Not too late to restructure Bank of Cyprus

30 January, 2014 | Posted By: Evdokimos Xenophontos

Not too late to restructure BoC
‘Old’ shareholders should have 7%, Laiki Legacy 9%

Former Bank of Cyprus senior executive and board member Evdokimos Xenophontos argues that the resolution authority acted wrongly when it forced Laiki Popular Bank to shut down and burden all its troubles on Bank of Cyprus, as a result of which a bail-in was imposed on depositors and shareholders saw their stake dwindle to 1% of what they were before the crisis began in March 2013.
In a letter sent to Central Bank Governor Panicos Demetriades, Finance Minister Haris Georgiades, CySEC chairman Demetra Kalogerou, BOCY board chairman Christis Hassapis and the bank’s new CEO John Hourican, he states that the bail-in benefited the government and not the shareholders or the duped bondholders and suggests a restructuring of the shareholder base.

By Evdokimos Xenophontos, FCA, CF, Cert.IoD, TEP

Page 99 of the BoC Interim Consolidated Financial Statements shows the fair values of the assets and liabilities of the “Good” Laiki which were compulsorily folded into the Bank of Cyprus through a decree issued by the Resolution Authority.
According to this statement the “fair value” of the net assets transferred to the Bank of Cyprus was EUR 424.55 mln while the number of shares issued to the Old Laiki were 844,014,000.
Thus, the shares issued in exchange of the said assets were issued on the basis of 50.3 cents per share, while the shares issued in exchange of the BoC deposits bailed-in were issued on the basis of 1 euro per share which is obviously wrong.
How can the “questionable” net assets of the dissolved Laiki Bank have a better value-treatment than the solid BoC deposits, particularly if these assets were transferred to the Bank of Cyprus against its will (and most probably illegally) in order to fund the problem-riddled 9.6 bln euro ELA obligations of the Laiki Bank to the ECB and the so-called insured deposits of the Laiki Bank, which obligation the Government could not afford to meet or otherwise undertake?
Also ignored was the fact that the BoC depositors were bailed-in not only to replenish the capital requirements for the BoC Risk Weighted assets, but also for the additional capital requirements in respect of the “good” Laiki Bank Risk Weighted assets over and above the EUR 424 mln of net assets.
These additional capital requirements, which were funded through the additional bail-in by the BoC depositors (again most probably illegally), amounted to about EUR 550 mln.
The Resolution Law states that the assets of a bank under resolution may be sold or transferred to a bridge bank, but I do not believe it is within the spirit and/or letter of the Resolution Law, that a bank under resolution (in this case the Bank of Cyprus) may (against its will) be loaded with the liabilities and problems of another bank under resolution. This was done in order to safeguard or protect the interests of the government and of the ECB.
At the same time the old BoC shares were reduced by 99% which is also wrong and unfair. The old shareholders (about 70,000) represent the whole investing public of Cyprus and they are also the main customers of the bank. It is not in the interests of the new shareholders to alienate them.
All the above were done arbitrarily without any professional advice and in my opinion they are totally illegal and unfair.
I believe it is in the interest of all stakeholders (1. bailed-in shareholders, 2. ex CoCoBond holders and the other bond holders, 3. creditors/depositors of Old Laiki, and 4. old BoC shareholders) if an investment bank that specialises on these matters (e.g. Deutsche Bank) is commissioned (as independent experts) to recommend a fairer balance between the different stakeholders.
The fact that the Resolution Authority has been expanded to include the Minister of Finance and the Chairman of the Capital Markets Committee (CySEC) is an opportunity to revisit this matter and find a fairer shareholder balance for all the stakeholders.
This will also enable most of the court cases against the BoC and/or the CBC and/or the government to be withdrawn.
I have communicated with a senior officer at Deutsche Bank who is very conversant with these issues and he already knows the Bank of Cyprus because Deutsche Bank was acting as our adviser for this matter (but they were not allowed to complete their assignment; when the Bank of Cyprus was placed under Resolution, the CBC advisers Alvarez & Marsal displaced them). The senior officer told me that they would be happy to express their opinion as experts provided this is done with the concurrence of the Bank of Cyprus and of the Resolution Authority. The cost would not be significant.
In the meantime, I have done an exercise myself on the basis of discussions I had with the Deutsche bank officer and other experts in February/March of last year.
In my exercise I have assumed that the shares issued to the bailed-in depositors would be on the basis of 20 cents per share which was the market price of the BoC shares as at March 2013.
I also assumed that the shares to be issued for the “good” Laiki Bank net assets would be on the same basis.
As regards the CoCoBond holders and the other bond holders, I assumed that 47.5% would be bailed-in, while the remaining 52.5% would be credited to 4/5 year deposit accounts (or exchanged with Long-term Government Bonds or a combination of both).
With hindsight, I believe that the banking authorities should not have allowed the Bank of Cyprus to market these very complex instruments to its retail client base.
Apart from the miss-selling by the bank’s staff at the branches, the Central Bank of Cyprus (the Regulator) had a conflict of interest because it wanted the banks to increase their capital (to which it gave priority) and did not give adequate consideration to the interests of the investing public. If the BoC staff could not themselves understand these very complex products, how could they be expected to explain their inherent risks to 12,000 or so investors within a time frame of two weeks?
Furthermore, had it not been for the PSI, which was a policy decision taken by the EU heads of states, including our own head of state, the CoCoBond holders would not have suffered any loss.
Additionally, I would argue that the folding of the “good” Laiki Bank into the Bank of Cyprus has benefited mainly the government which would have to face the EUR 9.6 bln ELA obligations to the ECB and the insured deposits of the Laiki Bank.
This is the underlying reason why I suggested that instead of receiving a 4/5 year deposit for the 52.5 % of their holding, the CoCoBond-holders could be issued with Long-term Government Bonds or with a combination of both.
The result of my above exercise is as follows:
• Old BoC shareholders 7%
• Ex MAEK holders 6%
• Bailed-in shareholders 78%
• Legacy Laiki Bank 9%
Total 100%
I have repeated the exercise with an issue price of 18 cents and 15 cents and the three outputs do not make much difference.