Icelandic Bank Reaches Extension on $2 Billion in Bonds

Landsbankinn hf agreed with LBI hf, the creditors of one of Iceland’s failed banks, on extending the maturity of 226 billion kronur ($2 billion) in bonds, a step toward clearing one of the biggest hurdles to lifting the island’s 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 yesterday in a statement.

The bonds that are part of the deal represent about 29 percent of the $7.2 billion that’s being blocked by capital controls from leaving the $16 billion economy. The island imposed controls in 2008 to protect the krona after the collapse of its three largest banks sent the currency into a tailspin and the nation into its worst recession in six decades.

“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 a statement. This is a “significant step in the development of both the Icelandic economy and Landsbankinn,” he said.

Finance Minister Bjarni Benediktsson said that the government hasn’t been directly involved in the talks on the bonds and will need time to evaluate the deal.

Conflicting Interests

“Each and every step needs to be a step in the right direction,” he said in an interview yesterday. “In this case we have on the one hand bonds that are easing pressure of the currency and on the other hand we would be letting payments out of the economy, which otherwise would be behind the capital controls. There are conflicting interests here that need to be thoroughly scrutinized.”

Landsbankinn, the Atlantic island’s largest bank, was created by the government from the remnants of Landsbanki Islands hf, which failed in 2008. A year later, a committee of creditors took 18.67 percent of Landsbankinn and was compensated for the rest with 260 billion kronur in foreign-currency linked bonds. The government in 2013 bought out the rest when it issued a 92 billion-krona bond.

The parties 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.

Exit Warning

Landsbankinn said it also has an option to make prepayments of the bonds without any additional costs.

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. 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.

Central bank spokesman Stefan Stefansson said yesterday that the governor wasn’t immediately available to comment on the accord.

(Updates with comment from finance minister starting in fifth paragraph.)
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