I have an immaterial stake in this issue. As I have previously discussed, I own 350 shares of AEB bought in the 4 to 8 range, 100 INZ bought in the 6 to 8 range, and 50 shares of ISF bought at less than 5, and so on. I was caught off guard with a recent buy of 100 shares of IGK. My main reason for discussing this issue has to do with reader interest. And, I needed to decide for myself whether to buy more junior debt securities from European firms after the enunciation of the "burden sharing" policy. I have many other alternatives for my capital, and I do not wish to add to my small positions in those European securities. I believe that the EC has permanently damaged those securities.
To understand my thinking on the subject you have to read all of the posts and the relevant sections of the prospectuses. This post is sort of a summary discussion.
In connection with the bailouts by the Dutch government last Fall, both Aegon and ING issued securities junior to the hybrids. My current view is that the hybrids are bonds, and the securities issued in connection with the bailouts are at the same level as common stock.
So, this is what I would argue if push came to shove and a lot was at stake:
When and if Aegon and/or ING buys any of those Junior Securities, a Mandatory Payment Event under the prospectus occurs and requires payments of deferred dividends and four subsequent dividends. The AEB prospectus clearly provides for the payment of all prior deferred dividends upon the occurrence of the Mandatory Payment Event, whereas the IGK prospectus goes back only for the prior four deferred dividends. Each prospectus has to be individually checked on those points.
Another trigger event would be making any payment to the owners of the Junior Security.
The Mandatory Payment Event occurs even if there was a Mandatory Deferral.
If the Mandatory Deferral Event occurs AFTER the Mandatory Payment Event, then there is an argument that deferral is allowed. I would question whether any deferral suggested, requested or even required under a Hugo Chavez European style "burden sharing" policy would qualify as a Mandatory Deferral Event. Why? Remembering that I am just a solo individual investor who has never been to Europe, and I am writing this missive from a desk located in Brentwood, Tennessee, I just view the Mandatory Deferral Event to be connected with inadequate capitalization, a solvency issue in short.
My posts so far on the subject include the following:
Thanks for your great effort on analyzing the current situation of this securities. I share your opinion on the low likeliness of some of this burden-sharing actions, as they would severly damage the reputation of ING or Aegon.
ReplyDeleteFERRAN: I think that burden sharing for your Dutch companies has already done more harm than any good that it could conceivably do for sure. It will hurt their ability to finance long term. Their credit ratings have already been slashed as a direct consequence of the mere enunciation of this burden sharing policy and its application to the Belgium bank KBC and Allied Irish Bank so far.
ReplyDeleteMy purpose in writing some of the posts on the Mandatory Payment Events is too show those with at lot a stake, mostly institutional investors, that they do have options in the event a deferral takes place. It would not make any sense for Aegon or ING to postpone paying the Dutch government back just to avoid triggering a Mandatory Payment Event so that they could continue deferring a cumulative dividend owed to the hybrid owners for a few quarters. Once they buy back a junior security, which is what they have to do to pay back their government, that triggers the Mandatory Payment event which for ING looks back and forward for 4 quarters. Hopefully, when the EC sees that its burden sharing policy is counter productive and would not even work, they will cease requesting firms to do it.