SNS Reaal Investors Appeal Expropriation to Dutch Court

The top Dutch administrative court heard appeals from investors today against the government’s decree to expropriate SNS Reaal NV.

Lawyers argued the state’s decision was disproportionate and relied too heavily on one assessment of the company’s real estate loans. Representatives of international bond investors said it infringed on the free movement of capital.

“The minister said bond holders should contribute to the costs of nationalization,” William Schonewille, a lawyer representing subordinated bondholders including Aviva Plc’s French asset manager, said at the hearing. “That is, however, not a ground for expropriation.”

Dutch Finance Minister Jeroen Dijsselbloem took control of SNS Reaal on Feb. 1 after real estate losses brought the bank to the brink of collapse. The nationalization included shares and subordinated bonds in SNS Reaal NV and SNS Bank NV. The expropriation of subordinated creditors reduced the rescue costs for the state by about 1 billion euros ($1.3 billion), Dijsselbloem said.

The Hague-based Dutch Council of State said it received about 700 appeals from investors, including Italian insurer Unipol Assicurazioni SpA and Dutch trade union FNV Bondgenoten, in the 10 days following the nationalization. The court’s ruling is scheduled for Feb. 25.

Capital ‘Redistribution’

Dijsselbloem, sworn in on Nov. 5, became the first finance minister to use powers granted under legislation introduced last year allowing the Dutch central bank to transfer assets and liabilities in a troubled bank. The finance minister can decide to expropriate in case of a grave and immediate threat to the stability of the financial system.

“The effect of the way the nationalization was shaped results in unfair gains for senior bondholders and unfair losses for subordinated debt,” Schonewille said. “The law’s purpose is not to come to a redistribution of capital.”

SNS Bank NV’s 6.625 percent senior notes due 2016 have rallied since Jan. 31.

“I scrutinized all alternative solutions involving market parties,” Dijsselbloem, 46, said on Feb. 1. “I found myself compelled to conclude no acceptable total solution was offered. I therefore had to use the instrument of last resort, which is nationalization.”

‘Taking Risks’

Dijsselbloem had to choose between letting SNS fail and nationalizing it, said Eric Daalder, a lawyer at Pels Rijcken & Droogleever Fortuijn in The Hague, representing the finance minister. The government applied a systematic “ladder of bankruptcy” in assessing which investors were expropriated.

“The state doesn’t intervene in banks to protect their investors,” Daalder said. “If you invest, you know you are taking risks.”

The intervention also met the legal requirement of a grave and acute danger. Between Jan. 16 and Feb. 1, 2.5 billion euros of savings were withdrawn from the bank. SNS bank had a cash position of about 4.5 billion euros at the end of last month, which would have been depleted by mid-February if outflows continued at the same pace, and considering other obligations, Daalder said.

The company’s real estate investments had a book value of 8.55 billion euros at the end of June, the finance ministry said. That compares with SNS Bank’s balance sheet of 82.3 billion euros.

Property Study

A study by Cushman & Wakefield Inc. commissioned by the Dutch government found SNS Property Finance would face additional losses of as much as 3.2 billion euros in a worst- case scenario, the Finance Ministry said in its decree.

In a base case, estimated losses were 2.4 billion euros, 1.4 billion euros more than foreseen by Ernst & Young in a separate study, the central bank said in a letter on Jan. 24.

“Why did the minister rely solely on the Cushman & Wakefield report -- why not an average?” Schonewille said. “Subordinated bondholders will have to hand in about 1 billion euros, a loss that may not even exist.”

The bailout of SNS Reaal will cost taxpayers 3.7 billion euros in write-offs and capital injections, and the government is also providing 6.1 billion euros in loans and guarantees.

Independent Expert

An independent expert should look into the valuations of the real estate, lawyers on behalf of Dutch investor association VEB said. The VEB appealed on behalf of more than 5,300 shareholders and bond investors. Schonewille repeated that request.

Cushman & Wakefield used a discount factor to value the property finance loans of 7 percent, lawyers said, citing a letter from SNS Reaal to the finance ministry dated Jan. 13. SNS Reaal said a factor of 4 percent to 5 percent would be more appropriate.

A percentage point change in the discount rate may result in a change of the expected loss figures of about 600 million euros, SNS said in the letter, which was also published on the website of Dutch newspaper Het Financieele Dagblad today.

“The notion that it was all about the Cushman & Wakefield report is incorrect,” said Daalder. “It was merely one of the elements” that brought the minister to his decision.

Ciska Bequet, an Amsterdam-based spokeswoman for Cushman & Wakefield, declined to comment.

Assigning Blame

“Investors question whether the decision violates the European Convention on Human Rights,” Ben Baldwin, a lawyer at CMS Derks Star Busmann in Amsterdam, said in an interview before today’s hearing. “Moreover, my clients question whether the minister’s decision was taken with due care and whether it was proportional.” Baldwin represents investors in subordinated debt from Italy and Switzerland.

Kadier Yuksel, 40, an airplane maintenance worker who attended the hearing as an expropriated shareholder, bought stock two days before the state took over amid speculation a solution with private investors could be found.

“We should look into who caused this,” Yuksel said. “We can look at the company’s management, previous ministers who misjudged the situation, the financial crisis. Shareholders will not be on that list.”

The case is: Council of State, case no. 201301173/1.

To contact the reporters on this story: Maud van Gaal in Amsterdam at mvangaal@bloomberg.net; Fred Pals in Amsterdam at fpals@bloomberg.net

To contact the editor responsible for this story: Frank Connelly at fconnelly@bloomberg.net