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26 November 2009

After many months of rumours (and a KBC denial published in these columns some months ago), it is now official: the possible sale of the Antwerp Diamond Bank (ADB) is contained in the $5 billion Belgian government bail-out of ADB's parent company KBC. The bail-out, or recapitalisation (which is a more friendly euphemism for the same term) has now been approved by Neelie Kroes, the European Competition Commissioner who also must determine whether state aid leads to excessive competitive distortions in the financial markets.

After a quite extensive investigation, Kroes has now determined that "the capital injection is necessary to maintain the market's confidence in KBC and to ensure its contribution in providing loans to the real economy." The recapitalization met with her criteria for state aid and "was an adequate remedy to a serious disturbance in the Belgian economy."

ADB Sale Second Priority

The sale of ADB is not among the first priorities outlined by the Competition Commissioner and it may take some 3 to 4 years before it is realized - if it is realized. I must be clear about this: if tomorrow a serious party makes an attractive offer, KBC will sell immediately. But otherwise, it will not become an immediate priority.

In fact, with regard to KBC, the Commission has approved two recapitalisations, an asset relief measure and restructuring package submitted by the Belgian authorities. The first priorities have to do with KBC's Europe-wide business: it must sell its entire European Private Banking business. In Belgium, KBC's home market, KBC will divest Centea (a bank) and Fidea (an insurer) as, says Kroes, "this will create more competition on the Belgian market." In Central and Eastern Europe, KBC will divest or run-down a significant number of businesses. It will continue to retain an important presence in the region, however.

KBC must also stop the activities of "KBC Financial Products" - the business that was responsible for marketing the Collateralised Debt Obligations that caused KBC's difficulties. KBC furthermore has provided a repayment plan outlining how it will repay the recapitalisations it received from the Belgian authorities.

And here is the catch. The bail out is mostly a loan that needs to be repaid. KBC sources believe that they will be able to start repayments within a two year period. When this makes progress, or is done in a satisfactory manner, disposals which have been earmarked as having a "second priority" may then be reconsidered. The lower priority assets are on lists, as their sales may provide the liquidity that KBC may need to meet its obligations. They are not "a must." At least, not now.

Impact on Diamond Clients

There are thus three scenarios on the table: (1) an early sale if there is a serious buyer; (2) a later sale if KBC's repayment progress is less positive than expected; and (3) no sale. An "early sale" is the sexiest - in the sense that it would mean that there is a very strong financial party interested in the bank. The ADB is not an industrial concern where the break-up value of parts may be worth more than the whole. Whoever buys it, wants to continue to operate it.

KBC Chief Executive Jan Vanhevel has warned that there will no be "cheap distress sales" of any asset; the EC has given ample flexibility for the processes to take the time needed. No fire-sales. As far as ADB is concerned, KBC has declared that it will continue its support for the bank as it has done so far - time will tell, of course.

A few hours before the EC announcements, ADB's Executive Committee Chairman Pierre De Bosscher gave a policy speech at the Antwerp Diamond Conference. Undoubtedly, De Bosscher was aware of the forthcoming announcement, though it wasn't reflected in his remarks. To the contrary. He stressed that during the crisis his bank had not reduced credit facilities! He also stressed the long-term nature of his policies.

Chairman Pierre De Bosscher's Policy Statement

His message was one of calm, stressing the difference between the general corporate banking approach and the policy followed by the bank. Generally speaking, he said, "when customers cannot abide by their borrowing covenant, ‘the strict corporate approach', would require either the immediate cancellation of credit lines (and as such precipitating the borrower into cessation of activities when no alternative source of financing is available), or imposing restructuring measures on the company (such as sale of assets, revision of its business plan and financial strengthening). "Last but not least, the bank could force a significant upward adjustment in pricing together with new and additional covenants.

"We did not do any of these things," said De Bosscher.  "We have [in the current crisis] not followed this path of abruptly pulling the plug or enforcing aggressive remedial action with our clients. Instead we have favoured, generally speaking, an approach allowing the gradual reduction of shortage of cover. We even punctually approved [the financing of] new purchase transactions when reasonable assurance concerning both minimum profitability and timely liquidation pattern could be provided, as such aiming at facilitating a quicker recovery by our clients. Indeed, a transactional based credit policy offers the advantage that

  • no reduction in credit lines (unless in an exceptional case) was necessary and,
  • hence access to existing credit facilities stays guaranteed during an economic slowdown and,
  • ultimately, finance can be obtained again at the same credit modalities as before as soon as sufficient valid transactional cover is at hand."

