In an extensive article on Iceland’s progress, the international financial data and media company Bloomberg quotes Arion CEO Höskuldur H. Ólafsson saying that the outlook is positive for the bank to successfully pull off the Eurobond issue.

Iceland is now recovering from letting its banks collapse with USD 25 billion debts in 2008, while the Eurozone is getting into worse trouble; and Iceland’s CDS (Credit Default Swap) rate now shows it costs less to insure Icelandic debt than Eurozone debt, Bloomberg reports.

Höskuldur believes this information is encouraging the three new domestic banks carved out of the remains of the collapsed ones to investigate their international potential. A lot of things in Iceland are going well, compared to the rest of Europe, he says.

By way of illustration it is pointed out that Arion Bank has a capital adequacy ratio of 21.4 percent, compared to the FME financial regulatory authority’s 16 percent target and a legal minimum of 8 percent.

Arion (formerly Kaupþing) is 13 percent in the hands of the Icelandic state and 87 percent owned by Kaupþing creditors and the bank says it is talking to international ratings agencies to get a credit grade.

“We have not fully concluded how much debt we intend to issue in foreign currencies in the near term,” Höskuldur told Bloomberg. “It’s important that we take small steps to begin with.”

The likely Arion bond issue is triggered by the Icelandic government’s USD 1 billion bond issue this June which was twice over-subscribed by investors — the country’s first foray into global markets since the crash of 2008. “It was paramount that the Icelandic Republic led the way and was successful,” Höskuldur said.

The deal with Arion will see key executives keeping a slice of the company worth around ISK 330 million (EUR 2.07 million). They will not pay anything for the shares and will not need to pay tax on them either, according to the contract with the bank.

Having made the deal, Arion will now be able to sell on the remaining 97.5 percent of the company.

Hagar runs many of Iceland’s biggest shops, including the Bónus and Hagkaup supermarkets.

Vísir.is reports that Arion Banki has not released any details about which Hagar bosses will be given shares; but it is known that current president of the company Finnur Árnason is among them.

The latest reports value Hagar at around ISK 13 billion (EUR 81.35 million). The stake being gifted to its former execs is worth around ISK 330 million, and is therefore around 2.5 percent of the business.

Arion Bank’s first-half profit after tax stood at ISK 10.2 billion (EUR 63.5 million) — which is ISK 2.3 billion more than the same period last year. A statement from the bank said the profit increase is greater than expected, largely because of a re-evaluation of its corporate loan portfolio.

Arion and the bankrupt estate of Kaupthing made their final transactions in the second quarter and this is therefore the first time Arion has released half-year results which are entirely independent of Kaupthing. The bank says this simplification and extra transparency is an important step for Arion, DV reported.

At the end of the first six months of the year, Arions capital adequacy ratio stood at 21.4 percent; which is significantly above the Central Bank of Iceland minimum level of 16 percent. The same is true of the bank’s liquidity position.

A statement from Arion director Hoskuldur H. Olafsson did not say whether or not the bank’s customers can expect to benefit from its good fortunes — although he did state that the bank is helping debtors by offering a wider and more flexible range of housing loan options.

A statement from the bank says that although recent Supreme Court of Iceland rulings have not directly affected Arion’s loan book, they do set a clear precedent that affects some 2,000 of the bank’s loans. The matter started when the court decided that ‘basket of currencies’ car loans in the boom years had been illegal; because although loaning in foreign currencies is allowed, the car loans were charged as if they were in foreign currencies, but paid out to customers in Icelandic kronur. The court found that this had been illegal. There is now another case in which a company is trying to claim that foreign currency loans to businesses should also be declared illegal.

In its latest move, Arion Bank appears to be trying to beat the trend and reorganise loans at its leisure and avoid being forced to make the changes at a later date.

According to RUV, there is also uncertainty over the legality of a further 2-300 Arion loans, and the bank wants to remove the uncertainty as soon as possible. The bank plans to complete the reorganisation of the loans in October and until then affected customers can choose whether to carry on paying as normal, or to pay a symbolic monthly sum of ISK 10,000 (EUR 60) for every million (EUR 6,000) in outstanding debt.

It emerged during the last week that the directors of Islandsbanki and Arion Bank are taking home millions of kronur each month in salary and that Arion has awarded its boss nearly 45 percent more pay in 2010 than in 2009.

