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Landesbanki

Offshore Money Managers  OMM

 Have been selling so called Equity Release (but which is not equity release - it is simply capital raising via short term loans against the value of real estate with an additional charge against the funds raised by the borrowing when later invested)

OMM and others have been relying on the advances from Icelandic Bank, Landesbanki and the following article and the attached may suggest that they have bitten off more than they (Landsbanki) can chew given current pressure on the Icelandic banking community.  The banking industry in Iceland is under immense pressure at present with interest rates rising last week to 11.5% and looking to go higher.  If they decide to call in the short term loans from those who have raised funds under the OMM scheme the proverbial will then hit the fan.........stand clear!

The weakness of the Icelandic Krona is causing considerable international concern.   It is normal practice for banks to borrow (or rather use the) funds of those with cash deposits as well as raising funds from external sources, such as other international banks.    The problem is that if your domestic currency falls and your local interest rates rise the  lenders have much reduced security and in this case it has led to outside lenders refusing to roll over large value loans.

Such funds are then used for other commercial projects.   One such project that Landesbanki are involved in is the short term lending currently being advertised erroneously in Spain as “equity release” (the ads talk of reductions in Spanish succession tax and then the borrower is persuaded to enter into a renewable 5 year loan i.e. renewable at the bank’s discretion).

Now here is where the math gets difficult!!

The Icelandic Krona has fallen against the Euro by around 20% since the beginning of the year and the Icelandic banking industry is in crisis.  Last week when rates were raised to 11.5% in Iceland - can you imagine the concern of the international lenders to such banks?

In essence Landesbanki now have funds loaned to EU based borrowers at rates around 5.5%, they are not having the existing international loans rolled over due to concern over the future security and now if the bank want to repay Euro or Dollar borrowings they need to find 20% more Krona than was required at the beginning of the year…….it is not good news for Landesbanki, OMM nor any borrower. If as I suspect the loans are called in early (and they can be recalled at any time subject to the required notice) those who have borrowed will be required ot repay from the net funds available after all the charges have been paid for the raising of the loan and for the set up of the associated investments….there will be a shortfall between the amount borrowed and the amount repayable in most cases in my view and whilst I hope that no-one’s home is really at risk this will have been an expensive exercise and have achieved nothing at great cost if this scenario should come about.

 

From an experienced licenced Financil Advisor

March 25, 2006

Icelandic Banks

Ooops!

ICELAND’S three biggest banks had their finances called into question last night, after US institutions refused to extend some of their loans to the banks.

A group of US insurers and mutual funds yesterday decided not to roll over $600 million of so-called short-term extendable notes they had made to Kaupthing, the icelandic bank.
The lenders also decided not to extend $200 million of the notes — which were issued a few months ago and would typically have been renewed every month for five years — made to Landesbanki, a rival to Kaupthing. Landesbanki provided the £162.8 million of debt used to finance yesterday’s acquisition of Wyndeham Press Group, the British printing and marketing firm, by Dagsbrun, the Icelandic telecoms firm

Classic banking mistake, borrowing short to lend long. Everyone does it, of course, but in moderation. Get too extended and all it takes is as above, someone to not roll over the short-term debt and you’re screwed.

Iceland’s biggest banks have grown so fast in the past three years that the loans they have made are now three times as great as their deposits, Mr Thomas said. A solid European bank would typically have a loan value of between one and 1½ times its deposits, he said.

Ouch.

March 25, 2006

TrackBack

 

  

 

Times Online

 

The Times

March 25, 2006

 

Icelandic banks refused extensions on loans

ICELAND’S three biggest banks had their finances called into question last night, after US institutions refused to extend some of their loans to the banks.

A group of US insurers and mutual funds yesterday decided not to roll over $600 million of so-called short-term extendable notes they had made to Kaupthing, the icelandic bank.

 

 

The lenders also decided not to extend $200 million of the notes — which were issued a few months ago and would typically have been renewed every month for five years — made to Landesbanki, a rival to Kaupthing.

Landesbanki provided the £162.8 million of debt used to finance yesterday’s acquisition of Wyndeham Press Group, the British printing and marketing firm, by Dagsbrun, the Icelandic telecoms firm.

Richard Thomas, an analyst at Merrill Lynch, said: “We are seeing the classic signs of an overleveraged banking system and this has flashed a red alarm signal. The banks are extremely vulnerable and it is clear that the sentiment is shifting against them.”

Iceland’s biggest banks have grown so fast in the past three years that the loans they have made are now three times as great as their deposits, Mr Thomas said. A solid European bank would typically have a loan value of between one and 1½ times its deposits, he said.

Alex Birry, an analyst at Fitch, the ratings agency, said: “The funding costs of the banks will start to go up and this will restrict scope for further growth.”

Gudni Adalsteinsson, of Kaupthing, said: “The US lenders in question have limited investment criteria. I can’t see that this will have an impact on the situation in Europe.”

Glitnir, another of Iceland’s biggest banks, also failed to roll over some of its short-term extendable notes.

BIG BACKERS OF DEALS

·  Landesbanki: backed leveraged buyouts of Mappin & Webb and Whittard of Chelsea

·  Kaupthing: last year acquired Singer & Friedlander, the merchant bank, and has financed many deals for Baugur, the Icelandic investment firm

 


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