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Ministry of Finance and Economic Affairs

Treasury sells 13% stake in Arion Bank to Kaupskil

The Minister of Finance and Economic Affairs has, upon consultation with the Government and the Ministerial Committee on Economic Affairs and Financial System Restructuring, agreed to Icelandic State Financial Investments’ (ISFI) proposal concerning the sale of the State’s 13% holding in Arion Bank to Kaupskil ehf., a subsidiary of Kaupþing ehf., for ISK 23.4 bn. The sale is to take place on the basis of purchase rights to the holding, according to a shareholder agreement from 2009 and the Act on the Sale of State Holdings in Financial Undertakings, no. 155/2012. Article 1, Paragraph 2 of the Act explicitly discusses sales relating to the purchase option provision concerning Arion Bank; furthermore, authorisation has been included in the fiscal budgets approved by Parliament since 2014.

By law, ISFI administers the State’s holding and protects the State’s interests in connection with the shareholder agreement. According to ISFI’s proposal, the shareholder agreement gives Kaupskil a unilateral, undeniable, and unequivocal contractual right to purchase the State’s holding.

The shareholder agreement stipulates how the purchase option price shall be calculated. The price assumes that the State’s capital contribution to the bank earns returns equivalent to the Treasury’s cost of capital on a contribution of ISK 9.9 bn, plus a 5% premium for the period during which the State was the owner of shares in the bank. Dividends received by the Treasury as the owner of the bank during the period – a total of ISK 2.7 bn – shall be deducted from the price. In addition to these dividends, the Treasury now receives ISK 23.4 bn for the purchase option, for a total of ISK 26.1 bn.

ISFI engaged auditing firm Grant Thornton to provide confirmation of the purchase price calculation according to the purchase option provisions. In the opinion of ISFI, the Treasury’s returns, which are used as a basis for the calculation of the purchase option price, are good in terms of both interest and risk premium. Calculations show that the State’s average annual nominal return on the capital contribution to Arion Bank since 2008 is about 10.8%.

With this transaction, the Treasury is no longer a shareholder in Arion Bank. The authorities will continue to protect the Treasury’s interests vis-à-vis the bank and the sale of holdings in it on the basis of stability agreements. In this context, it should be noted that the State has considerable interests in the successful sale of Arion Bank, as a well designed and executed transaction maximises the value of the profit-sharing agreement that is a part of stability agreements. The authorities are of the opinion that the outcome is favourable to the Treasury and that it is consistent with the Government’s plans to scale down the State’s holdings in financial institutions.

The State’s estimated total profit on the transaction is just over ISK 150 bn.

Even though the sale is taking place on the basis of a contractual purchase option, it should be noted that the price received for the holding is quite acceptable. The benefit derived from the State’s capital contribution to Arion Bank in the wake of the financial crisis in autumn 2008 lies in return on equity and net interest income on subordinated loans from the Government to the bank. The bank has already repaid the loans. In addition, the Treasury has received substantial income from the stability contribution paid by Kaupþing - i.e., due to the Kaupþing bond, other assets, and estimated income from the profit-sharing agreement. The State’s estimated total gain on financial interests in Arion and transactions with Kaupþing is just over ISK 150 bn.

The authorities are strongly committed to ensuring a healthy environment for financial activities and to strengthening the financial framework. The Minister of Finance and Economic Affairs has appointed a task force for a white paper on the vision for Iceland’s financial system. The objective of the work is to create a reliable foundation for discussion, policy formation, and decision-making on issues pertaining to the financial system and its future structure and development. The task force is expected to deliver a report to the Minister in mid-May. The report will then be discussed in Parliament. 


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