Ongoing stripping of the Dexia Group

Dexia (0,61 EUR, 0,00%) issued a press release with some extra clarifications of the ongoing break-up of the group:
The proceeds of the sale of Dexia Bank Belgium will be principally allocated to the early repayment of loans granted by Dexia Bank Belgium to Dexia S.A. and Dexia Credit Local. The Belgian State will indemnify the Dexia Group against any risk of loss associated to the performance of or other responsibilities arising from outstanding loans granted to Arco, Ethias and Holding Communal.

The negotiations with CDC and Banque Postale will result in the sale of respectively 65% and 5% of Dexia Municipal Agency (DMA), the Société de Crédit Fonciere of the Dexia Group dedicated to the refinancing of loans to local authorities. This will trigger a realised loss of € 680m based on June 30, 2011 figures and will reduce Dexia’s balance sheet by c. € 65bn and the liquidity requirements by c. € 10bn.

Dexia will extend to Dexia Municipal Agency a guarantee with respect to the performance and the legal risks associated to a portfolio of € 10bn of structured loans to French local authorities (the portfolios for which some “litigation” was started?). Dexia will also indemnify against losses in excess of 10bps on all outstanding loans, which represents 10 times more than the losses faced by Dexia Municipal Agency on an historical basis. Dexia would benefit from a counter guarantee from the French State on this same portfolio of structured loans up to 70% of losses over and above € 500m. This counter guarantee is subject to the approval of the European Commission.

The way we understand the “deal” CDC and Banque Postale will start a Greenfield public finance activity in France through a new commercial tool 65% owned by CDC and 35% owned by Banque Postale that will compete with CLF on the Frenchl market. Loans originated by the new entity will be refinanced through DMA (covered bonds) which is being stripped out of CLF. Dexia CLF will de-facto become a local public finance run-off vehicle with some side-activities in insurance (Sofaxis), real estate services (Exterimmo), automobile leasing (Dexia LLD) as well as personal services (Domiserve).

Dexia’s CEO, Mariani has been mandated to continue negotiating about the disposal of Dexia’s 50% stake in RBC Dexia Investor Services (RBC has a pre-emption), Dexia Asset Management and the 99.84% stake in DenizBank.

Our View:
It seems that the divestment process and “cherry picking” of the Dexia Group continues which will eventually lead to the conversion of Dexia Group into a fixed income hedge fund.

Conclusion:
We maintain our Hold rating and € 1 target price.