On 1 February 2013, SNS Reaal NV, the fourth-largest Dutch banking group by assets, was nationalised. This move followed concerns that its increasing losses on real estate lending and the lack of a credible private sector solution would lead SNS to bankruptcy, thereby threatening the country’s financial stability. As part of the nationalisation, SNS’ common shares, core Tier 1 securities, hybrid capital instruments and also dated subordinated debt have been expropriated by the government (i.e. investors are likely to suffer 100% loss on these securities).
This is an example of the use of new ‘bail in’ laws which have been implemented/are to be implemented across most of Europe. In this case the Dutch used their new Intervention Act (legislation passed in 2012) to expropriate the securities citing the bank’s core Tier 1 deficiency (7.7% at YE12) would not have been sufficient to cover projected losses on the property finance portfolio.
This highlights the reduced political interest of sovereigns supporting financial institutions especially extending support to hybrid or subordinated securities. Nonetheless, the outright expropriation of such securities – with potentially little or no compensation to bondholders – is a relatively severe move compared to other cases of troubled banks, where such investors, while accepting losses, were typically offered some compensation through discounted buybacks or exchanges. Such a move signals a potentially tougher line on subordinated debt in the Netherlands. Moreover, it may set a precedent for similar situations elsewhere in Europe, exposing investors in subordinated debt to greater loss-given default than previously the case.
By contrast, senior debt holders will benefit from the government support, via a capital increase and funding guarantees. Indeed, in a speech on 28 January, Frank Elderson, an executive director of the Dutch central bank said that he favoured a ‘more targeted approach to bail-in’ with designated ‘bail-inable’ bonds, rather than the current European Commission proposal, which ‘does not keep unsecured creditors out of range’.