ABN Amro’s dodgy spin-off readiness
Yesterday the Dutch government announced that it asked ABN Amro to prepare for re-floating on the stock market. The Dutch bank was nationalized in 2008 after the collapse of Fortis. With EU requirements on State support for ABN Amro expiring next year, the bank could be freed from the State as soon as next year.
According to the Dutch government, ABN Amro is ready to be spun-off.
I doubt the readiness. The Dutch government forgot to take a look at the rules on regulatory capital: spun-off ABN Amro will likely not comply with Basel III and CRR IV rules on the eligibility of regulatory capital. This oversight will create non-trivial regulatory problems of the type that we have seen in the recent past.
Here is why.
Firstly, some of the shares will not be directly issued to the ultimate investor. A middle-man foundation will hold preferential shares of ABN Amro, or it will be granted the right to acquire preferential shares of ABN Amro. The use of a middle-man foundation that holds shares and issues non-voting certificates to the ultimate investors to finance the shares is really not what Basel III and CRR IV had in mind regarding the requirement of direct issuance of capital securities. Article 28 of CRR IV on securities that count towards regulatory capital reads: “1. Capital instruments shall qualify as Common Equity Tier 1 instruments only if all the following conditions are met: (a) the instruments are issued directly by the institution … (b) …” This rule disqualifies the preferential securities for regulatory capital purposes.
Secondly is the ineffective Poison Pill option granted to he middle-man foundation. This foundation has the right to buy itself a majority holding into ABN Amro. Once exercised, this option will lead to the following issues.
- The middle-man foundation will become majority owner of ABN Amro and thus automatically becomes a full-blown bank. This entails being subjected to bank supervision and to bank capital rules of CRR IV. For example, Article 28.1(b) of CRR IV requires capital securities to be paid up in full. This rule will force the former foundation to fund the purchase of preferential shares by issuing securities that behave like ordinary shares. How will these securities co-exist with the non-voting certificates? How will these securities co-exist with the preferential shares issued by ABN Amro? Will there be appetite to invest in these securities?
- ABN Amro will become a subsidiary of the foundation that turned into its parent holding company. Existing shareholders will become minority shareholders of this subsidiary. The minority shareholders will require compensation for being diluted and their loss of voting rights. The required compensation may be in the form of higher dividend payments. Consequently, the majority owner will be reluctant to invest in ABN Amro, because any invested money will leak to the minority shareholders.
- The majority owner and parent holding company, now bank, will see a significant drop of its regulatory capital. This is because Basel III and CRD IV limit the recognition of minority shareholdings as regulatory capital, see Article 81 to 88 of CRD IV. The new bank holding company will therefore probably need to recapitalize, but given the prior point this is going to be difficult.
The Dutch government can save a lot of trouble to let go of ABN Amro completely. The current plan to spin-off this bank is an accident waiting to happen, and bank accidents tend to linger on for years.
Besides, the Dutch government should rethink its policies regarding the arcane middle-man foundations, as they hurt investors and foster poor governance.