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Dexia Posts 2.87 Billion-Euro Loss, Repays Emergency Loans

Dexia SA, the bank being wound down after two bailouts, reported a 2.87 billion-euro ($3.8 billion) loss as it sold most of its remaining lending units and funding costs exceeded interest income.

The 2012 net loss, which followed a record shortfall of 11.6 billion euros a year earlier, included 1.61 billion euros of divestment losses, the Brussels-based company said today in a statement. Dexia also paid almost 1 billion euros in fees for government funding backstops and interest on emergency loans from central banks, which have been repaid in the meantime.

The dismantlement forced Dexia into nearly complete government ownership as Belgium and France bought 5.5 billion euros of preferred stock in December to replenish the bank’s capital. While the second taxpayer-funded rescue in four years almost wiped out existing shareholders, it should enable Chief Executive Officer Karel De Boeck to restore market confidence in Dexia’s ability to honor its debt, reduce borrowing costs and minimize losses in winding down what European Union Competition Commissioner Joaquin Almunia called “the largest bad bank in the EU.”

“The best thing for us to happen is an increase in long-term interest rates reducing the cash collateral we have to put up,” De Boeck told reporters in Brussels today. “So you can see that the interests of Dexia and its guarantor states are not necessarily aligned as this would drive up their borrowing costs.”

Cash Collateral

The bank’s borrowing needs are sensitive to changes in long-term interest rates, as every 0.1 percentage-point decline in the 10-year yield requires an extra 1 billion euros of cash collateral to shield its counterparties in interest-rate swap contracts from losses.

Dexia had a net liability, prior to collateral, of about 30 billion euros on its derivative contracts at the end of last year. It also has about 28 billion euros of assets pledged with the Banque de France, in return for access to emergency loans, according to De Boeck.

While Dexia plans to carry most of its residual assets to maturity, De Boeck told Belgian lawmakers on Nov. 27 that the bank won’t be profitable before 2018. Its core Tier 1 ratio improved to 19.7 percent because of the bailout funds, up from 8.5 percent on Sept. 30.

That safety margin is less comfortable than it may look because Basel III capital rules would inflate risk-weighted assets by about 16 billion euros from 55.3 billion euros on Dec. 31 under the current rules, De Boeck said. He forecast a loss of about 950 million euros this year.

Basel III

Dexia also remains exposed to Europe’s sovereign-debt crisis, with a maximum credit risk of almost 61 billion euros in Italy and Spain, or about 5.5 times the bank’s Tier 1 capital as of Dec. 31. About 9 percent of its 66 billion-euro residual bond portfolio is rated non-investment grade.

The bank plans to issue about 25 billion euros of short-term debt and an additional 6 billion euros of long-term debt this year, De Boeck said. Dexia will seek to replace repurchase agreements with the European Central Bank with commercial repo funding, he said.

The Brussels-based bank and its French subsidiary Dexia Credit Local won EU approval in December for as much as 85 billion euros of government funding guarantees at a reduced cost of five basis points annually. A basis point in a hundredth of a percentage point.

State Guarantees

It has already tapped 31.5 billion euros of those guarantees since the agreement took effect on Jan. 24, in addition to 20.8 billion euros of temporary guarantees rolled over into the new agreement, according to data compiled by the Belgian central bank. Dexia also has 13.8 billion euros left outstanding under an earlier guarantee agreement associated with its first government bailout in 2008.

Dexia Credit Local’s guaranteed medium-term notes have a AA rating at Standard & Poor’s, equivalent to Belgium’s credit score and six steps above DCL’s own long-term credit rating of BBB. Moody’s Investors Service assigned an Aa3 rating to the guaranteed debt securities. DCL’s deposit certificates, which account for the bulk of Dexia’s guaranteed debt, have the highest short-term credit scores at both Moody’s and S&P.

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