August 25, 2012 / 11:23 AM / 6 years ago

Dexia says likely to pump money into Luxembourg arm

BRUSSELS (Reuters) - Franco-Belgian bank Dexia SA (DEXI.BR) said it believes it will need to recapitalise its Luxembourg arm before the latter’s imminent sale, which could see it demanding further money from the Belgian and French governments.

Dexia, bailed out for a second time in three years last October, agreed in April to sell Dexia Banque Internationale a Luxembourg (Dexia BIL) for 730 million euros. A 90 percent stake will go to Precision Capital, owned by Qatar’s al-Thani royal family, and the remaining 10 percent to the Luxembourg government.

The need to recapitalise follows a decision to transfer Dexia BIL’s bond portfolio to Dexia at December 2011 market prices. This contributed to a net loss of 1.9 billion euros for Dexia BIL in 2011.

This “legacy” portfolio sale by Dexia BIL had “severely affected its solvency”, making it unlikely to meet the capital adequacy ratio promised for its sale, Dexia said in a statement late on Friday.

“At present it appears that this ratio will not be achieved at closing and that an increase of the capital of BIL will be necessary pre-closing, the amount being under consideration and negotiation,” the statement said.

The likely failure to achieve the capital ad ratio comes in spite of Dexia BIL’s sales of units such as Dexia Asset Management and RBC Dexia Investor Services. These sales “will generate a gain in the BIL accounts which will improve the capital base of the BIL and ease the need to recapitalise it”, according to the statement.

Dexia BIL previously said after the sales were agreed that it had a common equity Tier I capital adequacy ratio of 9 percent of assets under Basel III rules. Dexia undertook to maintain Dexia BIL’s capital ratio at that level at the time of the sale. This is due to be completed in the third quarter, which means within the next month.

But given Dexia’s own extensive losses — 11.6 billion euros in 2011 and 1.2 billion euros in the first six months of 2012 — a capital increase for Dexia BIL may force Dexia to seek funds itself.

That would see it calling upon fresh money from the states currently guaranteeing its borrowings — principally Belgium and France, and to a lesser extent Luxembourg.

The three states have currently agreed to guarantee up to 55 billion euros of Dexia’s borrowings, with Belgium underwriting 60.5 percent, France 36.5 percent and Luxembourg 3 percent. Those guarantees could rise to as much as 90 billion euros.

Reporting By Philip Blenkinsop; Editing By Sebastian Moffett

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