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Netherlands to Sell $8.7 Billion ING U.S. Mortgage Bonds

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The Dutch government will sell 6.4 billion euros ($8.7 billion) of U.S. mortgage bonds that it acquired during a 2009 bailout of ING Groep NV (INGA), the country’s biggest financial-services company.



ING will pay about 400 million euros to the Netherlands from a provision it took in 2009 to unwind the transaction, the Amsterdam-based company said in an e-mailed statement today. The government may make a gain of almost 800 million euros, though there will be a one-time impact on this year’s budget deficit of 223 million euros, Finance Minister Jeroen Dijsselbloem said.



The Dutch government is seeking to return money to taxpayers after it provided more than 95 billion euros to rescue companies including ING, ABN Amro Group NV and SNS Reaal NV. ING received a 10 billion-euro capital injection in October 2008, when mortgage-backed securities held at its U.S. units plunged in value. In a second round of aid in January 2009, the Netherlands assumed 80 percent of the risk on the 27.7 billion-euro portfolio of the Alt-A mortgage bonds.



ING rose 1.5 percent to 9.53 euros in Amsterdam trading today, the highest level in four years. The shares have advanced 35 percent so far this year.


The sale of the mortgage bonds, to be held within a year and requiring European Union approval, will increase ING’s core Tier 1 capital ratio, a key measure of financial strength, by about 10 basis points, the company said.



“This is a clear step closer to being detached from state aid,” Cor Kluis, an Utrecht, Netherlands-based analyst at Rabobank International, said by e-mail. “If ING will now pay back the remaining capital it will be fully government-free.”



ING could repay the state aid by mid-2014, ahead of a schedule agreed with EU regulators last year, Kluis said. He recommends that clients buy the shares.



The EU approved ING’s rescue on condition that the company sell its global insurance operations and return the financial aid with premium and interest. Other strings attached included a ban on management bonuses for as long as aid is outstanding. The company also said it won’t pay dividends to shareholders before completing repayment.



The government hired BlackRock Inc. (BLK) to manage the sale of the bonds, which were backed by mortgages that typically didn’t require documentation such as proof of income, Dijsselbloem said in a letter to Parliament today. ING Groep is being advised by its banking arm’s Financial Institutions Event Finance & Advisory unit.

Competing Bids

To maximize proceeds, the Dutch will invite competing bids throughout the sale process, which can be halted at any point, Dijsselbloem said. Progress and results will be published on the Dutch State Treasury Agency website, he said.



The finance industry in the Netherlands measures more than four times the economy. In February, the government spent 3.7 billion euros to nationalize SNS Reaal, the fourth-biggest bank, after losses on real estate brought it to the brink of collapse.



ING sold the mortgage-backed securities to the Dutch state at a discount, while giving the government a loan, which shrank as the mortgages underlying the debt were repaid.



The market value of the Alt-A securities held by the Netherlands has risen to about 71 percent of their nominal value of 9 billion euros, ING said today. The government’s debt to ING stood at 6 billion euros at the end of September, meaning the Netherlands can make a cash profit of about 400 million euros on a sale at current market prices.

Impact Limited

Under the 2009 agreement, ING also pays the Netherlands an annual guarantee fee, while it gets management and funding income in return. The company took a one-time pretax provision of 1.3 billion euros in the fourth quarter of 2009 for these future payments, which decrease as the portfolio shrinks.



“Financially the impact is limited -- the capital release translates to 5 euro cents a share,” said Benoit Petrarque, an Amsterdam-based analyst at Kepler Cheuvreux who has a reduce recommendation on the stock. “What’s positive for ING’s management is that together with repayment of the remaining state aid by 2015 this will be the end of the European Commission’s involvement.”



ING has returned 7.8 billion euros from the direct capital injection the government provided in 2008, with 2.4 billion euros in interest and premiums. ING said on Oct. 30 that it plans to repay another 1.13 billion euros on Nov. 6, while final payments are scheduled for March 2014 and May 2015 at the latest.



“Over the past years we have worked hard to make ING stronger and simpler and to limit risks,” Chief Executive Officer Ralph Hamers, who took the helm last month, said in the statement. “We are looking ahead to take ING through the last phase of our restructuring.”

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