Brussels, 30 th June 2009
State aid: Commission temporarily approves recapitalisation and asset relief by Belgium for KBC Group
The European Commission has temporarily approved, under EC Treaty state aid rules, a package of measures that the Belgian authorities intend to grant to KBC Group N.V. First, the Commission authorised a recapitalisation amounting to €3.5 billion, which is in line with its Guidance Communications on state aid during the current financial crisis (see and ). Second, the Commission has granted temporary clearance to the impaired asset relief, with final approval dependent on the result of an in-depth investigation. Whilst some of its provisions are in line with Commission guidance on the treatment of asset relief measures (see ), other provisions (including valuation of the portfolio) require further in-depth analysis before a final decision can be taken. Both measures were approved for six months on condition that Belgium submits to the Commission an in-depth restructuring plan for KBC Group within 3 months.
Competition Commissioner Neelie Kroes said: "The KBC decision shows once more the Commission's willingness to endorse appropriate solutions to the current financial crisis, whilst ensuring respect for the EU's state aid rules so as to minimise potential distortions of competition. These measures will strengthen trust in the solidity of KBC, a systemically important bank. But the Commission needs to verify in detail that all conditions of the Impaired Assets Communication are met. Given that KBC has now received a number of significant aid measures, Belgium must submit, within the next three months, an up-dated restructuring plan that takes into account both recent measures."
On 6 February 2009, the Flemish Region announced its intention to inject €3.5 billion of capital into KBC in two tranches of €2 billion and €1.5 billion. On 14 May 2009, KBC announced that it had reached an agreement with the Belgian authorities on an asset relief measure. Both measures were formally notified to the Commission on 18 June 2009. In addition, in conformity with its decision regarding recapitalisation by the Belgian Federal State in December 2008, the Belgian authorities submitted a restructuring plan for KBC on 18 June 2009.
Due to the current financial crisis, even fundamentally sound institutions may experience distress and be required to reassure financial markets of their stability. Against this background, it was considered necessary to strengthen KBC's capital base against possible future losses and protect it against continued writedowns of its portfolio of synthetic CDOs (i.e. collateralised debt obligations in which the underlying credit exposures are taken on using a credit default swap rather than by buying physical assets).Both measures will improve KBC's Core Tier-1 ratio. The guarantee on the CDO portfolio will also remove the source of volatility from KBC's balance sheet and reduce its risk weighted assets.
The recapitalisation measure, carried out using securities which are similar to those approved by the Commission in December 2008 (see ) in the course of KBC's first recapitalisation, is in line with the Recapitalisation Communication and has been approved as rescue aid for 6 months.
The guarantee by the Belgian Federal authorities covers 15 CDO portfolios with an aggregate notional amount of €20 billion. A first tranche of losses for an amount of €3.2 billion will be borne entirely by KBC (“First Loss”). Losses incurred in a second layer of €2 billion above the set First Loss can be compensated, at KBC’s request, by the Belgian State at 90% (i.e. €1.8 billion) via the subscription to new KBC ordinary shares at market value (the “Equity Range”). 90% of losses beyond the Equity Range (up to €14.8 billion) are compensated by the Belgian State in cash, while 10% of the risk is retained by KBC (the “Cash Range”). For the Equity Range, KBC pays an underwriting fee of approximately €60 million semi-annually. For the Cash Range, KBC pays a guarantee fee of approximately €110 million every 6 months.
The Commission assessed the asset relief measure under its guidance Communication. Following an initial assessment, the Commission decided for reasons of financial stability not to raise objections for six months. However, as some aspects need further analysis, in particular regarding valuation, the Commission has decided to open an in-depth investigation on this and corresponding elements like burden sharing, remuneration and management of assets.
As KBC has received three significant aid measures since the beginning of the crisis, it must undergo an in-depth restructuring. Belgium already submitted a plan to the Commission, in line with its obligation under previous aid measures, but Belgium now has three more months to provide a fully substantiated and up-dated, plan addressing, inter alia, the distortions of competition resulting from this measure.
The non-confidential version of this decision will be made available under the case number N360/2009 in the on the once all the confidentiality problems have been resolved. New publications of state aid decisions on the internet and in the Official Journal are listed in the online newsletter ).