure fair competition, not to damage companies. In this case they decided that state aid to ING and Aegon was in order, with the provision that there be burden sharing, specifically that state aid should not be used to pay out coupons or dividend [paragraph (26) of the EU restructuring paper] – at least, that is how I read that paragraph and the footnotes 33 and 34. In the latter, they specifically say "although temporary dividend or coupon bans may retain capital within the bank and increase the capital cushion and hence improve the solvency of the bank, they may equally impede the bank's access to private finance sources, or at least increase the cost of new future financing", indicating that they will not be foolishly make unrealistic demands to banks. In my opinion Moody's and Fitch simply used a buckshot approach to downgrade many of these hybrids, not looking at the details, which makes them the ones doing the damage, not the EU, just because as you say, those institutional investors now have to sell (volume since 8/20 is about four times it was previously, see e.g. Perhaps I'm too optimistic, but my hunch is that the EU will not forbid ING or AEG to make coupon/dividend payments and then the rating agencies will upgrade these hybrids again. Or alternatively, to avoid being accused of using state aid to pay out, ING/AEG could issue new stock to make the payments. Rather that (and hurt the common stock owners a bit) than defer them and risk further downgrades.


    PS 1: I see that my 'name' appeared as an idiotic long string. I have now added a readable alias to my yahoo open ID – hope it works.

    PS 2: My English isn't that of the average Dutchman. I have worked for decades with an international company where English is used very often, many years as a text editor of scientific articles written in English. (Since two years enjoying early retirement, living off my capital, almost 40% of which consists of ING perpetuals II.)

  5. DutchPerplex: I think that the emphasis has to be on paragraph 26 rather than the footnotes. Merely announcing the policy will cause the deleterious results which the EC professes to comprehend in the footnotes.

    Of your two Dutch firms, I would view Aegon to be in better shape than ING to avoid a deferral for a number of reasons. ING is into state aid much deeper than Aegon. The amount of the aid is higher at 10 billion Euros vs. 3 billion for Aegon, but ING also did a subsequent arrangement where the Dutch government guaranteed some Alt-A mortgage loans, called liar loans in the U.S. That is, the borrower states their income and the mortgage originator says I believe you. Moreover, Aegon is further along in paying the State back. And the argument that AEG has already triggered a mandatory payment event until March 2010 is a good one, due to its payment on a Junior Security in May 2009 (plus the argument for a 4 quarter mandatory payment linked to buying any junior securities which AEG said it intends to do in Dec)

    A lot may depend on the earnings for the next quarter. A good recovery in profits would alleviate some of the pressure for deferral.

    I do not see a strong connection myself between the burden sharing policy, where junior bond holders have payments deferred even when the firm has the ability to pay and is otherwise solvent, and the EC policy of promoting fair competition by looking hard at state aid. I do not see the connection between the fair competition goal and paragraph 26. If there was some concern that state aid in the extraordinary circumstances of last Fall was too generous, then dictate changes in that aid package. But the terms were not too generous. They would not distort competition. After all 8.5% is not a low rate, and ING has to pay a 50% premium to buy back the State's shares. In short, it was not state aid that would distort competition under the dire circumstances from last year.

    Thus, the EC policy aimed squarely at junior bond holders is more of a penalty than an implementation of any policy objective in my view.

    In the U.S., the source of the problems, there was never an official burden sharing policy for debt holders, let alone an attempt to implement one, and the EC has already done both ( e.g. KBC & Allied Irish). Even the disasters like Fannie and Citigroup have kept paying interest on their bonds, even the most junior ones. The intervention of the EC into a boardroom type of decision based on what I view as a primarily political decision, with at best a tenuous connection- if any- to any EC policy objective, makes all hybrid securities less desirable for investors around the world. For me, I have said many times in my blog that I had an unfavorable view of the hybrids due to the lack of a promise to every pay the principal back, and then they have these liberal deferral provisions with no maximum time limit on deferral. The U.S. Junior bonds will typically put a maximum of five years on a deferral.

    There is an alternative payment mechanism in the Aegon prospectuses where AEG would sell common stock to pay a deferred dividend. The Fitch analysis said that the EC might look more favorably on using that method to make a payment rather than using cash on hand.