The Situation: After the nationalization of the Dutch SNS banking and insurance group, the Dutch Minister of Finance offered zero compensation to expropriated bondholders.
The Result: Ten years after the nationalization, the Dutch Supreme Court confirmed compensation awards totaling approximately €1 billion including accrued interest.
Looking Ahead: The SNS case provides some interesting lessons on where those seeking compensation in the context of bank bailouts and resolutions may head.
"Justice delayed is justice denied" goes the old saying. This month marked the end of a 10-year pursuit for justice with €1 billion finally being paid out by the Dutch state in compensation for its expropriation of SNS Bank and SNS Reaal ("SNS") in February 2013. For a full decade, the Dutch government had refused to compensate victims of its expropriation, claiming that their assets were all worthless at the time of its intervention. The Dutch Supreme Court recently ruled that the Ministry of Finance and its advisors got that analysis spectacularly wrong and that the former (subordinated) bondholders were actually owed approximately €1 billion in compensation, including interest accrued over the prior decade.
The expropriation of SNS by the Dutch State in 2013 was effected under the Dutch Intervention Act (Interventiewet), a Dutch law introduced in anticipation of the EU's Bank Recovery and Resolution Directive (the "BRRD") that had to be implemented in EU Member States' legislation by 2014. Whilst the application of the Dutch Intervention Act is limited to Dutch banks, the BRRD sets a framework for the EU Member States' interventionist powers when dealing with failing credit institutions. Both are aimed at granting tools and powers to the relevant government to intervene when systemically relevant financial institutions are on the brink of failure. Although there are significant differences between the Dutch Intervention Act and the BRRD, they share some similarities.
With the financial turmoil that has resurfaced in 2023, with major bank failures seen in both Europe and the United States, the SNS case provides some interesting lessons on where those seeking compensation may or may not head with their arguments.
The principles laid out in national insolvency laws will often form the basis for compensation.
The Dutch State nationalized SNS in February 2013, expropriating SNS shares and bondholders' securities, as well as certain other instruments (such as loans). Under the Dutch Intervention Act, the Dutch State must make an 'offer of compensation' to expropriated parties. That offer must: (i) provide full compensation for the damage that expropriated parties will directly and inevitably suffer as a result of the expropriation; and (ii) represent the actual value of the expropriated securities. When determining the actual value, the Dutch Intervention Act prescribes a two-step approach. First, it must be established what would have happened with the failing entity absent government expropriation. Second, it must be determined what price would have been paid at the time of the expropriation assuming a free market sale of the expropriated securities between a reasonably acting seller and purchaser in that scenario (i.e., absent the expropriation).
In the SNS case, a continuation of SNS's operations was not possible as it no longer satisfied the minimum capital requirements imposed by the Basel III-requirements. The Dutch Central Bank (as regulator) had already announced it would invoke the emergency regulations, which would have given it effective control over SNS through the appointment of trustees. As a going concern scenario was ruled out, the only other possible alternative scenarios were a (partial) takeover or the opening of bankruptcy proceedings. The first of these scenarios had already been explored through an offer made by a private equity party. That potential deal fell apart in the run-up to the expropriation. As such, the Enterprise Chamber (the court charged with performing the valuation exercise) found that a bankruptcy was the only realistic scenario for valuation purposes.
Under the BRRD, expropriated parties may be entitled to compensation if they receive less value under the resolution/scheme than they would have received in a bankruptcy of the relevant bank (the no-creditor-worse-off principle). The Danish Andelskassen J.A.K. matter provides a good example of a case in which creditors successfully argued for compensation based on the no-creditor-worse-off principle. Both in BRRD-interventions and the SNS expropriation, the expropriated parties' rights to compensation will often depend on the value that they would have received for their securities in the event of a bankruptcy.
Having established a bankruptcy of SNS as the relevant valuation scenario, the Enterprise Chamber then had to establish what a reasonable buyer would have offered for the securities at the time of the expropriation in light of the fact that a bankruptcy was inevitable. That will largely key off what each of the creditors would have received in that bankruptcy scenario.
As in many other European jurisdictions, Dutch bankruptcy trustees have an obligation to maximize the value of the bankruptcy estate. In most cases a fire-sale liquidation would not lead to the realization of the bankruptcy estate's maximum value. This became particularly evident when court-appointed experts had to determine the outcome of a hypothetical SNS bankruptcy.
