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Public funding of failing banks in the European Union (LBF vol. 19) 2020/2.6.1.1
2.6.1.1 Funding by new or existing market investors and lenders
mr. M. Louisse-Read, datum 01-06-2020
- Datum
01-06-2020
- Auteur
mr. M. Louisse-Read
- JCDI
JCDI:ADS213693:1
- Vakgebied(en)
Financieel recht / Europees financieel recht
Staatssteun (V)
Voetnoten
Voetnoten
Deutsche Bank, Funding, available on the website of Deutsche Bank: www.db.com.
The Guardian, Deutsche Bank shares slump further as fallout from bad press continues, 23 May 2019. Bloomberg, Five Charts Show the Big Problems for German Banks, 22 May 2019.
Although you can say that the shareholders and creditors can decide not to approve such recapitalisation, they will often not have a real choice. The relevant competent authority will urge the bank to restore its balance sheet in order to avoid any intervention by such authority, including, as an ultimum remedium, the withdrawal of the authorisation of the bank.
Agreement on the Terms of a Capital Raising Plan to Secure the Long Term Future of the UK's Leading Ethical Bank, 28 June 2017. Co-op bank, Successful Completion of Restructuring and Recapitalization, 1 September 2017.
EC, State aid: Commission clearance of Portuguese recapitalisation of Caixa Geral de Depósitos (CGD) - how the rules apply to bank recapitalisations, 10 March 2017, MEMO/17/557.
Some national resolution regimes of Member States already provided for write down and/or conversion powers prior to the introduction of the BRRD and SRMR. See De Serière Ondernemingsrecht 2012 in respect of (the lack of) forced recapitalisation under the Dutch resolution regime (Interventiewet) that applied prior to the BRRD and SRMR. The PONV conversion power was available per 1 January 2015 under the BRRD and per 1 January 2016 under the SRMR. The bail-in tool became available under the BRRD and SRMR per 1 January 2016.
Article 59 BRRD. Article 21 SRMR.
Article 2(1)(57), Article 43 and Article 44 BRRD. Article 3(1)(33), Article 27 SRMR.
If a bank is still attractive to market investors and lenders, that is to say a) market investors and/or lenders are willing to provide capital (either in equity or in debt form, depending on the bank’s needs) to the bank, and b) they are willing to do so against a price and on terms that are acceptable for the bank, a bank may be able to restore its balance sheet by raising funds in the capital and money markets, including interbank markets.
An example of a bank that raised funds in the financial markets to resolve its financial difficulties is Deutsche Bank. Its revised 2018 issuance plan of EUR 20-22 billion, comprising debt issuance with an original maturity in excess of one year, was completed and it concluded 2018 having raised EUR 19.8 billion in term funding. This funding was broadly spread across the following funding sources: senior non-preferred plain-vanilla issuance (EUR 9.4 billion), senior preferred plain-vanilla issuance (EUR 1.0 billion), covered bond issuance (EUR 2.5 billion), and other senior preferred structured issuance (EUR 6.9 billion). The investor base for 2018 issuances comprised asset managers and pension funds (40%), retail customers (19%), banks (8%), governments and agencies (5%), insurance companies (3%) and other institutional investors (18%).1 This funding plan was however not sufficient, since Deutsche Bank continues to be in financial trouble.2
In addition to capital raising, or instead of capital raising, the existing share holders and creditors of a bank can enter into a ‘voluntary’ agreement to recapitalise the bank. This may entail the write down of equity instruments and/or conversion of debt into equity. For a voluntary recapitalisation the approval of the shareholders and/or creditors is necessary.3
The Co-operative Bank p.l.c. (the Co-op Bank) announced on 28 June 2017 that it reached an agreement with its shareholders and creditors on the terms of an equity raise and recapitalisation. The recapitalisation involved the cancellation of certain notes and preference shares issued by the Co-op Bank and resulted in the following:
Existing shareholders of the Co-op Bank exchanged their shares in the bank for shares (A Shares) issued by a new holding company of the Bank (Holdco) equivalent in aggregate to 5% of the pro forma A Shares outstanding in Holdco.
Retail noteholders (individual persons with a holding of an aggregate principal amount of £100,000 or less) received cash, at a level equivalent to up to 45% of the nominal value of their notes and subject to an overall cap of £13.5 million on the aggregate cash amount to be paid to retail noteholders and potential downward adjustment to the cash amount to be paid to retail noteholders, if such a cap is reached.
Other holders of notes who are not retail noteholders received A Shares equivalent to 17.4% of the pro forma A Shares out standing in Holdco in aggregate and allocated among these noteholders pro rata to their holdings in the notes.
Based on a total conversion of approximately £426 million of notes and an assumed principal amount held by retail noteholders of approximately £30 million, the recapitalisation was used to generate at least £443 million of CET 1 capital.
The recapitalisation has been implemented by way of a creditors' scheme of arrangement that required, amongst other things, the approval by a majority in number of the class members of each relevant class and the sanction of the court.4
Another example is the recapitalisation of the Italian bank UniCredit. Its shareholders gave UniCredit permission for a EUR 13 billion rights offer. The shareholders meeting also approved the conversion of every 10 shares into one new share after the stock dropped more than 45% in 2016.5
As a consequence of the introduction of the resolution regime, recapitalisation of a bank by the existing shareholders and creditors can now also be forced.6 A forced recapitalisation entails that the regulatory capital of the bank is written down and/or conversed through the exercise of the ‘PONV conversion power’ by the resolution authority.7 If the write down and conversion of regulatory capital through the exercise of the PONV conversion power is not sufficient to recapitalise the bank, the resolution authority can decide to use the bail-in tool to write down and/or convert eligible liabilities.8 The exercise of the PONV conversion power and the application of the bail-in tool are discussed in more detail in sections 4.5.2 and 4.5.3.