DEXIA: Birth of a hedge fund – What about valuation?

The Belgian state is acquiring Dexia ( EUR, 0,00%) Banque Belgium and its subsidiaries –except 49% owned Dexia AM – for a total consideration of € 4bn and an earn-out mechanism in favour of Dexia S.A. in the event of a potential resale within 5 years. Based on June 30, 2011 figures it would trigger a c. € 3.8bn loss and reduce risk weighted assets by € 42bn. The negative AFS reserve would be reduced by € 2.2bn. This implies that Dexia Group would see its net equity (€ 6.9bn) decline by c. € 1.6bn.
The Belgian, French and Luxembourg states will jointly guarantee the interbank and bond funding for a period of 10 years raised by Dexia S.A. and its subsidiary Dexia CLF. The burden sharing is split as follows: Belgium 60.5%, France 36.5% and Luxembourg 3%. The ceiling for this refinancing guarantee is maximum € 90bn. The guarantee fee will be communicated as soon as possible (whisper figure: upfront € 270m for Belgium –but not yet confirmed – variable cost “if any” unknown).
Dexia’s CEO has been instructed to enter into negotiations with CDC and Banque Postale to conclude an agreementin relation to the financing of French local authorities, including the backing of Dexia Municipal Agency by CDC. This would reduce Dexia S.A.ST funding requirement by c. € 10bn.
Dexia will continue to negotiate on an exclusive basis (two weeks starting October 10) with a view to the disposal of Dexia BIL (which owns Dexia Investor Services and half of Dexia AM).

At this stage we have many questions left unanswered about: 
 - Potential divestment of CLF and pricing; 
 - Potential sale of Crediop & Sabadell to Dexia S.A. and pricing; 
 - Potential sale Dexia Municipal Agency and pricing; 
 - Potential sale DenizBank and pricing; 
 - Are there / will there be any side-deals with the Belgian reference shareholders (Holding Communal, Arco and Ethias) and what will happen with the € 450 guarantee granted to Holding Communal; 
 - Who will assume the Dexia Banque Belgium credit loss (up to € 1.2bn) if Holding Communal defaults ( contract with Belgian Government provides in an immunization clause for Dexia Group but linked to 2008 capital increase; 
 - What will be the guarantee cost?

Our View:
The (lack of) information currently available does not allow us to assess the risks and the valuation of the fixed income hedge fund that Dexia is to become.

Conclusion:
We do not give a rating or target price given lack of sufficient information.