Iceland in Continuing Consultations Regarding - Capital Control Liberalization (LBI)

The Iceland Ministry of Finance today announced that it has continued its consultations with parties affected by the capital controls in Iceland about the proposals the Government is considering for the liberalization of those controls.

Members of the Iceland Task Force on the Liberalization of Capital Controls (established by the Ministry of Finance and the Central Bank of Iceland in 2014) (the “Task Force”) and their advisers (the “Iceland advisers”) have had a series of consultation meetings over the last two months with, among others, representatives of a small number of institutions holding significant claims on the estates of the three large Icelandic banks that failed in 2008, Kaupthing hf. (“Kaupthing”), Glitnir hf. (“Glitnir”) and LBI hf. (“LBI”).  The Task Force reports to the Steering Committee on the Liberalization of Capital Controls (the “Steering Committee”), a body composed of the Iceland Minister of Finance, the Governor of the Central Bank of Iceland and representatives of the Prime Minister's office.

At these meetings with estate claimants, the Task Force discussed its preliminary recommendation to the Steering Committee for the manner in which the capital controls -- insofar as they affect the estates of the three large failed banks -- could be liberalized.  The Task Force explained that the domestic assets of the estates (mostly denominated in Icelandic krona) posed a threat to Iceland's balance of payments and economic recovery program.  The Task Force reported that it was considering recommending that all assets of the three estates could, following a composition arrangement approved by Icelandic courts, be distributed to the claimants in those proceedings following payment by each estate of a one-time Stability Tax.  The preliminary recommendation of the Task Force included a list of proposed legal amendments intended to streamline and expedite the composition process for the estates.  The Task Force's preliminary analysis suggested that to achieve the goal of neutralizing a threat to the balance of payments, this Stability Tax would be set at a rate of 37% of the total assets of each estate (measured as of end-June 2015), with an automatic exemption of ISK 45bn for each estate, which would bring the effective tax rate down to about 35%.  The recommendation under consideration by the Task Force would also permit the estates to use part of their assets to make long term investments in Iceland.  Those investments could reduce the tax base of an estate and thus lower the effective rate of the Stability Tax as it applies to an estate.  Once the tax had been paid, the estate would be free to deal with and distribute its assets and the stability tax could be paid in any currency of the estate's choosing, including ISK.

Subsequent to these meetings, the Iceland Ministry of Finance has continued to refine the draft legislation for the Stability Tax, including the rate of the tax, exemption requirements and authorized long term investments.  The Ministry of Finance expects the legislation to be introduced in Parliament today.

The Steering Committee has separately considered a framework (the “Framework”) developed by the Task Force for analyzing and addressing the balance of payment implications of domestic assets held in the estates.

The Task Force has also received suggestions from claimants attending these meetings for a voluntary arrangement designed to neutralize the balance of payments risks posed by the domestic assets in the estates.  These proposals contemplate addressing these risks through a combination of the payment of a voluntary stability contribution together with other measures designed to attenuate the release of krona that have been trapped behind the capital controls and augment the foreign currency reserves of the Central Bank of Iceland. 

LBI

Specifically with regard to LBI, there were consultations between (i) a group of restricted holders of LBI claims (the “LBI Claimants”) and their advisers and (ii) certain members of the Task Force and the Iceland advisers.

On 8 June 2015, in light of those consultations, a proposal was submitted to the Minister of Finance (in his capacity as chairman of the Steering Committee) on behalf of the LBI Claimants, based on their consultations with certain members of the Task Force and the Icelandic advisers (the “LBI Claimants' Proposal”).

The LBI Claimants' Proposal was made in consideration of prior measures taken by LBI, with the guidance and approval of the Central Bank of Iceland (the “CBI”), to address the balance of payments impact of Landsbankinn and Avens, two of LBI's largest domestic assets.  The measures contemplated by the LBI Claimants' Proposal are as follows: 

• A stability contribution (the “Stability Contribution”) would be made by the LBI estate to the Icelandic authorities consisting of:
  
• • all of LBI's ISK-denominated s cash-on-hand as of the effective date of any composition of the estate; less
  • Reserves (as defined below); plus
  • any ISK denominated cash-on-hand on the earlier of (i) the conclusion of the wind-down of the estate post composition and (ii) 31 December 2018 (including any residual balance remaining in the Reserves following payment of domestic de minimis claims and ISK expenses of the type constituting Additional Reserve (as defined below); provided that at any time prior to 31 December 2018 LBI shall promptly release to the CBI, or such other party as the CBI may designate, any funds in the Reserves that may no longer be used according to the prescribed purposes thereunder; plus
  • the Transferred Assets (as defined below).
• As part of the Stability Contribution, LBI will transfer or assign to the CBI, or such other party as the CBI may designate, its domestic assets to the extent realizable in ISK so that any future ISK recoveries of the estate will form part of the Stability Contribution.  The so-called “Transferred Assets” consist of:
  
• • The estate's (i) ISK denominated assets, (ii) claims and disputed rights against Residents (as defined in Article 1(1) of Act no. 87/1992 (the “FX Act”), and (iii) all equity in foreign SPVs that hold all or substantially all ISK denominated assets or claims against Residents, in each case other than to the extent realizable in FX, of which the estimated recoverable value is understood to equal up to ISK 9.5 bn as of 31 December 2014; and
  • The estate's non-cash domestic FX assets to the extent not supported or backed by non-domestic sourced FX, the estimated recoverable value of which is understood to equal the ISK equivalent of ISK 0.7 bn as of 31 December 2014.
• The Transferred Assets specifically exclude: (i) the LB Bond; (ii) the Avens Bond; (iii) the Landsvirkjun Bond; (iv) LBI's claims in the estates of Baugur Group, ehf., BG Holding ehf., Kaupthing hf. and Glitnir hf., in each case to the extent recoveries of such claims are in FX sourced from the respective estate assets (other than pursuant to ISK/ FX exchange transactions with the exception of any ISK/FX transactions as part of any of the debtors' approved composition plans); (v) any damages and voiding action litigation resulting in FX settlements (including under insurance policies) from non-residents, and (vi) any equity stakes in or claims against companies that have more than 80% of their revenue and costs abroad as provided for in Article 13(n)(6) of the FX Act.
  
