Landsbankinn Reaches Accord on Biggest Iceland Krona Hurdle

Landsbankinn hf reached an agreement with LBI hf, which is winding up one of Iceland’s failed lenders, on extending the maturity of 226 billion kronur ($2 billion) in bonds, potentially clearing one of the biggest hurdles to lifting capital controls.

Under the accord, which is contingent on LBI obtaining “certain exemptions from the capital controls,” the final maturity will be lengthened to October 2026 from October 2018, the Reykjavik-based bank said in a statement.

Landsbankinn, the north Atlantic island’s largest bank, was created by the government from the remnants of Landsbanki Islands hf, which failed in 2008 along with the country’s other two big banks. The bonds being extended represent about 29 percent of the $7.2 billion that’s being blocked by capital controls from leaving the $16 billion economy.

“The agreement will significantly improve Iceland’s balance of payments and pave the way for easing of the capital controls,” Chief Executive Officer Steinthor Palsson said in the statement. “We therefore consider this to be a significant step in the development of both the Icelandic economy and Landsbankinn.”

The parties also agreed that the interest rate on the bonds will remain unchanged at 2.9 percentage points over the London interbank offered rate through October 2018, after which it will rise to 3.5 percentage points through 2020. After 2020, the margin will rise to 4.05 percentage points over Libor.

Government Takeover

Landsbankinn was created after Landsbanki Islands was unable to secure short-term funding and collapsed. A year later, a committee representing creditors took over 18.67 percent and was compensated for the remainder with the 260 billion-kronur foreign-currency linked bonds. The government retained the rest of the new bank’s shares in 2013 when it bought out LBI’s creditors for 92 billion kronur. The government controls 97.9 percent, while Landsbankinn’s employees own 2.1 percent.

The central bank warned last month that the current account surplus “won’t cover” foreign payments in “coming years,” saying that krona assets held offshore and deposit money in winding-up proceedings must be reduced before the controls can be lifted. Central bank Governor Mar Gudmundsson then warned Landsbankinn’s creditors that failure to reach an agreement could mean that Iceland would freeze their assets by not allowing them “to exit the country,” he said.

To contact the reporter on this story: Omar R. Valdimarsson in Reykjavik at valdimarsson@bloomberg.net

To contact the editors responsible for this story: Jonas Bergman at jbergman@bloomberg.net Jim Silver

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