Special Funding Program
SNSand Hermes
Last month saw several important
initiatives aimed at securing our
future growth. The first was the
successful close of a major Rabobank
Group funding exercise in which we
increased our guarantee (or Tier 1)
capital by issuing a new class of hybrid
securities onto the international
capital markets. A second initiative,
clearly related to the first, was
an announcement by group chairman
Hans Smits of plans to issue
comparable securities to members
within the Rl cooperative itself.
Meeting requirements
Facilitating trust
Strengthen, tighten, renew
Whats NewS Issue 10- December 1999
While details of the latter exercise
have yet to be elaborated, the inter
national capital market issue set an en-
couraging precedent. Pre-marketed by our
lead managers, Warburg Dillon Read (a
division of Switzerland's UBS) and Merrill
Lynch of the US, it met with brisk de-
mand, not least among retail clients in the
Benelux, Germany, France, Spain and
Switzerland. Our own distribution net-
work took orders for fully EUR .310 miI-
lion worth of securities. Consequently, the
overall value of the transaction was in
creased front EUR 300 to EUR 650 mil-
lion. This made it one of the largest exer-
cises of its kind in Europe to date, and
despite the massive twofold increase in its
originally envisioned size it was still over-
subscribed.
According to IFR, the definitive weekly
publication on international financing,
'The lead [managers] recognized that am-
ple liquidity rentains in the market for a
liquid and highly creditworthy name.
Rabobank is the world's most highly rated
private sector financial institution.'
The issue was important for several rea-
sons, the most obvious (and most com-
mented upon) relating to our structure as
a cooperative organization. Being owned
by our members we of course do not issue
ordinary shares or any other type of
traded equity; however, being a player on
the global market, we must maintain a
strong funding base in order to compete
and thrive. The special funding vehicle, as
well as the comprehensive plan to issue se
curities in Rabobank members, will en-
able us to meet both our cooperative and
our financial requirements. For Rabobank
and its associated companies including in-
surer Interpolis, lessor De Lage Landen,
Robeco, RaboSecurities, Rabobank Trust
and the ship mortgager Nedship Bank, it
will also ensure that our Tier 1 ratio re-
ma ins strong.
The international issue gave outside in-
vestors an opportunity to acquire pre-
ferred securities in one of the world's most
highly rated credit institutions, at a time
of frequent calls for capital from lesser
rated banks. (In fact, the paper received
the highest ever rating for a Euro prefer-
ence share issue: aa 1 by Moody's and AA
by Standard Poors.)
In order to facilitate the deal, a new US-
based finance subsidiary called the
Rabobank Capital Funding Trust was set
up through our New York operations. It
issued an initial tranche of 26 million 7%
non-cumulative, non-voting perpetual
trust preferred securities, with a par value
of (iBP 25. (A dividend is payable on the
securities, which rank as Lier I and are
listed on the Luxembourg and Amsterdam
stock exchanges, as long as the Rabo
Group earns a profit as it has for each of
its 100 years of existence to date). The
benefits of the trust construction were that
it was familiar to target investors on the
institutional and private banking market -
the instrument was valued much like a
fixed income security. Moreover, for Euro-
pean retail investors, many of whorn had
never bought an issue of this kind before,
the no-withholding-tax feature which
made it possible to receive an attractive
combination of security and pre-tax yield.
It is hoped that the issue of comparable
securities in the Rabobank Group to its
own members sometime in the first half
of next year will not only strengthen our
capital base by a substantial amount but
also tighten bonds and renew the coopera
tive concept for a new millennium.
Answering suggestions that the funding
initiatives might be a precursor to an
actual listing of the Rabobank Group,
Smits was very clear that he has ruled this
option out, although he added that a
public flotation of some of its parts might
be an option at some future date.
Our profile on the Dutch secu-
ritization market has once
again been heightened, this time
by our participation in the recent
EUR 437 million mortgage
backed transaction for SNS Bank,
the numbcr five Dutch bank.The
deal was made possible by Lon-
don's structured products desk
(Mark Gheerbrant and Charles
Gundy), together with relationship man
agement (Paul Michielsen) in Utrecht. It
involves the sale by SNS of a portfolio of
residential mortgage loans to a specially
created company, called Hermes. This
company in turn finances the purchase of
mortgage loans by issuing rated bonds on
the market. Through the use of a put op
tion, Rabobank effectively guaranteed
that investors would be repaid no later
than 10 years after closing, thus enhanc-
Charles Gundy
ing the bonds' marketabil-
ity. (Technieally, Rl com-
initted to buy the bonds
back from Hermes in the
unlikely even that SNS
failed to take them back
onto its balance sheet
within a specified time.)
Moreover, using innova-
tive structural techniques
involving the use of a bank subordinatcd
loan, we were also able to ensure the sol-
vency charge on the transaction by the
Dutch Central Bank was very low indeed,
thus substantially improving the return on
solvency. Having delivered these value
adding elements, Rl was asked by SNS to
play a senior role in the distribution of the
bonds as senior co-lead, thus enhancing
our reputation and standing on the Euro-
pean market for asset backed securities.