BNP to Buy 75% of Fortis Bank With Belgian Guarantees (Update2)

BNP Paribas SA, France’s biggest bank, agreed to buy Fortis’s former banking units in Belgium and Luxembourg and take a stake in the insurance business after obtaining state guarantees on potential losses.

BNP Paribas will buy 75 percent of state-owned Fortis Bank NV and gain control of the Luxembourg banking unit for 2.88 billion euros ($3.64 billion) in stock, the Belgian government said today in a statement. Fortis Bank will then pay 1.38 billion euros cash for 25 percent of Fortis Insurance Belgium SA.

The French bank will become the biggest by deposits in Belgium and Luxembourg, two of Europe’s wealthiest nations, if it wins over Fortis investors. Belgium is seeking to sell the Fortis banking operations after the September collapse of Lehman Brothers Holdings Inc. and the freezing of credit markets triggered state bailouts of Fortis and Dexia SA.

“The Belgian government is likely eager to make the deal work,” Albert Ploegh, an analyst at ING Wholesale Banking in Amsterdam, wrote in a note yesterday. “If the guarantees are such that they cannot offload enough risks associated with Fortis Bank, there is no incentive to sell the operations.”

Under the new agreement, the Belgian government will provide 740 million euros of equity funding to a company created to split off 11.4 billion euros of risky assets into a separate entity. BNP Paribas will contribute 200 million euros to the risky-asset entity and Fortis will provide 760 million euros.

Guarantees

Fortis Bank will contribute the remaining 9.7 billion euros in debt funding, backed by a 4.36 billion-euro guarantee from Belgium. The structured-credit investments have been marked down to about 58 percent of par value, Belgian central bank Deputy Governor Luc Coene told reporters in Brussels.

BNP Paribas also obtained a 1.5 billion-euro state guarantee on losses exceeding 3.5 billion euros on the structured-credit holdings that remain within Fortis Bank.

“This solution guarantees the bank’s safety and future,” BNP Paribas Chief Executive Officer Baudouin Prot told reporters in Brussels. “And I think this is very important for the Belgian economy at a time when its banking industry is going through a difficult period.”

Fortis shareholders blocked an earlier agreement to sell units to BNP Paribas on Feb. 11. Once Belgium’s largest financial-services company, Fortis will emerge from the state- organized breakup as an insurer with the right to potential gains on Belgium’s stake in BNP Paribas.

Shareholder vote

Fortis will put the new agreement to a shareholder vote in April. Meetings may be scheduled on April 8 in Brussels and the following day in the Dutch city of Utrecht, Fortis Chairman Jozef De Mey told reporters.

All Fortis investors will be able to vote on the transaction, Chief Executive Officer Karel De Boeck said. At the Feb. 11 meeting, only those investors who held Fortis shares as of Oct. 14 were eligible to cast ballots following a December court injunction blocking the asset sales.

Fortis became a casualty of the global financial turmoil after spending 24.2 billion euros buying ABN Amro Holding NV assets in the biggest bank takeover just as the U.S. subprime- mortgage market collapsed and credit markets froze.

The bank and insurer was forced to sell most of its businesses over three days last October after running out of short-term funding and seeing its share price plummet.

The Netherlands bought Fortis’s Dutch banking and insurance businesses for 16.8 billion euros on Oct. 3. Finance Minister Wouter Bos plans to merge ABN Amro and Fortis Bank Nederland (Holding) NV and may list or sell the bank by 2011. The Dutch insurance business won’t be integrated and may be sold earlier.

Capital Ratios

Belgium nationalized Fortis Bank for 9.4 billion euros in two transactions on Sept. 29 and Oct. 10, and Luxembourg agreed to take 49.9 percent of the banking unit in that country, which was renamed Banque Generale du Luxembourg SA on Dec. 22, by converting a loan into shares.

The purchase of Fortis Bank won’t improve BNP Paribas’s capital adequacy ratios as originally planned. The Belgian bank said yesterday it had a fourth-quarter net loss of 6 billion euros, based on preliminary figures.

“It was an absolute minimum for us that the transaction would be neutral for our capital ratios,” BNP Paribas Chief Financial Officer Philippe Bordenave said in an interview today in Brussels.

BNP’s Tier 1 capital ratio, a measure of a bank’s ability to absorb losses, stood at 7.8 percent on Dec. 31. That compares with 9.1 percent at Credit Agricole SA and 8.8 percent at Societe Generale SA, France’s second- and third-largest banks. Fortis Bank’s Tier 1 ratio was “about 10 percent,” the state- owned Belgian bank said yesterday.

Debt Protection

Belgium also agreed to shore up Fortis Bank’s capital to a maximum of 2 billion euros should the lender’s Tier 1 ratio fall to less than 9.2 percent. The capital infusion could raise the government’s stake in Fortis Bank to as much as 49.9 percent.

The cost of protecting Belgian government debt from default soared 44 basis points to 154 in the five days following Fortis shareholders’ rejection of the breakup on Feb. 11, according to CMA Datavision prices in London. A basis point on a credit- default swap contract protecting $10 million of debt from default for five years is equivalent to $1,000 a year.

Belgium has the third-highest debt as a percentage of gross domestic product in the euro region. Last year’s bailouts of Fortis, Dexia, KBC Group NV and mutual insurer Ethias Group increased debt to 88.7 percent of GDP from 83.9 percent at the end of 2007, according to preliminary figures published by Belgium’s central bank last month.

Credit-default swaps, contracts conceived to protect bondholders against default, pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements. An increase signals deterioration in the perception of credit quality.