KBC Bank has announced:
tender offers in certain countries in Europe and, in respect of one security, in the United States of America to repurchase four series of outstanding hybrid Tier-1 securities with a total nominal value of approximately €1.6 billion. The securities will be purchased at 70% of their face value.
By doing so under current market conditions, KBC Bank offers bondholders an opportunity to exit by paying a premium above the market price. At the same time, KBC Bank will generate a value gain when buying back at a discounted price compared to the nominal value of the securities, which further enhances the quality of its core capital position. If all outstanding securities would be bought back, the after tax value gain would be approx. 0.2 billion euros while the impact on the core Tier-1 ratio, banking would be estimated at +0.25%.
In the past, KBC has issued several hybrid securities that were qualified as regulatory Tier-1 bank capital. Such securities are ‘hybrid’ securities that have both equity and debt features. In general terms, they pay an interest coupon, but have no final maturity and rank junior to other bonds upon bankruptcy.
KBC wishes to reiterate its stance of refraining from exercising its call options on hybrid Tier-1 securities for the remainder of the year.
The tender offers cover the following securities and are being made solely to the relevant holders of such securities:
- EUR 280 million hybrid securities issued by KBC Bank Funding Trust II;
- USD 600 million hybrid securities issued by KBC Bank Funding Trust III;
- EUR 300 million hybrid securities issued by KBC Bank Funding Trust IV;
- GBP 525 million hybrid securities issued by KBC Bank.
The last of these recently had its coupon suspended:
Having issued core capital securities to the State in order to strengthen its solvency level, KBC’s company restructuring plan needs to gain clearance from the European Commission. On 6 August, KBC communicated that KBC was advised by the European Commission to refrain, until the end of the year, from payment of “discretionary coupons” on its perpetual subordinated hybrid Tier-1 securities.
- The restriction is expected to impact the directly issued perpetual debt securities issued by KBC Bank in a total amount of 525 million sterling (in 2003, 2004 and 2007).
- For the KBC Bank funding Trust II 280 million euros 1999 issue, coupon payments in the second half of 2009 remain uncertain as they are subject to ongoing discussions with the European Commission.
- For the other hybrid securities, coupon payments in the second half of 2009 are considered to be non-optional and will be paid.
…
What makes the coupon payment for the KBC Bank 525 millions sterling issue “discretionary”?Pursuant to conditions 4(i) (“deferred coupons”) and 5(a) (“deferral notice”) of the offering memorandum, and assuming no “net asset deficiency event” occurs (as defined in the prospectus), KBC Bank NV may in its sole discretion defer the payment of interest unless such interest would or would become mandatorily due.
Pursuant to conditions 5(b) (“payment of deferred coupon”) and 6(b) (“mandatory coupons”), interest would be mandatorily due if KBC Group NV or KBC Bank NV were to pay any dividend on or redeem any junior securities or parity Securities. This would, for example, be the case if any dividend is declared on the ordinary shares of KBC Group, which fall under the definition of junior securities. Currently, there are no parity securities (as defined in the prospectus) outstanding.
As at today’s date, KBC does not anticipate to make any payment in respect of any junior securities prior to 19 December 2009. Accordingly, as a consequence of the restrictions imposed by the European Commission, KBC will, absent any such payment, be required to exercise its discretion and withhold the interest payment falling due on 19 December 2009. At this time, it remains unclear if and when KBC will make any payment in respect of junior securities in the course of 2010.
Finally, coupon payments on the sterling hybrid securities do not rank pari passu with coupon payments to holders of other KBC hybrid securities (see condition 3(a) (“Status of the securities”)). Therefore, coupon payments to holders of other KBC hybrid securities in 2009 (whether in the first or second half of the year) do not trigger a coupon payment to the holders of the sterling hybrid securities.
I haven’t drawn any diagrams of the KBC’s capital structure, but it sounds pretty intricate!