The shareholders and subordinated bond holders of SNS Reaal are now fighting an alleged expropriation at the Dutch Council of State. The investors are contesting the Dutch government’s position that shareholders and subordinated debt holders cannot sue for compensation against the bank due to mismanagement at SNS Reaal. Clearly, the Dutch government, as the sole owner is looking to limit its liabilities. But the bail-in will also cause problems for CDS due to the lack of a deliverable security.
As the Financial Times detailed last week, the Dutch Minister of Finance and new Eurogroup head Jeroen Disselbloem issued a decree which denies subordinated debt holders any claim for compensation in the bank-insurer’s nationalisation. In essence, the Dutch government has bailed in the sub debt, probably at a 100% loss without any legal recourse. Clearly, this won’t sit well with investors.
According to the Financieele Dagblad, a leading Dutch financial newspaper, attorneys involved in the proceedings who wish to remain anonymous have told journalists that they see the Council of State protest as one that could be fruitful. The public hearing in front of the Council of State is this Friday and there are some 400 complaints already filed on behalf of 1000 investors. The Council of State could rule the Dutch government’s expropriation unconstitutional and grant the investor plaintiffs some sort of legal route to eventual compensation.
Also of interest is the fact that just when the European Banking Authority was saying that all was well at SNS Reaal with the stress tests last October, the Dutch central bank, de Nederlandsche Bank and the Dutch Ministry of Finance were already conferring about an eventual nationalisation. This has been shown via a letter to the then Finance Minster de Jager which Yahoo! News recently published.
The Dutch bank nationalization is of wider interest because of the effect on the bank CDS market. The Wall Street Journal reported the following in an article about whether SNS Bank CDS contracts will be triggered:
“Unless these [bank bail-in] issues are addressed, we could see a significant decline in bank CDS liquidity, with negative consequences for the bank bond market as a result,” Citigroup analysts said in a note to clients Monday.
Since the sub debt has been expropriated, it is not available for tender at auction for a CDS payout. Because you need a ‘deliverable security’ to process a CDS contract, the CDS contracts on SNS for sub debt would be worthless. According to Citi, bail-ins that mandatorily convert debt to equity or simply expropriate debt in this way will be problematic for the reasons given above.
More details will follow as they become available.