According to several press sources, Belgium has informed France and the European Commission that the terms of the break-up and rescue of the (0,26 EUR, -1,54%) Group, including the guarantee structure (€ 90bn o/w 60.5% for Belgium), is not feasible and should therefore be renegotiated.
October 8, the Board of Directors and the French and Belgian Government reached an agreement about the break-up of the Group. All operating entities, except Crediop, Sabadell and Kommunalbank Deutschland, are to be divested. This leaves the shareholders with an investment in a fixed income hedge fund. The proceeds of the divestment will be used as a capital buffer to the hedge fund whereas the funding will benefit from French (36.5%) and Belgian (60.5%) state guarantee.
Bank Belgium has been sold to the Belgian government for € 4.0bn including the transfer of c. € 20bn of legacy assets (LPM division) and € 2.2bn of negative AFS reserves. The divestment triggered a € 4.1bn realised loss in 3Q11. The sales agreement provides in an earn-out mechanism in favour of S.A. and an immunisation for credit losses that Bank Belgium could incur on Holding Communal.
Dexia’s CEO has been mandated to negotiate with CDC and Banque Postale to conclude an agreement in relation to the financing of French local authorities, including the acquisition of 70% of Municipal Agency. The deep discount to book value offered which would trigger a € 680m realised loss was justified by CEO Mariani by the fact that Banque Postale and CDC will have to replace the cheap funding received from Banque Belgium (Did they sponsor Dexma?) by more expensive funding for which the bill is passed on to shareholders.
has entered into exclusive negotiations with the Quatari State Holding with the view to the disposal of BIL.
Our View:
Renegotiating the terms of the break-up of Group comes with a bad timing now that France has been informed by Moody’s that its AAA-status is at risk. Should the French be uncompromising, it might put the funding structure and hence the survival of the bond hedge fund is to become, at risk. Dexia’s valuation will also largely depend on further losses that may be realised upon divesting group entities and on how much of the € 7,843m negative AFS reserve is recoverable upon maturity.
Conclusion:
At this stage we are unable to make a proper valuation of the Group and hence set a symbolic target price of € 0.10 with our recommendation that is changed from Hold to Reduce.