The scenarios regarding the break-up of the ( EUR, 0,00%) Group are starting to take shape.
The Belgian Federal Government is in favour of a scenario where the Belgain retail bank is nationalized whereas the other operating entities are sold. This would leave investors with an investment in the run-off book with c. € 21bn sovereign risk exposure and also additional exposure to Italy and Spain via Crediop and Sabadell. It implies that is being transformed into a fixed income hedge fund.
The Belgian reference shareholders can agree with this scenario with one big exception: they would like to see a spin-off of the Belgian retail bank towards the shareholders. This would leave them with an investment in a solid bank with a viable business model. They have some leverage to use on the negotiations. The Flemish region government has granted guarantees to Holding Communal (Dexia’s 14.3% shareholder) of € 450m to cover for these loans (mainly from Dexia), cover that is to be raised to € 1bn. If the Federal government wants to pursue its own scenario, than the Flemish regional government could lift that guarantee. This would trigger a default of Holding Communal (and potentially also Arco, 13.7% shareholder) and leave retail bank with a c. € 1.3bn claim on Holding Communal only covered by a collateral of shares.
Any acquirer of retail bank, be it the Federal government or an external acquirer would potentially incur a € 0.5 –1.0bn loan loss on Holding Communal.
It is obvious that at this stage, it is virtually impossible to assess the valuation of the Group since we do not know what shape the group will take. A board meeting is to be held on Saturday. Meanwhile the shares will remain suspended until Monday, October 10.
We maintain our Hold rating and € 2.0 target price which could change materially pending the outcome of the negotiations and the decisions to be taken in the coming days.