Dutch banks allowed to repay state-backed debt early

Fri Dec 31, 2010 7:03am EST

Related Topics

* Measure affects 40.8 bln euros in state-back bonds

* Banks must pay fee to redeem ahead of maturity

* Repayment a reputational issue - analyst

By Aaron Gray-Block

AMSTERDAM, Dec 31 (Reuters) - Dutch banks and insurers will be allowed to repay about 40.8 billion euros of emergency financing ahead of schedule, the Dutch finance ministry said on Friday, a sign of the sector's recovery and ability to tap capital markets.

When Dutch financial institutions were hit by the global credit crisis in 2008 the finance ministry agreed to guarantee up to 200 billion euros ($265 billion) in corporate bonds, enabling banks and insurers to issue state-backed bonds.

ING (ING.AS), Fortis Bank Nederland, SNS Reaal SR.AS, NIBC and other financial institutions raised a total of 50.3 billion euros from such state-backed bonds, but the ministry said on Friday that the scheme had not been used since December 2009 and would end on Friday.

Some of that debt has already matured, however, and by Dec. 1 there was still 40.8 billion euros in outstanding debt.

"This indicates that the banks are able to finance themselves independently in the capital markets," the ministry said in a letter to parliament.

To encourage companies to seek alternative sources of funds, the ministry will allow banks over the next six months to repay the state-backed loans and refinance in the market.

Walter Leering, a fixed income analyst at Theodoor Gilissen, said banks would now need to weigh the costs of early repayment -- which would include an early redemption fee to the government plus a premium to encourage investors to switch out of the bond -- against the cost of waiting for the bonds to mature.

"The main point of early repayment is the reputational issue -- to say they don't need state support any more," Leering said.

The scheme had allowed companies to issue state-backed bonds of between three months and 60 months' maturities.

Prices for two of the state-backed loans, one issued by Fortis Bank Nederland which is now part of ABN AMRO [ABNNV.UL] XS0423724987=R and the other issued by ING XS0415072098=R, fell slightly after the finance ministry statement, but analysts said this was more likely due to quiet end-of-year trading. (Editing by Sara Webb and Susan Fenton)

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