Reconfirming Longstanding Policy     

"Whatever the changes [in the post-crisis diamond industry] may be, I am convinced that the true essence of the relationship between the specialised diamond banker and his client should not be altered in the future. I firmly believe in the virtues of proximity and relationship banking as well as in the adequacy of our specific diamond credit model. This model is transaction oriented and based on the individual asset conversion cycle of each customer, reflecting the credit needs following the activities of the company.

"As far as ADB is concerned," said De Bosscher, "and notwithstanding the ever increasing regulatory pressure and capital constraints weighing on all of us stemming from national and supranational authorities, I can assure you that we will continue to fully adhere to our relationship banking and transaction oriented credit policy, hereby continuously aiming to strike an adequate and appropriate balance between risk and reward. In addition, in line with trade statistics which have shown that the Antwerp marketplace has weathered the storm comparatively better than other diamond centres, we will not fail to support and even promote the prominent role of Antwerp as the world diamond centre.

"However, we should always bear in mind that our typical diamond lending model may not be narrowed to the mere issue of providing sufficient and formally valid transactional cover, but finds its rationale in the asset conversion cycle within the diamond pipeline.                           

"It is in the common interest of all stakeholders in the industry to strive to create a smooth flow of goods through the pipeline from miner to end consumer where each participant adds his own unique value throughout the chain in an efficient, economically viable and transparent way. Why shouldn't we all together grasp the opportunity offered by the present turmoil to improve the business model of our industry and take on the challenge to enhance the economic soundness of all transactions in order to pursue a decent level of profitability at all stages of the pipeline?" noted De Bosscher. "As a fully dedicated diamond banker, we feel that we should contribute to this common goal and thus, inspired by some harsh lessons learned over the past year, more than ever aim at avoiding financing all kinds of inefficiencies,

  • distortions or speculative behaviour such as overpaying, overbuying goods and overstretched financing terms.
  • and last but not least unethical behaviour as not honouring contracts.

"Therefore, it is our view at ADB that existing transactional credit modalities need not only be reinforced but also more accurately calibrated to the underlying business cycle."


ADB's Diamond Borrowing Best Practices

"There are a number of credit issues which could and will be tackled in the very near future in favour of all parties concerned, and what we could call if I may be somewhat presumptuous ‘diamond borrowing best practices'":

  • Effective self securing transactional cover, by obtaining duly enforceable titles
  • Effective self liquidating transactions by requiring full, direct and separate payment of each underlying receivable
  • Setting of qualitative and quantitative criteria on eligible counterparties
  • Full transparency on payments so as to ascertain proper diamond usage of the credit
  • Adequacy of financing period and optimal combination of purchase and sale facilities in regard to the individual business cycle
  • Timely submission of consolidated financial statements according to international recognized standards
  • Higher solvency (either through additional capital or lower finance ratio) in function of shrinking margins on certain assets

"Finally," said Mr. De Bosscher, "let us not lose sight that since diamond banking entails a close relationship between the bank and its client based on mutual trust, an open dialogue should be initiated as soon as the borrower fears that he will be confronted with lack of collateral due to deteriorating markets."

Looking at the Long-Term

I do like to stress that ADB is not in for a quick buck, but strives at a long relationship with its customers. You will certainly remember that we were the first [diamond financing] bank to emphasize the importance of a visible solvency (...) others in the industry followed, that we also were the first to ask for consolidated figures (...) others in the industry followed  (...) all this not to annoy our customers but in favour of our so beloved industry.  Also in respect to the aforementioned pending credit issues, ADB will take the lead," concluded Mr. De Bosscher, who characterized his speech as being "your banker's dream of his Customer of Choice in the new economy."

History will tell whether this speech will, if anything, make ADB "more attractive" to a potential buyer, whether it may strengthen KBC resolve to make sure there will be no disposal of "second priority" list assets - or whatever. For customers, the name plate on the door might change. It's unlikely that more than that will happen - if it happens.