Now raising intellectual capital
Aegon raises money to repay the taxpayer
The strongest U.S. banks have already shrugged off the TARP, with its tiresome restrictions on executive pay. In Britain, Lloyds Banking Group has toyed with a jumbo capital raising as a way off the hook of the British government’s fiendishly complex asset protection scheme.
In the Netherlands too, the financial sector is looking to shrug off the bonds of state assistance. Dutch insurer Aegon is the latest with a plan to pay back government loans.
However, wriggling out altogether won’t be easy. The Dutch government has structured its rescue operation so that recipients have to pay a hefty tax to get out altogether.
The Dutch state lent Aegon 3 billion euros last October during the worst part of the crisis. When Aegon repays the money it has to pay a 50 percent surcharge, turning 3 billion into 4.5 billion euros. The surcharge doesn’t change whether Aegon keeps the money for one year or 20. And there is no final redemption date on the loan.
This may seem an odd structure as it seems actively to discourage recipients from repaying the money early. But there is some method in The Hague’s madness. Finance is a strategic sector for the Dutch government. It wanted to ensure that financial firms requiring assistance took it for long enough genuinely to repair their balance sheets.
Why is Aegon so keen to repay this perpetual zero coupon capital, one might ask? Well, it is only zero coupon so long as Aegon doesn’t pay its shareholders a dividend. If it does the loan bears interest at 8.5 percent.
So the government has put some grit in Aegon’s shoe. At some point, then shareholders are going to agitate for it to repay the funds, penalty or no penalty, so that they can receive the income for which they hold insurance stocks.
Aegon isn’t yet in a position to liquidate the loan entirely. It needs central bank approval to do so and this probably wouldn’t be forthcoming for the full amount.
But it does want to take advantage of a wrinkle in the agreement. This allows it to repay 1 billion of the 3 billion euros without payment of the 50 percent premium. It is only allowed to take advantage of this if it does so before the end of this year. It will have to pay interest on this tranche, but even so that will only force it to pay 1.13 billion euros — rather than 1.5 billion euros.
The requirement for central bank approval explains why Aegon is raising 1 billion euros through the markets. The authorities can hardly argue that Aegon is denting its solvency ratio, even if it had a solid 3.5 billion euro buffer above the level that it needs to retain an “AA” credit rating as at the half year.
Aegon’s case will be watched closely by its homegrown rival, ING. Jan Hommen, its newish chief executive, said that the bancassurer is reviewing its strategic options with a view to repaying its 10 billion euro loan from the Dutch government.
It also faces an 8.5 percent coupon if it resumes paying dividends. Hommen indicated to Reuters that he would hope that the terms of the loan might be amended. One option could be that ING would offer to repay the state less sooner, rather than more later.
Maybe the government will go for this. But it seems to have structured its rescue programme quite smartly. It has both given recipients assistance on terms that give them some breathing space to restore themselves to health.
But the exit fee is set high in order that both taxpayers feel that they are getting a reasonable whack, and to discourage financial institutions from flipping out of the support cheaply — something that has caused enormous public angst in the United States.
You can read some of Margaret’s latest columns here.