Dexia’s Breakup May Make Its Shareholders Losers Holding Little of Value
Dexia SA (DEXB)’s planned breakup to protect its Belgian depositors and its municipal-lending business in France may leave little value for its shareholders.
About 15 years after the French-Belgian bank was created in a merger and after about 100 billion euros ($133 billion) in public guarantees and funds kept the lender afloat in the 2008- 2009 period, France and Belgium are trying to split up its assets in a manner designed to avoid injecting more capital.
Under an option favored by France, Dexia SA may be left holding a “bad bank” with the lender’s worst assets, while Belgium assumes control of operations in that country and state entities in France buy up the French municipal-lending business, two people with knowledge of the plans said. Dexia’s market value has tumbled 42 percent in the past four days on concern shareholders will be the losers in a possible breakup.
“Whether or not this structure would benefit shareholders depends on the prices France and Belgium would pay for their national assets,” said AlphaValue Bank analyst Christophe Nijdam. “One should bear in mind that the two states are judge and jury as they are the majority direct and indirect shareholders of Dexia.”
Belgian entities own 44 percent of Dexia and French state- linked ones hold 26 percent. France may announce details on Dexia’s rescue today, French Finance Minister Francois Baroin told RTL radio yesterday. Dexia today said its board will meet Oct. 8 to discuss the options for the future of the lender.
In the first step toward its dismantling, Dexia today said there’s an investor interested in its profitable retail and private banking unit in Luxembourg. Dexia, which fell 22 percent on Oct. 4, slid as much as 17 percent after Luxembourg Finance Minister Luc Frieden mentioned the possible sale. Trading was suspended until the morning of Oct. 10. The shares have fallen more than 90 percent since the 2008 capital injection.
“It’s hard to tell how much Dexia is worth, but shareholders are ruined, with the core assets in France and Belgium back at their starting blocks,” said Francois Chaulet, who helps manage 250 million euros at Paris’s Montsegur Finance.
On Oct. 4, Belgian Prime Minister Yves Leterme said Dexia is pooling its troubled assets into a “bad bank” with Belgian and French government guarantees. Dexia, which was bailed out by the two governments in 2008, will put its “legacy” division, which held 113 billion euros of assets at the end of June, into the bad bank, Leterme said.
“It’s impossible to have an idea of the final losses” from the troubled assets, said Chaulet. “Sharing this burden is the last touchy balancing act for a bank where management has always been difficult. Since Dexia’s inception, the two nationalities have been competing for executive direction.”
For Dexia shareholders to retain value from owning a bad bank, the total cost of its debt financing and fees for use of the government guarantees will need to be lower than the interest the bad bank collects, said Dirk Peeters, an analyst at KBC Securities NV in Brussels. That’s not the case for Dexia’s legacy division right now, he said.
Peeters reduced his price estimate for the shares to 2 euros from 3.50 euros, saying his valuation can change “materially” pending disclosure of the governments’ measures.
That’s more than double the 90 cent-a-share price estimate of Jean-Pierre Lambert, an analyst at Keefe, Bruyette & Woods in London. He cut his estimate on Oct. 4.
The French-backed plan involves the two governments guaranteeing Dexia’s borrowings before splitting up the lender, said the people, who declined to be identified because the talks are private. Belgium may then assume Dexia’s assets in that country, while France’s state-owned La Banque Postale and Caisse des Depots et Consignations would buy Dexia’s French municipal- lending unit, leaving Dexia as the bad bank, the people said.
That would avoid an immediate recapitalization of the lender, which would then sell its legacy assets over time, the people said. If Dexia transferred its bad assets to a new company, the bank would need more capital because a sale would crystallize what are at the moment paper losses, one of the people said. A final decision is yet to be made and the talks are still fluid, the people said.
“Both the French and the Belgians have a common interest in overcoming this difficult period,” Kris Peeters, the leader of Belgium’s Flemish regional government, said on public broadcaster VRT yesterday. “But we must be vigilant, unite the Belgian shareholders and find solutions that are beneficial for the bank and the group.”
The Flemish region holds a direct stake, having bought 500 million euros of Dexia stock in the bailout three years ago.
“The fair distribution of the burden is a very sensitive and crucial element in the negotiations,” Belgian Prime Minister Leterme said on RTL radio today. “To save Dexia, we need a fair division of responsibility.”
The French-backed plan may force the Belgian government to nationalize Dexia Bank Belgium and shield it from the bad bank, dipping into public coffers even though Finance Minister Didier Reynders said he was looking “not to spend taxpayer’s money on a dossier such as this one.”
The bond market is seeing Belgium as a loser in the Dexia plan. Belgian government bonds slumped for a second day on concern Dexia’s rescue will inflate the country’s debt load. The extra yield investors demand to hold Belgian bonds instead of German equivalents of similar maturity widened 6 basis points to 216, the highest yield difference since Sept. 14.
“The French viewpoint is likely to be pushing for a solution where lending to municipalities in France is preserved,” said AlphaValue’s Nijdam. “The Belgian side doesn’t want to be burdened by the so-called bad portfolio as they consider it a legacy from Dexia’s French operations.”
Dexia’s breakup, three months after it got a clean bill of health in European Union regulators’ stress tests, has transplanted Europe’s banking crisis from the continent’s periphery to its heartland. The Brussels- and Paris-based bank is being rescued after its short-term funding evaporated as Europe’s sovereign debt crisis worsened.
Dexia emerged from the 1996 merger of Credit Local de France SA and Credit Communal de Belgique SA, the biggest municipal lenders in their respective countries. Unlike Credit Local, which relied exclusively on wholesale funding for its lending, the Belgian firm also operated a retail bank in Belgium.
Over the past decade, the Franco-Belgian bank sought to combine with another retail bank in France and elsewhere in Europe to reduce its reliance on wholesale funding. It failed to merge with Italian lender Sanpaolo IMI SpA in 2004.
That dependence on wholesale funding hobbled Dexia as money markets seized up after Lehman Brothers Holdings Inc. collapsed, and the lender turned to emergency funding from central banks. It was one of the largest euro-area users of emergency loans from the Fed, borrowing $58.5 billion as of Dec. 31, 2008, according to data compiled by Bloomberg.
Dexia posted a 4 billion-euro loss for the second quarter, the biggest in its history, after writing down the value of its Greek debt. Once the world’s largest lender to municipalities, it received a 6 billion-euro bailout from Belgium, France and its major shareholders in September 2008.
“The decision to maintain Dexia as it is after the 2008 bailout was not a viable option,” said AlphaValue’s Nijdam. “From day one, the creation of Dexia didn’t work.”