Monday, September 7, 2009

ING Paying the State Back or Converting Shares after 11/2011: Which is Better for ING

I thought that I would elevate a comment, with some slight modifications, that I just made to one of the readers from the Netherlands to the main post section of the blog (See comments to ING Moving Closer to Raising Funds by Selling Private Asset Management Business/Kraft/ TimberWest)

"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 in 2010. 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 wants 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. (see ITEM # 4 Bought 50 PZB at $16.05/Bought 50 PJS at $17.8 in Roth/Case Shiller/Budget Deficits/EC-Permanently Damaged its Banks) 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. Commentaries It would seem that a similar arrangement to what 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."

I would certainly hope that ING's agreement with the Dutch state could be modified to allow a partial prepayment without the 50% premium in 2009, similar to Aegon's agreement with the state. That would clearly be in the best interests of ING. It would seem unreasonable to me for the Dutch state to refuse such a request.

In case anyone forgets, I would add that ING pays back the Dutch state by buying back those Junior Securities issued in October 2008. And that will cause when and if it happens a Mandatory Payment Event for the hybrid securities.

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