On her Facebook page, the Prime Minister said that such sums of money are completely unfair while so many in Iceland are still struggling with the worst effects of 2008′s banking crash. An Arion board member meanwhile defended the move, saying that the higher wage relates to a new bank director and is therefore not a pay rise but a whole new employment contract.

The other big banking story of the weekend was the merger of SpKef into Landsbanki due to the savings bank’s terrible liquidity position.

Minister of Finance Steingrimur J. Sigfusson told RUV that he would have liked to rescue the bank, which he described as a linchpin of the savings banks network; but added that it would have cost the state as much as ISK 20 billion (EUR 124.2 million). By forcing Landsbanki to take over the troubled bank, the taxpayer is saving at least ISK 8 billion, he said. This means, however, that the state is still faced with a roughly 12 billion krona bill.

Some 120 people worked for SpKef and Landsbanki has promised to save all the jobs it can — although it will not rule out redundancies outright. SpKef branches in Isafjordur, Olafsvik, Grindavik and Reykjanesbaer will be closed down and merged with local Landsbanki branches. The other 14 (mostly rural) SpKef branches will remain open but will be re-branded as Landsbanki.

Arion made its decision to sell 10-11 separately due to advice that it will raise more money than if it were sold along with other Hagar chains including Bonus and Hagkaup. The bank was also responding to Competition Authority concerns that keeping the group together would not benefit free competition in the food market.

10-11 runs 23 stores in the Reykjavik capital region, in Reykjanesbaer and in Akureyri. They are open 24-7 and employ 230 people. The chain was valued at ISK 4 billion(USD 34.1 million) last year. With 10-11 sold off, Hagar will be left with 38 food stores.

Press release:

During the selection process a keen emphasis was placed on appointing directors with diverse educational backgrounds and broad experience of the banking and corporate sectors. The appointments also took into account the particularly challenging conditions in the Icelandic economy and the task of reconstruction facing the Icelandic business sector. Bringing in non-Icelandic board members with far-reaching expertise was a further important consideration. Two of the new board members are from Scandinavia and have broad experience of international finance and are experts in their respective fields. The Chairwoman, Monica Caneman, is the former deputy CEO of Skandinaviska Enskilda Banken (SEB), where she worked for 25 years. Since 2001 she has developed a career around corporate board assignments.

The new board is the first since the Resolution Committee of Kaupthing, on behalf of its creditors and the Icelandic government, reached an agreement on the ownership of Arion Bank. Under this agreement Kaupskil ehf, the holding company of Kaupthing, controls Kaupthing’s 87% share in Arion Bank and appoints four board members, while the Icelandic State Banking Agency controls the government’s 13% share and appoints the fifth board member.

The Board of Directors has been appointed in accordance with the terms stipulated by the Icelandic Financial Supervisory Authority (FME) on Kaupskil’s ownership of Arion Bank, which stated that the majority of board members, including the Chairperson, should be independent of Kaupthing and individual creditors. In addition, one board member may come from the Resolution Committee. The Icelandic State Banking Agency has appointed one board member in accordance with the proposals of a selection committee. Following the appointment of the board the FME will assess whether the board members meet the stipulated requirements on relevant expertise and experience in the financial sector.

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.

The Old Kaupthing resolution committee has been working hard to negotiate a consensus among creditors before yesterday’s deadline expired. The two main options on the table were for the Icelandic government to hold on to Arion Bank for the time being with Old Kaupthing creditors having options on 90 percent of the bank later; or for creditors, the vast majority of whom are not Icelandic, to take 87 percent of the bank straight away and leave the government with 13 percent.

According to RUV sources, Old Kaupthing creditors have decided to take the second option and take control of Arion Bank. Arion will therefore be a foreign-owned bank as of today – provided that the country’s financial regulator and competition authority approve the move.

It looks likely that from today, both Arion and Islandsbanki will be foreign-owned banks in Iceland and of the three big players, only New Landsbanki will remain a nationalised institution.

The government passed Islandsbanki (New Glitnir) onto its principal creditors and retains just a five percent stake, RUV reports.

Eight small savings banks have also requested the state invest in them. If the government decides to comply with their wishes, the management of the investment would go to the specially created banking commissioner who looks after all the government’s investments in financial institutions.

It is understood the government plans to rid itself of New Landsbanki by attempting to build up the new bank until its shares can again be traded publicly on the stock exchange. The eventual goal is total government withdrawal from the banking industry within five years of the crash, or roughly four years from now. At that point, the role of banking commissioner would legally cease to exist.