Background to ING’s State aid arrangement with the Dutch Government
Background to ING’s State aid arrangement with the Dutch Government
What has happened today, Friday 13 May, 2011?
ING today repurchased EUR 2 billion core Tier 1 securities from the Dutch State, in effect repaying EUR 2 billion of State aid, granted to ING in 2008. In addition, ING paid a 50% repurchase premium, bringing the total payment to EUR 3 billion.
What is the background to the State aid facility from the Dutch government?
In the midst of the financial crisis in October 2008, ING reached an agreement with the Dutch Government to strengthen its capital. ING received a capital injection of EUR 10 billion and issued core Tier 1 securities worth EUR 10 billion to the Dutch State.
In October 2009, ING and the European Commission (EC) agreed upon a “restructuring plan” which was required of Europe-based financial institutions that received aid from their governments. This plan included the proposed separation of Bank and Insurance/IM. The plan also provided for an early repayment of EUR 5 billion of State aid, under changed terms which included a reduction in the repayment premium. ING completed the EUR 5 billion repayment in December 2009, and paid an extra EUR 606 million in coupon payments and repurchase premiums. CEO of ING Jan Hommen said at the time that ING appreciated the ongoing support from the Dutch State, but the company wanted to repay the government as soon as it was financially responsible to do so.
The EUR 2 billion repayment announced today is at a 50% premium (the original terms agreed upon with the Dutch government in October 2008). This brings the total payment to EUR 3 billion, which ING is funding from retained earnings due to the strong recovery of its banking business in 2010.
How much has ING paid back so far?
ING has now repaid EUR 7 billion of the original EUR 10 billion; a payment of EUR 5 billion in December 2009 and the payment of EUR 2 billion announced today. When coupon payments (in effect, interest payments) and payback premiums are added, ING has repaid so far a total of EUR 9 billion to the Dutch state.
Why pay a 50% repurchase premium?
When the arrangement was originally negotiated, ING and the Dutch State agreed on an acceptable rate of return to the government for the term of the capital injection. The repurchase premium is therefore a part of that return, and is averaged out over the term of the capital injection to achieve the required rate of return. The average return on the EUR 7 billion paid back so far (which includes today’s payment) is 17%.
When will the next repayment be made?
Provided that strong capital generation continues, ING intends to repurchase the remaining EUR 3 billion core Tier 1 securities from retained earnings ultimately by May 2012, on terms that are acceptable to all stakeholders. This is conditional on there being no material changes regarding ING’s capital requirements and no material changes in ING’s outlook on external market circumstances.
Why is ING repaying the Dutch State in instalments rather than all at once?
Basically, it gives the company more time to generate additional capital from earnings to repay the remaining EUR 3 billion.
How does this repayment effect ING’s capital position?
The strong capital generation of ING Bank in 2010 has continued into this year, resulting in a core Tier 1 ratio of 10% at the end of the first quarter of 2011. Today’s payment to the State reduces this ratio by approximately 95 basis points, resulting in a core Tier 1 ratio of 9.1% on a pro-forma basis.