Monday, September 7, 2009

ING Moving Closer to Raising Funds by Selling Private Asset Management Business/Kraft/ TimberWest

1. ING Moving Closer to Selling Private Asset Management Business in Asia and Switzerland: The WSJ.com reported that ING received four bids for its Asian private asset management business, and three for the part of that business in Switzerland, that may raise as much as 2 billion dollars. The Journal noted that those funds would help ING pay back the Dutch government. Assuming ING is allowed to pay back the Dutch government, this would require the purchase of Junior Securities issued to the Dutch government in October 2008. The agreement between ING and its host government can be found at exv2w10. Buying a Junior Security triggers a Mandatory Payment Event for the ING hybrids. Pay Back Dutch Government=Buying Junior Security=Mandatory Payment Event/Bond Investing Process ING HYBRID DEFERRAL CONUNDRUM Assume, hypothetically, that the EC asks ING to defer its December 2009 quarterly hybrid payments. ING then closes a deal on selling its private asset management business in January 2010, and uses all or part of the proceeds to buy back some of those Junior Securities issued to the Dutch state shortly after receiving those funds. What exactly would the EC accomplish with its request for deferral? Why would it request that ING postpone paying the Dutch state back into order to cause a delay in the payment of cumulative dividends on the hybrids? The purchase of the Dutch government's Junior Security would require payment of up to four deferred coupons and a mandatory payment of the next four (assuming no subsequent valid Mandatory Deferral). The EC would have gained one quarter deferral of hybrid payments while causing irreparable damage to ING. Would that be beyond the pale (Beyond the pale) of idiocy? Yes, without a doubt, though that is not to say it will not happen.

My suggestion for others is to examine how state aid was provided to the banking institution that you are interested in, and how the institution has to pay the government back. Did the institution issue shares to the government Junior to the securities that you own which allow for deferral of coupon payments as long as certain preconditions are met? Then, you would examine the prospectus for what is called Mandatory Payment Events. These provisions require payments when any payment is made on a Junior Security or any purchase of a Junior Security with a few exceptions. Another potential avenue is whether some parity securities require payment and whether a payment on any parity security then triggers a mandatory payment event on all other parity securities.

2. Kraft (owned): I bought a 100 shares of Kraft in March at $22.26. /BOUGHT Kraft & NESTLE/ Prior to today, I was inclined to hold the shares for the dividend yield, which was over 5% at my cost. The offer made by Kraft to acquire Cadbury at a premium price may cause me to reevaluate holding Kraft. Finance The offer is in cash and stock and represents a 42% premium to Cadbury's closing price last Friday. Cadbury has already rejected the offer. Kraft responded that it will continue to seek a deal that the Cadbury's Board could support, meaning a higher price could be reasonably expected from Kraft now. Reuters

3. TimberWest (owned-Lottery Ticket): I did not note previously that TimberWest has retained BMO Capital to advise it on the possible sell of 46,500 acres of timberland on Vancouver Island, containing timber inventory of 4 million cubic meters. TMWEF My position is very small: LB Goes Nuts: Buys 50 TMWEF at $3.24 . I have no idea what that may be worth. I did a quick calculation with a $2,000 per acre assumption and came up 93 million. The more interesting question is why sell now?


4. "Write me a letter — and I'm serious about this one — write me a letter about ways you can help us achieve our goals. I think you know the address." This is a quote from a U.S. President's address to the nation's students. Public Papers Was that President trying to indoctrinate America's children in his socialist agenda as claimed by the Florida Republican Party chair, Jim Greer. Or was he engaged in some Orwellian conspiracy by asking the children to write him a letter? (Orwellian? Maybe, I need to brush up on my Orwell reading or maybe those using that phrase need to read Orwell at least once. Or if read, maybe they need to read it again and try to understand it this time) Yes, the True Believers do not have to be consistent or even to make sense, as they worked themselves up into a lather about Obama's plan to have the students write him a letter about how they could help the President. What is the problem with that? I do not have a clue, except to note that Obama has dropped that idea due to the now standard loud and vehement "conservative" protest. The problem seems to me to be that Obama would be asking the students to write the letter rather than President Daddy Bush who is quoted in the blue highlight above, when he made a similar suggestion in his nationwide broadcast to the school children. As I said, consistency is not one of the rituals prized by the TBs.

