November 13, 2009 6:00 pm

KBC sets out large-scale divestment programme to EC

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KBC Group (KBC BB), the Belgian banking company, has set out its plans to the European Commission (EC) to help pay back the EUR 7bn in state aid it received through a combination of full divestments and partial IPOs, a source close to the process told dealReporter.

JP Morgan is believed to be advising KBC on its restructuring plan, which will see it sell a slew of assets in Belgium and abroad. The source said the group will fully offload: Belgian bank Centea; Belgian insurance broker Fidea; London brokerage Peel Hunt; Russian bank Absolut; Serbian bank KBC Banka; merchant bank Antwerpse Diamantbank; and part of London’s KBC Financial Products. It will also sell a ‘large chunk’ of KBL European Private Banking and will float 40% of CSOB in Prague and 40% of K&H Bank in Hungary, as reported in the Belgian press this week.

“The divestment plan is an informal agreement KBC has with the EC and is expected to be rubber-stamped in two weeks,” the source said. The group is thought to be preparing an announcement on the matter at an investment day in London scheduled for 4 December.

An EC spokesperson said “It is possible there will be a decision by then [4 December].” However, he stressed that the Commission is remaining cautious.

The Flemish government is also waiting to be presented with KBC’s proposals in the near future and will have a considerable say in any decision made, a person familiar with the situation said.

Regarding the assets on the block, UK-based Peel Hunt is thought to be attracting interest, although reports of a possible management buyout are wide of the mark, according to a source familiar with the brokerage and a banker following the situation.

As for finding buyers for the Belgian activities, the fact the EC is showing flexibility on repayment will likely give KBC more chance of finding buyers. “If they are forced to sell within a few months, there will be few buyers able and willing to pay a high price,” another sector banker said. “If the term imposed is in the region of 18 months or more, the list of willing buyers will be longer.”

This banker said Delta Lloyd is a likely suitor for the Belgian insurance activities. Following its IPO, Delta Lloyd has said it intends to pursue buys and Belgium is its second home market, he pointed out.

Listing part of the Hungarian and Serbian businesses does not necessarily mean definite withdrawal from those markets, the sector banker said. Rather, it may serve as a means of bringing in cash now to meet EC conditions. The possibility of buying back the stakes would then be open once the bank clears the state aid hurdles.

Raising further capital

The sale process could take two-to-three years to complete but is unlikely to raise the required EUR 10.5bn thought to be needed to pay back the Flemish and Federal state, the first source said.

KBC has received EUR 7bn in government hybrid capital, placing it at the top of the list of European state aid beneficiaries. After interest the total amount repaid will be 150% greater though, a recent analyst note pointed out.

“The asset sales programme will probably not be enough to suffice the payment in full,” the source said, “but this repayment is very flexible and there is an indefinite time KBC has to pay the money back. There is a reasonable timeframe and the last thing KBC wants is for a fire sale.”

“KBC will need to employ various means to raise the capital it needs,” the sector banker pointed out. One possibility for further capital raising mooted by a top ten shareholder in the group is that the group could consider a hybrid exchange offer in the manner of Lloyds Banking Group. The UK-listed bank last week invited bondholders to exchange their securities for GBP 7bn of Enhanced Capital Notes (or CoCo bonds), which it subsequently upped to GBP 9bn after strong demand.

A second source close to the process said such a solution had not been thought about “yet.” He said any such measures would be shaped by the EC’s stance on how quickly the bank needs to pay back the government hybrid capital.

While a host of other European banks have raised equity to repay governments, including Lloyds last week, BNP Paribas and Societe Generale in France, and Erste Bank in Austria, this is a less viable option for KBC, both sources said. Its share capital is dominated by ‘reference’ shareholders, which control around 52% of the group and do not want to be diluted, the first said. The largest shareholder is listed investment vehicle KBC Ancora, which holds 23% of the stock. According to its website, it has an agreement with other permanent shareholders Cera and MRBB to “ensure the shareholder stability and continuity of KBC Group”.

“Existing shareholders will do anything to avoid a capital increase,” the second source said. “KBC is structurally different because of the shareholders’ position.” The first source also said the resistance of KBC’s controlling shareholder makes a rights issue unlikely. “Whatever happens, KBC will seek to avoid diluting existing shareholders and will examine the full list of alternatives to raising equity,” another sector banker said.

An insider at KBC Ancora confirmed that it prefers alternatives to a capital raising, citing the dilutive effects of such a move on existing shareholders.

KBC and the Flemish regional government declined to comment. The Belgian government was unavailable for immediate comment.

Shares in KBC were down 4% at EUR 31.11 on Thursday, giving it a market capitalisation of EUR 11.13bn.

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