Under Dutch law, post-petition interest is not payable by the bankrupt entity during the bankruptcy. The bankrupt entity is, however, still entitled to receive interest on outstanding loans made to its clients. As such, the experts determined that, if SNS had gone bankrupt, the trustees would have elected to implement a long term run-off of SNS's loan portfolio. By virtue of the interest asymmetry, whereby banks' trustees can collect interest from debtors but not owe any to creditors, they are often able to create significant value during the bankruptcy, with limited expenses. This led the experts to conclude that SNS's trustees would almost certainly have been able to repay its creditors in full. The Enterprise Chamber agreed with the experts and adopted this long-term run-off scenario to determine the value of the bonds.
In a long term run-off scenario, (almost) risk-free rates can be applied to discount future cash flows.
As a final step, the Enterprise Chambers had to establish at what price the expropriated securities could have been sold in a free market sale at the time of expropriation (absent that expropriation). A potential buyer would have had to wait until the end of the run-off period, but would have almost certainly received the full principal amount of its claim at that time. On that basis, the Enterprise Chamber ruled that the value of the securities at the time of the expropriation was equal to the discounted value of the principal due on those claims.
As full repayment of all principal claims is almost certain in a long-term run-off, the associated future risks were deemed close to zero. In respect of the creditors of the bank, the Enterprise Chamber therefore applied the lowest-risk discount rate (10-year German government bonds).
Is the SNS template relevant to the recent Credit Suisse failure?
In the days leading up to the Dutch Supreme Court judgment in the SNS case, the Credit Suisse crisis put bank interventions back on the front pages of newspapers. Various groups of former (subordinated) bondholders and shareholders of Credit Suisse announced that they would claim compensation following Credit Suisse's government-mandated take over by UBS.
The Credit Suisse case provides an interesting, yet different example of governmental intervention to save a financially distressed bank. Rather than being effected as an expropriation, as was the case with SNS, the transaction was implemented as a commercial "shotgun marriage" with the government working in conjunction with the private sector to effectively fold Credit Suisse into UBS. Interestingly, despite Switzerland having a bank resolution regime similar to the BRRD (as the Netherlands does), when a systemically important bank came under serious stress and the regime looked like it was going to be needed, the Swiss Finance Minister baulked, believing that the deployment of the existing protocols would have triggered the very international financial crisis that they were designed to avoid. Instead, the Swiss government used a huge amount of public money to fund an ad hoc rescue effort which not only bore no relation to the regime that was supposed to be applied but also was put into effect by an Emergency Ordinance that bypassed Parliament and the shareholder assemblies of both Credit Suisse and UBS.
As a key term of that transaction, the subordinated (AT1) bondholders of Credit Suisse saw their claims wiped out in full, while shareholder value was not (although it was significantly diluted). The terms of the relevant bonds are said to have stipulated that any claims on them would be wiped out if certain trigger events occurred. Per Credit Suisse and the Swiss government, a trigger event had occurred, when the Swiss Financial Market Supervisory Authority intervened (specifically, the receipt by Credit Suisse of an irrevocable commitment of extraordinary support from the public sector).
The Credit Suisse case emphasizes the need to thoroughly assess the applicable terms when analyzing potential investment opportunities. Not only may the terms lead to a negative outcome in the event of governmental intervention, but they may also have value implications if assessed on a going concern or on a bankruptcy basis. That will likely leave Credit Suisse creditors exploring a different set of potential claims/remedies to those available to SNS creditors under the Dutch regime. For example, arguments that a qualifying trigger event had not in fact occurred when assessed objectively, claims in misrepresentation inducing investment, claims related to a failure to properly and timely regulate/report/disclose, claims that this was effectively a disguised expropriation with the expropriator working hand in glove with a nominated beneficiary/conspirator, claims in mismanagement, investment treaty claims relying on investment expectations at the time of investment (for example that Switzerland would follow its own laws and not pass new ones that took away rights/value; all without reference to parliament or the affected parties). SNS bondholders saw no compensation for 10 years before finally being repaid in full. Credit Suisse bondholders may need similar levels of patience and an even more creative playbook.
Jones Day represented some of the expropriated bondholders in the Dutch court case in a 10-year pursuit of full compensation.
Three Key Takeaways:
- In bank resolutions and expropriations, the expropriated parties' rights to compensation may well depend on the value they would have received for their securities in the event of a bankruptcy; a long-term run-off scenario will often enable the bankrupt entity to create significant value during the bankruptcy, with limited expenses, meaning that (almost) risk-free rates can be applied to discount future cash flows.
- This leads to a high probability of certain instruments being paid in full even in a bankruptcy scenario, which can be key given the no-creditor-worse-off principle.
- But the terms of the bonds/assets will always remain key. As the Credit Suisse example shows, every failure is fact specific and there will always be a need to thoroughly assess the applicable terms when valuing/investing.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.