2 comments:

  1. Thanks for your continuing careful attention to ING in particular and banks in general facing possible requests from the EC to defer their coupon or dividend payments. I want comment on your remark that ING might pack back the Dutch government aid. You know (because you mentioned it yourself on 25 August) that ING will suffer a 'fine' of 50% if they do so early, i.e. before November 2011. That makes it a very unlikely event, paying 5 billion euro extra just to get the government and the EC off their back. In fact the new CEO Hommen has alluded to wanting to renegotiate the conditions (meaning of course lowering the fine), pointing to the deal Aegon made with much more favorable conditions. That is why Aegon issued new common stock, planning to pay back part of their aid (1 billion euro) before December 1st and make a profit of 370 million, i.e. not a fine but a profit.

    I agree with your assessment of forcing ING to defer payment for one quarter. Knowing Mrs Kroes since she was Minister of Infrastructure here in Holland in the eighties, I can say she is not idiot (no matter what many, especially in the US may think, see e.g. http://messages.finance.yahoo.com/Stocks_(A_to_Z)/Stocks_I/threadview?m=te&bn=9512&tid=8710&mid=8710&tof=8&frt=1#8710 ), and the likelihood of that scenario is minuscule. But we shall see. I am trying to find when we may expect the EC decision and someone on the interesting Motley fool forum you came up with mentioned the end of this month. So just a couple of more weeks of uncertainty.

    ReplyDelete
  2. Dutchperlex: Assuming no renegotiation of the terms, it is my understanding that ING will have to pay 15 EUROs to redeem the 10 Euro face value security issued to the Dutch state. ING could wait until after November 12, 2011 to convert those shares on a one for one basis into ordinary common shares. ING closed today at 10.84 Euros. I would reasonably anticipate that ING will recover and will be trading at more than 15 EUROs by 11/21/2011 provided a continued improvement in the world's economy. So, it could easily be more dilutive to common shareholders for ING to exercise that conversion option after 11/2011 than to buy shares at 15 EUROs starting next year. In other words, it could easily cost them more by allowing conversion of the Dutch government shares 1 for 1 when the price of the ING shares are over 15 Euros.

    Also, the shares issued to the Dutch government come with a high dividend, the greater of .85 Euros on that 10 Euro par value security or 120% of the ordinary dividend paid to the common shareholders. Sure, this does not have to paid after that first payment in May 2009, unless a dividend is declared on the common. However, I would venture a guess that common shareholders expect a dividend in 2010 with improving conditions. So, if things do continue to improve into 2010, ING may want to get rid of the Dutch state to avoid paying that rich dividend before declaring a restart on the common dividend.

    Also, I have read several comments by the CEO where he stated that ING want to pay back the government as soon as possible, which suggests a buy back of those shares rather than a conversion. The most recent statement was at the time of ING's earnings release on 8/13 as reported in the WSJ:
    "ING wants to repay the state support as soon as possible, Mr. Hommen said, adding that economic uncertainty made it impossible to say when the payment could be made. He said the priority was to keep ING viable."

    I would view the situation as fluid. I doubt that anything will happen to pay back the government in 2009, unless the agreement is modified to allow an early prepayment without penalty. ING is in the process of selling several units. A public offering of stock is another possibility as conditions improve. Merrill Lynch suggested ING needs to wait for the price to rise above 13.6 Euros to make a payoff work with proceeds from a stock float. So, I would rate the odds substantially higher than you that the Dutch state will be paid back in 2010, provided conditions continue to improve. If that occurs, ING would have to pay up to 4 deferred dividends on the hybrids, so why bother deferring them in the first place which is my point.

    I am curious why ING did not negotiate a similar provision to the Aegon arrangement that allowed for 1 billion Euro prepayment this year without a penalty. http://blogs.reuters.com/commentaries/2009/08/13/aegon-raises-money-to-repay-the-taxpayer/ It would seem that a similar arrangement that AEGON received on an early prepayment should be worked out with the government, and made proportional for ING.

    As to Mrs Kroes, I did not even know she was a woman. I have no opinion on her intelligence or business savy. I would have to say that the burden sharing policy itself is counter productive and idiotic, particularly as applied retroactively now to the state aid given last year. Time will tell, but I believe that the EC has already raised the cost of capital to the European firms like ING and Aegon for years to come with the mere enunciation of the policy and actual attempts to implement it with at least 2 institutions.

    ReplyDelete