(CN) – The Netherlands bailout of ING may not have included an advantage compared to the repayment terms an average investor would receive, the General Court of the European Union ruled.
Following the financial crisis in 2008, several EU member states took measures to maintain the stability of financial markets in Europe. The Netherlands granted ING, an institution regarded as financially sound throughout the crisis, three state aid measures “designed to maintain the continuity of the payments system and the inter-bank market in the Netherlands,” according to the General Court.
First the Dutch government fully subscribed hybrid securities for ING to increase capital in November 2008. On ING’s initiative, there were two options in the measure for the terms of repayment. One option allowed ING to repurchase the securities at 15 euros each, a 50 percent redemption premium over the 10 euro issue price. The other option converted the securities into ordinary shares on a one-to-one basis after three years.
If ING chose the conversion option, the Dutch government could still let ING repurchase the securities at 10 euros, plus accrued interest. If ING issued dividends on the ordinary shares, the Netherlands would also get a coupon on the securities.
A later amendment to the terms enabled ING to buy back half the securities at the issue price of 10 euros, plus accrued interest, and an early redemption premium if ING’s share price was higher than 10 euros. This guaranteed the Dutch government a minimum return of 15 percent, according to the court.
The Netherlands also exchanged cash flows applied to “impaired” mortgage-backed securities in the United States, and it made guarantees on ING liabilities, amounting to more than 12 billion euros (roughly $15 billion in 2008).
In April 2009 the European Commission notified the Netherlands, ING and the central bank of the Netherlands that the aid measures would not be approved if “ING was not willing to accept significant restructuring measures in order to restore its viability and to mitigate the resulting distortions of competition,” according to the general court’s summary.
“In particular, the commission considered that ING would have to accept a ban on acquisitions, a price leadership commitment and asset divestments going beyond those envisaged by ING, including its interests in three entities: a bank active in the Netherlands, an entity active in the United States and an entity active in Europe,” the court summarized.
The Dutch government responded by submitting a plan for the restructuring of ING along with a proposal from ING to reduce its balance sheet “by an amount deemed significant in relation to its total value. … At the same time, ING provided detailed arguments to substantiate its claim that there were no distortions of competition,” according to the court summary.
But the commission rejected the restructuring plan as “not credible” in July 2009, saying that, “without approval of the plan by the commission services, the capital injection and impaired assets measures would have to be regarded as unlawful aid that must be recovered.” The Netherlands and ING had about a month to come up with a plan that would gain the commission’s approval.
The Commission decided in November 2009 that the Dutch government’s injection of capital to ING constituted state aid.
ING, supported by the national bank, and the Netherlands appealed after the commission also found that amendments to the repayment terms constituted an additional 2 billion euros in aid.
On Friday, the Luxembourg-based General Court said the Commission erred in limiting itself to finding that the amendment to the capital injection repayment terms constituted state aid. It should first have examined whether the amendment gave ING an advantage to which a private investor would never have agreed.
“The court finds that it is not apparent from the decision of 18 November 2009 that the commission carried out such a comparison,” the court said in a statement.
“In that regard the commission did not examine how a return of between 15 percent and 22 percent in favor of the Netherlands state following the amendment to the repayment terms did not correspond to that which could reasonably be expected by a private investor confronted by a similar situation, that is to say a holder of securities of the type issued at the time of the capital injection which can be repaid by the issuer,” the court added. “The court finds that the Commission could not adopt its decision without taking such information into consideration and examining its effect on its assessment of the aid.”
The court annulled the finding that the amendment constituted additional aid of approximately 2 billion euros.
The European Commission has two months to appeal the annulment, on points of law only.