• LBI will continue to retain cash in a reserve fund (the “Disputed Claims Reserve”) against certain large rejected disputed Article 109-111 priority claims by Glitnir hf., BG Holding ehf. and Kaupthing hf. into LBI (the “Rejected Disputed Priority Claims”); provided that LBI and the WuB will use commercially best efforts to resolve such claims, inter alia by continuing to pursue or defend them before the Icelandic courts.
  
• LBI will establish an additional reserve fund of up to ISK 3 bn for any domestic claims and any other reasonable, certified and documented ISK expenses relating to the wind-down of the estate (which shall not include any amounts paid in respect of management incentive schemes or performance payments) and for the payment of any de minimis amounts to domestic claimants in ISK, in connection with the composition contemplated by the Claimant Proposal (the “Additional Reserve”). The aggregate total amount of the Additional Reserve is capped at ISK 3 bn. The amount of such reserve is based on the average ISK operating costs of the estate for 2013 and 2014.  LBI will establish, upon composition, an account with a domestic commercial bank where the Additional Reserve will be deposited. The Disputed Claims Reserve and the Additional Reserve are referred to as the “Reserves”.
  
• The LBI Claimants agree to execute an undertaking which will stipulate that all material actions by the parties shall be completed on or before 31 December 2015.
  
• To accelerate the repayment of LBI's residual Article 112 claims in full by 31 December 2015 in cash, the LBI Claimants agree to backstop and/or underwrite a secured financing (the “112 Priority Financing”), on terms to be agreed, to LBI on the following basis:
  
• •  such financing shall be secured by all substantially all assets of LBI and have priority ranking ahead of Article 113 claims and any debt and equity investments delivered to Article 113 claimants in a composition of LBI (excluding any de minimis payments made to Article 113 claimants to facilitate a composition);
  • participation in such financing shall be offered on a ratable basis to all Article 113 claimants in the composition;
  • such financing shall be in an aggregate FX principal amount of no more than ISK 65 bn and shall be available upon composition; and
  • such financing remains subject to:
  • • the prepayment of the Avens Bond in Euros by the CBI in an ISK equivalent amount of ca. ISK 30 bn;
    • the prepayment by LB of the LB Bond tranche maturing in October 2016 (in the ISK equivalent amount of ca. ISK 31 bn);
    • any legislative amendments if and to the extent necessary to allow the estate to enter into such financing;
    • the payment, by the estate of any available cash to the Article 112 claimants (including any FX cash which can be released from the Disputed Claims Reserve); and
    • no material adverse change in the priority claim pool in the estate following 31 March 2015.
• On the basis that  a composition is achieved in the manner contemplated herein, LBI will unilaterally grant LB an option to convert (the “Conversion Option”) the current secured LB Bond to Euro-denominated market instruments under its EMTN programme to assist LB in achieving a more market typical unsecured funding structure. The Conversion Option shall be agreed with LB and be subject to the condition that LB has a long-term credit rating in foreign currency of at least BB+ by Standard & Poor's or Ba1 by Moody's on the date of any exercise of the Conversion Option.  The Conversion Option may be exercised at any time from the date the composition of LBI is approved according to Chapter IX of the Icelandic Bankruptcy Act until the later of (i) 15 December 2016 and (ii) 15 months after the composition approval by the Icelandic courts.  Any reference to “"market terms”" (or similar) of such EMTNs shall be confirmed and supported by a fairness opinion of an internationally-recognized investment bank, independent of the LBI claimant group and engaged by LB with a recent track record of issuing bonds in Iceland (an “Investment Bank”)
  
• Distributions to claimants would flow freely once (i) residual Article 112 claims have been paid, (ii) the Stability Contribution has been tendered, (iii) Transferred Assets have been transferred or assigned, (iv) the Conversion Option has been granted and all actions and provisions relating thereto have been satisfied.
  
• The provision of 112 Priority Financing and the Conversion Option remains subject to the LBI Claimants' internal credit approvals.
  
• The LBI Claimants would provide releases for parties including the CBI and Iceland.
  

The Task Force has confirmed that the LBI Claimants' Proposal is consistent with the Framework endorsed by the Steering Committee and recommends that an exemption be issued to LBI based on the LBI Claimants' Proposal. If granted an exemption from the capital controls by CBI after consulting with the Minister of Finance on the basis of the LBI Claimants' Proposal, the remaining assets of the LBI estate shall no longer be subject to capital controls and shall be freely available for distribution to claimants in the estate in accordance with the procedures established by Icelandic law.  In addition, the LBI Claimants' Proposal is premised on legislative changes and/or advance tax rulings being required to ensure that the composition does not result in any tax payable by LBI or its claimants as a result of composition (e.g. tax payable on debt forgiveness or issuance of notes and equity to claimants).

The Task Force's consultations with parties affected by the proposed liberalization of capital controls are ongoing.