04 December 2014

Central Bank grants LBI hf. an exemption for payments to priority creditors following agreement amending Landsbankinn-LBI bond

Central Bank of Iceland

Following legally mandated consultation with the Minister of Finance and Economic Affairs, the Central Bank of Iceland has granted LBI hf. an exemption from the Foreign Exchange Act, which will enable the bank to remit payments to priority creditors in the amount of 400 b.kr.

Furthermore, the Central Bank of Iceland has pledged to grant LBI hf. exemptions for further partial payments to priority creditors from its future recoveries, provided that such exemptions are not deemed to jeopardise monetary and exchange rate stability, in accordance with the views that are considered when applications for such exemptions are evaluated.

The background to the exemption is that LBI hf. and Landsbankinn hf. have reached an agreement to amend the bonds issued by Landsbankinn hf. on the basis of the Financial Supervisory Authority’s 9 October 2008 decision on the division of assets and liabilities following the collapse of Landsbanki Íslands hf. Under this agreement, the residual maturity of the bonds will be lengthened and LBI hf. will participate in Landsbankinn hf.’s refinancing risk after 2018. This entails various amendments to the previous agreement reached by the parties on 8 May 2014, but in other respects the agreement will take effect concurrent with the Central Bank’s exemption. LBI hf. entered into the agreement amending the terms of the Landsbankinn-LBI bonds on the condition that the above-mentioned exemption and pledge be granted. These conditions are much narrower in scope than those requested by LBI hf. in June, following the agreement reached in May, which entailed a request for extremely broad exemptions covering all of the estate’s assets.

The Central Bank’s conclusions concerning the exemption and the related pledge are based on two types of analysis: an analysis of the effect of amending the terms of the Landsbankinn-LBI bonds, thereby fulfilling the agreement between the parties, and an analysis of the effects of the exemption as such and the related disbursements from the LBI estate on the balance of payments and on financial stability. Consideration was also given to the precedent that such an exemption would set.

In the opinion of the Central Bank, amending the bonds will have a positive effect on economic and financial stability in Iceland and will facilitate capital account liberalisation. The risk of destabilising the balance of payments in coming years will therefore be reduced, as the debt service burden on residents’ foreign-denominated debt will be much less than previously estimated, or the equivalent of 124 b.kr. through 2018. Improving Landsbankinn hf.’s funding profile should also ease the bank’s access to funding in foreign credit markets on manageable terms and enable it to meet the business community’s need for foreign-denominated credit financing.

Further information can be obtained from Már Guðmundsson, Governor of the Central Bank of Iceland, at tel: +354 569-9600.

No. 41/2014
3 December 2014