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ING Stymies Investors Seeking Bond Payment: Corporate Finance

November 08, 2012

ING Stymies Investors Seeking Bond Payment

A giant poster hides construction work taking place on the Belgium headquarters of ING Groep NV's building in Brussels. Photographer: Jock Fistick/Bloomberg

ING Groep NV’s junior bondholders are having their patience tested by the biggest Dutch financial services company’s attempts to escape restrictions imposed after a bailout.

A European Commission veto that blocks repayment of some ING securities expires Nov. 18, enabling the bank to redeem at face value one month later some 1 billion euros ($1.3 billion) of 0.925 percent subordinated floating notes due March 2016. The securities are quoted at 95 cents on the euro, signaling redemption won’t happen this year

“It used to be taken for granted these sorts of bonds would be called but that’s not at all clear anymore,” said Simon Adamson, an analyst at independent debt research firm CreditSights Inc. in London. “It’s such a low-coupon bond they may take the view that they may as well leave it outstanding.”

ING Chief Executive Officer Jan Hommen pledged to cut 2,350 jobs this week as the Amsterdam-based lender presses ahead on talks with the Commission to revise bailout conditions, including forced asset sales and curbs on competition. The bank foundered in 2008 when subprime mortgage assets held at its U.S. unit plunged, triggering a 10 billion-euro rescue.

The bank’s 2016 bonds have a yield to maturity of 2.4 percent, Bloomberg generic price data show. If the bank redeems the bonds, that’s commensurate with a yield of more than 54.6 percent to the Dec. 18 call date.

Fortis Bank

Credit investors are signaling that ING is less likely to call its bonds than Fortis Bank SA/NV, a remnant of the Fortis banking group that was broken up in the wake of the credit crisis and is now a unit of BNP Paribas SA.

Fortis’s 800 million euros of Tier 2 floating-rate bonds due 2018 are quoted at 96.95 cents on the euro to yield the equivalent of 1.5 percent to maturity. They yield 12.6 percent to their next call date in February.

Hommen said he couldn’t comment on whether ING plans calling bonds after this month’s deadline when questioned during a conference call to discuss third-quarter results on Nov. 7.

ING is “making good progress in our talks with the European Commission,” Hommen said. “Under the arrangements we have we have to ask the EC for permission to make calls and do repayments. I cannot give you any further answer than this.”

Earnings Drop

The bank posted a 64 percent drop in net income to 609 million euros from 1.69 billion euros a year ago, below the 846 million-euro estimate of nine analysts surveyed by Bloomberg. Profit fell because of losses on hedging contracts protecting capital of its insurance business and a goodwill writedown on a life insurance unit in South Korea it has to sell, ING said.

Standard & Poor’s gives ING Groep NV (INGA), the holding company, a rating of A with a “stable” outlook, and estimates the ratio between capital and assets, or leverage, was about 113 percent in March. Moody’s Investors Service cut it two levels to A3 in June, citing “adverse operating conditions, including the current recession and declining house prices in the Netherlands.”

ING’s core Tier 1 capital adequacy ratio was 12.1 percent at the end of the third quarter, the lender said in its earnings statement, compared with 11.1 percent at the end of June. Sales of holdings including Spanish covered bonds as well as Spanish and Irish residential mortgage-backed securities cut risk- weighted assets by 5 billion euros.

The ratio between the lender’s net debt and shareholders’ equity, a measure of leverage, is about 421 percent, down from 1,147 percent in September 2008, data compiled by Bloomberg show. During the pre-crisis year of 2006, the ratio was at about 530 percent to 630 percent, the data show.

Capital Rules

The bank’s targeting a core Tier 1 ratio of more than 10 percent from 2013, taking into account new capital rules known as Basel III. It’s the only Dutch lender on the Financial Stability Board’s list of systemically important banks published earlier this month, which means it’s subject to a 1 percent capital surcharge on top of requirements from the Basel Committee on Banking Supervision.

Hommen is under orders to shrink ING’s balance sheet by 45 percent and dispose of the bank’s insurance operations by the end of 2013 as part of the conditions imposed under the bailout. The lender agreed earlier this year to sell its Canadian online bank for $3.16 billion and raised about $3 billion by selling shares of U.S. lender Capital One Financial Corp.

The sale of insurance units in Hong Kong, Thailand, Malaysia and a stake in China Merchants Fund should lead to gains of 1.89 billion euros, according to the company.

Investor Confidence

Antoine Colombani, a spokesman for the European Commission, declined to comment on ING’s progress in fulfilling the terms of its restructuring plan.

While ING may not call the 2016 bonds next month, the bank could decide to exercise its option on one of the quarterly call dates after that after prices have risen from as low as 89 cents on June 29, according to Ralf Boeckel, a fund manager at Union Investment in Frankfurt.

“Looking at the price action, market participants seem to estimate a higher call probability on this bond,” said Boeckel, whose firm manages 180 billion euros of assets, including ING’s 2016 bonds. “The market seems to price in a call at one of the next call dates.”

Some of the lender’s divestment plans have been derailed by Europe’s debt crisis, while the Commission is probing whether the Netherlands is making an adequate return on funds provided to ING.

Asset Disposals

“They’ve been disposing of assets for quite some time which has generally boosted capital,” said Paul Smillie, a global banking analyst in Singapore at Threadneedle Asset Management, which oversees about $45 billion of fixed-income securities.

ING has repaid the Dutch government 7 billion euros of the aid plus 2 billion euros in interest and premiums. Full repayment by 2012, Hommen’s original goal, is uncertain because of Europe’s debt crisis and tougher capital requirements.

The bank will make the repayments as quickly as possible, Chief Financial Officer Patrick Flynn said in an interview with Bloomberg Television Nov. 7.

The sooner restrictions are lifted, the sooner the bank can call its bonds, according to Jan Van Parys, who holds ING debt as part of the 87 billion euros of assets he helps oversee at KBC Asset Management SA in Luxembourg.

“We are quite positive on ING,” he said.

To contact the reporters on this story: John Glover in London at johnglover@bloomberg.net; Maud van Gaal in Amsterdam at mvangaal@bloomberg.net

To contact the editor responsible for this story: Paul Armstrong at parmstrong10@bloomberg.net; Frank Connelly at fconnelly@bloomberg.net


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