On Friday, as pertains to Dexia, a name that suddenly everyone is talking about yet which nobody except for this blog covered back in May, we predicted that "We expect a partial or complete nationalization to be announced imminently, which in addition to all other side effects, would lead in a Bear Stearnsing of all accrued profit." Sure enough overnight we got the following announcement from the French and Belgian Finance ministers: "As part of the restructuring of Dexia, the Belgian and French, in conjunction with central banks will take all necessary measures to ensure the safety of depositors and creditors. To this end, they undertake to guarantee to bring their financing raised by Dexia." Translation: Partial nationalization. And with 5 year CDS ripping in a good 6-8 point upfront, bid at about 26 points at last check, down from 35 on Monday, getting out while the getting was good sure seems like a good idea. Alas, none of this will be any consolation to equity longs, whose value has just dropped over 20%, as this is nothing but a repeat of Bear Stearns. We repeat that at the end of the day, Dexia CDS will trade just wide of Belgian default risk, which we in turn expect to soar in the coming hours.
Some more observations from Nomura's trading desk:
On Dexia read across for Belgium/France. Required govt guaranteed issuance in the next six months or so looks to be around €30bn-€50bn given short term refi needs of €96bn of which €34bn was ECB funding. Not clear how this split will work between Belgian and French guarantees. In itself probably not enough to hit France’s AAA but adds to the pressure. At the moment no statement on any kind of government recap/nationalisation but in our view it is likely that Dexia will require capital support from the governments, the level of which will depend on proceeds received from any asset sales that take place in the restructuring.
The French and Belgian Finance Ministers announced a statement on Dexia (google- translated):
"As part of the restructuring of Dexia, the Belgian and French, in conjunction with central banks will take all necessary measures to ensure the safety of depositors and creditors. To this end, they undertake to guarantee to bring their financing raised by Dexia."
This is the "positive liquidity-related" headline we were anticipating. We think this implies that Dexia can raise guaranteed short-term funding. From their H1 2011 release, ST funding requirement was €96bn o/w €34bn was ECB funding. Moody's also mentioned higher collateral posting on derivatives/swaps -- so we expect that Dexia may need to raise €30-50bn guaranteed funds in the short term.
While there is "support" provided to depositors and creditors, we would note that "creditors" remain undefined at this stage but possibly includes senior unsecured. We would also note that this does not seem to imply explicit blanket guarantees but more "implicit" guarantees.
As we had stated in our earlier notes, we expect senior spreads to tighten, particularly in the short end (steeper curves). At this stage, we do not expect sub (LT2/T1) bonds to benefit given the lack of visibility into Dexia's reorganisation plans.
Following an emergency board meeting, Dexia releases a statement last night. The statement was quite vague on any concrete actions but stated that the CEO has been given authority to undertake measures to resolve structural problems and to open up new prospects for franchises in Belgium and France.
The other key point in the release was that support from the key shareholders' which include the French and Belgian State will be forthcoming: "The Group’s shareholders would like to reaffirm their unity and their solidarity in the phase which begins today." and "The states shareholders have confirmed their will to support Dexia Group, so that it can implement the various measures in an orderly manner and under the best conditions."
We think the Board resolution opens up the possibility of "split" which had earlier been denied - other newssites (FT, De Tijd) have reported that they believe that possibly all subsidiaries are for sale (Dexia Belgium, Dexia Asset Management, Denizbank). Also, the probability of a sale of public-lending portfolio to a CDC/BP JV remains high.
Overall, the release doesn't provide a lot of clarity except to affirm the state support. We continue to think that further liquidity supportive headlines/action on Dexia will be forthcoming - however, despite some tightening (which has already happened partially), senior spreads would remain wider than peers unless further clarity on the future is provided.