Dexia’s 11.6 Billion-Euro Loss in Breakup Wipes Out Equity
Dexia SA (DEXB), the lender being broken up after losing access to short-term funding, said disposal losses, additional writedowns on Greek bonds and a slide in the value of other government debt depleted shareholders’ equity.
The 2011 record loss of 11.6 billion euros ($15.4 billion) compares with profit of 723 million euros a year earlier, the bank, based in Brussels and Paris, said today in a statement. Dexia’s own funds dropped to a negative 2.02 billion euros from 1.13 billion euros at the end of September.
“Spreads tightening in the first quarter resulted in positive gains, so overall net equity is at minus 1.2 billion euros currently,” Benoit Petrarque, an analyst at Kepler Capital Markets in Amsterdam, wrote in an investor note. “The stock is still uninvestable.”
Dexia was clinging to 18.7 billion euros of emergency loans from central banks at the end of last year and tapped 22 billion euros of temporary state guarantees to make up for a loss of unsecured funding and deposits. The lender said its future depends on support from Belgium, France and Luxembourg as well as European Union approval of a restructuring plan involving as much as 90 billion euros of state guarantees.
Dexia declined 2 cents, or 6.5 percent, to 28.7 cents at the 5:40 p.m. close of trading on Euronext Brussels. That’s the biggest drop in two months, trimming the bank’s market value to less than 560 million euros. The shares have lost almost 91 percent in the past 12 months.
1.5 Trillion Euros
The group remains an important institution for the stability of the European financial system, given the size of the balance sheet and interest-rate swap contracts with a nominal value of 1.5 trillion euros, Chief Executive Officer Pierre Mariani told reporters in Paris today.
There’s no reason why the European Commission, the EU’s antitrust regulator, should apply its usual rules for setting the cost of state guarantees because Dexia won’t have significant commercial operations left in a number of countries following the breakup, according to Mariani.
The lender’s residual assets will generate an interest margin of 30 basis points to 40 basis points, which gives a good idea of Dexia’s financial equilibrium, he said. Dexia took almost 20 billion euros of three-year loans from the European Central Bank on Dec. 21 and may take more next week, Chief Financial Officer Philippe Rucheton said.
‘Going Concern’
“The new restructuring plan still needs to be drawn up and there’s no final agreement between the Belgian, French and Luxembourg states to grant guarantees on 90 billion euros of funding,” said Dirk Peeters, an analyst at KBC Securities NV in Brussels, who recommends investors to reduce their Dexia holdings. “This leaves several pre-requisites not yet met to allow Dexia to continue operating on a going concern basis.”
The cost of insuring Dexia Credit Local SA’s senior debt for five years using credit-default swaps decreased 17 basis points to 675 basis points as of 4:30 p.m. in London, according to CMA prices. A basis point on a contract protecting 10 million euros of debt for five years is equivalent to 1,000 euros a year.
Most Belgian government bonds fell, pushing the yield on the benchmark 10-year security due in March 2022 to 3.67 percent at 5:40 p.m. in Brussels, a three-week high. The extra yield investors demand to hold the bonds of the country that agreed to take a 60.5 percent share of the Dexia guarantees instead of German debt of similar maturity widened to 179 basis points.
‘Too Uncertain’
Dexia’s record shortfall included a 4.05 billion-euro loss on the sale of its Belgian bank unit to the country’s government and a 984 million-euro loss on the divestiture of Dexia Municipal Agency, the unit that sells covered bonds to finance French municipal lending.
Dexia said its core Tier 1 ratio, a measure of regulatory capital that doesn’t include paper losses on assets held for sale, would rise to 7.3 percent from 6.4 percent when excluding the 110 billion euros of assets still earmarked for disposal.
Those assets include the bank unit in Luxembourg, Municipal Agency, Dexia Asset Management and the 50 percent stake in the custody venture with Royal Bank of Canada. They exclude Istanbul-based Denizbank AS (DENIZ) as Dexia said the outcome of the planned sale “remains too uncertain.”
Writedowns on Greek sovereign debt totaled 3.61 billion euros last year, including 1.25 billion euros of impairments taken by its former Belgian bank unit before it was sold on Oct. 20. In addition, Dexia wrote down an additional 1.01 billion euros on derivative contracts tied to the Greek debt.
Dexia said it won’t pay a dividend or coupons on hybrid debt, unless it’s legally obliged to pay interest on the securities.
To contact the reporter on this story: John Martens in Brussels at jmartens1@bloomberg.net
To contact the editor responsible for this story: Jerrold Colten at jcolten@bloomberg.net
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