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Ministry of Finance and Economic Affairs

Capitalisation and compensation agreement between the Government of Iceland and the Resolution Comittee of Kaupthing

The Government of Iceland and the Resolution Committee of Kaupthing are pleased to announce that an agreement has been reached in respect of the initial capitalisation of New Kaupthing and the basis for the compensation payable between the two parties following the creation of New Kaupthing in October 2008. This will put New Kaupthing on a secure financial footing for its future development.

It has been agreed that Kaupthing will subscribe for a majority shareholding in New Kaupthing (the “Subscription”) following an initial capitalisation of New Kaupthing by the Government. New Kaupthing will remain an independent subsidiary of Kaupthing which can be built and developed for the benefit of all its stakeholders.

The Government will capitalise New Kaupthing on 14 August 2009 with an estimated ISK 70 bn. This Government capitalisation will be made pending the completion of the Subscription and, on completion of the Subscription, will be reduced.

On completion of the Subscription, the Resolution Committee has agreed to contribute 65% of the capital required by New Kaupthing (in ordinary equity) and therefore the Government will continue to contribute 35% of the total capital (in the form of ordinary equity and tier 2 capital). Overall this is expected to reduce the Government’s capital contribution materially. As a result, New Kaupthing will be owned 87% by Kaupthing and 13% by the Government.  In addition the Government will have the right to nominate a Board member.

There will be no changes to the status of depositors under Icelandic law as a result of these arrangements. New Kaupthing will, through the capitalisation and further liquidity support as part of the agreement, be in a strong liquidity position.

Hawkpoint is acting as exclusive financial adviser to the Government and Morgan Stanley to Kaupthing in this transaction.  In addition creditor representatives participated in the negotiations.

Commenting on the agreement reached, Steingrímur J. Sigfusson, the Minister of Finance of Iceland said:

“We are pleased to have reached agreement with the Resolution Committee of Kaupthing.  This is an important step in securing the financial strength of New Kaupthing and we believe that the potential ownership by Kaupthing will bring additional benefits through the involvement of international stakeholders.”

Commenting on the agreement reached, Steinar Thor Gudgeirsson, the Chairman of the Resolution Committee of Kaupthing said:

“This agreement with the Government is in line with the Resolution Committee’s actions in Nordic countries, where agreements reached with the relevant authorities on securing the assets for Kaupthing have resulted in higher value for the bank’s assets.  The Resolution Committee is of the opinion that creditors’ interests are best served through retaining ownership of New Kaupthing with the aim of building up a valuable and dynamic bank leading the way in corporate and retail banking services in Iceland.  This agreement will strengthen New Kaupthing and position it for faster recovery of the Icelandic economy with stronger ties to the outside world.”

Commenting on the agreement reached, Finnur Sveinbjörnsson, the CEO of New Kaupthing said:

“We are pleased that this important step has been taken in the re-organisation of the Icelandic banking sector and that the balance sheet of New Kaupthing has been put on a sound and secure footing.  We will continue to focus on new solutions for our customers, both corporate and retail.  Our customers will not experience any disruption due to change in ownership but will benefit from the removal of uncertainty concerning our financing which will enable us to move more swiftly and decisively. We welcome international stakeholders to our bank and are determined to rebuild the trust and reputation of the Icelandic banking sector.”

Key terms of the agreement

In the event that the Subscription is not completed, the Government capitalisation will remain in place and the Government will continue to own New Kaupthing.  In this case, other arrangements will be put in place between the two parties to settle compensation.  It is envisaged that these arrangements will include a lien over certain assets of Kaupthing which will be held in escrow to compensate New Kaupthing in case it is determined at the end of the escrow period that a negative net asset value was transferred at the time New Kaupthing was created in October 2008.  In conjunction with this a portfolio of loans within New Kaupthing will be monitored during the escrow period to determine the value of the asset transfer to New Kaupthing.  The Resolution Committee of Kaupthing would also be granted an option over 90% of the Government’s shareholding in New Kaupthing subject to the Government earning a reasonable return on its investment. The option over Government equity will be exercisable between 2011 and 2015.

The agreement remains subject to satisfactory binding documentation, due diligence, creditor consultation and the approval of the Icelandic Financial Supervisory Authority, the FME.

It is envisaged that final binding agreements will be signed prior to 14 August 2009 and that the capitalisation by the Government will occur at that date.  Thereafter, it is expected that the Resolution Committee will distribute information to creditors in conjunction with New Kaupthing.  As part of the creditor consultation, a creditors’ meeting is planned to be convened by Kaupthing in September 2009.

Ministry of Finance, July 20 2009


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