Agreement on ownership of Arion Bank

Press release No. 77/2009

Kaupthing Bank acquires 87% share in Arion Bank
- The Resolution Committee of Kaupthing Bank contributes up to ISK 66 billion in common equity

The Resolution Committee of Kaupthing Bank has, in consultation with the creditors and being supported by its financial advisor throughout the process, decided that Kaupthing Bank and thereby its creditors shall acquire 87% of common equity in Arion Bank. The Government will continue to own 13% of common equity. The Resolution Committee believes that active ownership of Arion Bank will maximize the value of assets which were transferred between the banks in October 2008. When Arion Bank was capitalized the Government committed itself to contributing ISK 72 billion in common equity. A part of the agreement the Resolution Committee will contribute up to ISK 66 billion of the amount promised by the Government.

Key points:

• 
  Kaupthing Bank acquires 87% of the share capital in Arion Bank and 13% remain under Government ownership.
• 
  The Resolution Committee contributes up to ISK 66 billion in common equity instead of the Government.
• 
  Arion Bank has strong foundations and employs a team of highly qualified and experienced staff. The success of Arion Bank is directly linked to the interests of Kaupthing Bank’s creditors.
• 
  Arion Bank remains governed by Icelandic law and Icelandic supervisory institutions ensuring deposits held in the bank remain as secure as before.
• 
  The Resolution Committee appoints four members to the new board of Arion Bank and the Government one.
• 
  Arion Bank becomes an independent operating subsidiary of Kaupthing Bank.
• 
  By continuing to work closely with foreign creditors, Arion Bank has the opportunity to rebuild the trust and reputation of the Icelandic banking sector.

The common equity of Arion Bank is approximately ISK 72 billion and the Tier I ratio 12%. The bank is fully capitalized and its liquidity position is strong. The bank has been profitable since it was established in October 2008. With the Resolution Committee’s involvement, Arion Bank will become a strong bank and well positioned to lead the development of the Icelandic economy for the good of Icelandic people and domestic companies as well as its owners. The agreement with the Government entails that the Government contributes a subordinated, FX denominated loan which will increase Arion’s capital ratio to 16%.

Morgan Stanley, the advisor to the Resolution Committee, has been working with the Resolution Committee on the settlement between Kaupthing Bank and Arion Bank. The Icelandic Government was assisted by Hawkpoint, its appointed financial advisor. The Resolution Committee consulted creditors’ representatives who performed their own due diligence with the information available to them.

The creditors’ representatives participated in the negotiation process with the Government.

Steinar Thor Gudgeirsson, the chairman of the Resolution Committee of Kaupthing Bank:
“We believe that creditors’ interests are best served by acquiring the majority shares in Arion Bank. With active ownership of Arion Bank, including membership in its board, the Resolution Committee is in a position to strengthen the bank even further. The continued relations with foreign creditors enable us to build up confidence between foreign and domestic financial institutions. Throughout the negotiation process the Resolution Committee placed great emphasis on the creditors’ being given the opportunity to provide feedback and to state their views. This decision eliminates the uncertainty over Arion’s future and we can now concentrate on the process of reconstructing the Icelandic economy.”

Steingrimur J. Sigfusson, the Minister of Finance:
“The Government is satisfied that Kaupthing Bank’s creditors have acquired the majority of the share capital in Arion Bank, and it is important for the development of the Icelandic economy as a whole that the Government contributes less than originally estimated. The bank is fully capitalized and has solid financial foundations and is an important part of the new Icelandic economy. Arion Bank should be in a position to achieve the financial restructuring of companies and offer viable solutions to indebted individuals and Icelandic households.”

The Resolution Committee’s decision is subject to approval from the FME and the Competition Authority. Kaupthing Bank owns Arion Bank through a holding company, and therefore, Arion Bank will become an independent operating subsidiary of Kaupthing Bank. The Resolution Committee will appoint four out of five board members and the Icelandic Government will select one. The Resolution Committee aims to have two foreign experts and two Icelandic experts on the board of directors, one of which will be from the Resolution Committee.

Prelude:
The Resolution Committee and the Icelandic Government signed an agreement on settlement between Kaupthing Bank and Arion Bank on 3 September 2009. The agreement provided the Resolution Committee with two alternatives: Firstly, Kaupthing Bank could acquire 87% of common equity in Arion Bank which would leave the Icelandic Government with a 13% share. Secondly, Kaupthing Bank had the option to participate in the capitalization at a later stage through a call option on 90% of the shares in Arion Bank which could be exercised in the period 2011-2015.

Ministry of Finance, December 1 2009