Iceland in Continuing Consultations Regarding - Capital Control Liberalization (Kaupthing)


The Iceland Ministry of Finance today announced that it has continued its consultations with parties affected by the capital controls in Iceland about the proposals the Government is considering for the liberalization of those controls.

Members of the Iceland Task Force on the Liberalization of Capital Controls (established by the Ministry of Finance and the Central Bank of Iceland in 2014) (the “Task Force”) and their advisers (the “Iceland advisers”) have had a series of consultation meetings over the last two months with, among others, representatives of a small number of institutions holding significant claims on the estates of the three large Icelandic banks that failed in 2008, Kaupthing hf. (“Kaupthing”), Glitnir hf. (“Glitnir”) and LBI hf. (“LBI”).  The Task Force reports to the Steering Committee on the Liberalization of Capital Controls (the “Steering Committee”), a body composed of the Iceland Minister of Finance, the Governor of the Central Bank of Iceland and representatives of the Prime Minister's office.

At these meetings with estate claimants, the Task Force discussed its preliminary recommendation to the Steering Committee for the manner in which the capital controls -- insofar as they affect the estates of the three large failed banks -- could be liberalized.  The Task Force explained that the domestic assets of the estates (mostly denominated in Icelandic krona) posed a threat to Iceland's balance of payments and economic recovery program.  The Task Force reported that it was considering recommending that all assets of the three estates could, following a composition arrangement approved by Icelandic courts, be distributed to the claimants in those proceedings following payment by each estate of a one-time Stability Tax.  The preliminary recommendation of the Task Force included a list of proposed legal amendments intended to streamline and expedite the composition process for the estates.  The Task Force's preliminary analysis suggested that to achieve the goal of neutralizing a threat to the balance of payments, this Stability Tax would be set at a rate of 37% of the total assets of each estate (measured as of end-June 2015), with an automatic exemption of ISK 45bn for each estate, which would bring the effective tax rate down to about 35%.  The recommendation under consideration by the Task Force would also permit the estates to use part of their assets to make long term investments in Iceland.  Those investments could reduce the tax base of an estate and thus lower the effective rate of the Stability Tax as it applies to an estate.  Once the tax had been paid, the estate would be free to deal with and distribute its assets and the stability tax could be paid in any currency of the estate's choosing, including ISK.

Subsequent to these meetings, the Iceland Ministry of Finance has continued to refine the draft legislation for the Stability Tax, including the rate of the tax, exemption requirements and authorized long term investments.  The Ministry of Finance expects the legislation to be introduced in Parliament today.

The Steering Committee has separately considered a framework (the “Framework”) developed by the Task Force for analyzing and addressing the balance of payment implications of domestic assets held in the estates of the three large failed banks.

The Task Force has also received suggestions from claimants attending these meetings for a voluntary arrangement designed to neutralize the balance of payments risks posed by the domestic assets in the estates.  These proposals contemplate addressing these risks through a combination of the payment of a voluntary stability contribution together with other measures designed to attenuate the release of krona that have been trapped behind the capital controls and augment the foreign currency reserves of the Central Bank of Iceland. 


Specifically with regard to Kaupthing, there were consultations between (i) a group of restricted holders of Kaupthing claims (the “Kaupthing Claimants) and their advisers and (ii) members of the Task Force and the Iceland advisers.

On 7 June 2015, in light of those consultations, a proposal was submitted to the Minister of Finance (in his capacity as chairman of the Steering Committee) on behalf of the Kaupthing Claimants based on their discussions with the Task Force and the Iceland advisers (the “Kaupthing Claimants' Proposal”) on the following terms:

  • A stability contribution (the “Stability Contribution”) would be made by the Kaupthing estate to the Icelandic authorities consisting of:
    • the issuance and delivery of an ISK-denominated secured promissory note in the nominal amount of ISK 84 bn to be reduced annually by the actual ISK expenses (exclusive of incentive schemes) of Kaupthing for 2015, 2016 and 2017 paid to domestic Icelandic parties (including any de minimis payments paid in ISK to domestic claimants in connection with the composition) with the aggregate overall amount of all such reductions to be capped at ISK 5 bn (the “Secured Note”),
    • an assignment of the estate's equity, rights and claims against certain domestic Icelandic counterparties (including other Icelandic estates) in a nominal amount of approximately ISK 114.8bn (approximately ISK 14.4bn book value)  (the “Assigned Rights”); and
    • an assignment of any amounts in ISK recovered by Kaupthing in respect of disputed claims against domestic parties and any claims against domestic parties that would otherwise have constituted Assigned Rights but which were not capable of outright assignment (this amount to be paid net of any ISK amounts paid by Kaupthing to domestic parties in connection with claims against Kaupthing).
  • The Secured Note would have the following terms:
    • payable in two equal installments on the second and third anniversaries of the issuance date;
    • 5.5% interest rate; and
    • secured by a pledge over Euro Medium Term Notes (“EMTN”) issued by Arion hf. (“Arion”) to Kaupthing (the value of the pledge will be no less than 115% of the outstanding principal amount of the Secured Note).
  • The estate's FX exposure to Arion (approximately ISK 43.8bn) would be termed out in the form of bonds issued under Arion's EMTN program on market terms with a minimum term of 7 years.
  • The estate would purchase at par the long-term FX financing provided by the Central Bank of Iceland (the “CBI”) to Arion (ISK 55.1bn) and would offer to term the financing out in the form of bonds issued under Arion's EMTN program on market terms with a minimum term of seven years.
  • The estate will split any realized economic value of Kaupthing's 87% stake in Arion upon a sale or other disposition of Arion (and/or Kaupskil, Arion's parent) in excess of ISK 100 bn, with the CBI or such other party as the CBI designates, on a total returns basis, as follows:
    • ISK 100 bn -ISK 140.00 bn: 33 1/3 /  66 2/3;
    • ISK 140.01 bn- ISK 160.00 bn: 50 / 50; and
    • more than ISK 160 bn: 75 / 25,

      in each instance with the first factor payable to the CBI, or its designate, and the second
      factor payable to Kaupthing.

  • Distributions to claimants would flow freely once the Secured Note has been issued, the related security has been posted, the Assigned Rights have been transferred, and formal exemption granted from CBI.
  • The Kaupthing Claimants would provide releases for parties including the CBI and Iceland.
  • The Kaupthing Proposal contains a mechanism that would adjust the proposed stability contribution of the Kaupthing estate so that it is no less favourable to the claimants of the Kaupthing estate than the terms of any comparable exemption granted to the estate of Glitnir (determined by reference to the size of Kaupthing's stability contribution as a percentage of the estate's total assets in comparison with the equivalent percentage for Glitnir).

The Task Force has confirmed that the Kaupthing Claimants' Proposal is consistent with the Framework endorsed by the Steering Committee and recommends the issuance of an exemption based on the Kaupthing Claimants' Proposal. If granted an exemption from the capital controls by CBI after consulting with the Minister of Finance on the basis of the Kaupthing Claimants' Proposal, the remaining assets of the Kaupthing estate shall no longer be subject to capital controls and shall be freely available for distribution to claimants in the estate in accordance with the procedures established by Icelandic law.  The assets of the estate shall not thereafter be subject to capital controls in Iceland and neither the estate nor its claimants will be subject to any form of Stability Tax or similar tax or charge.

The Task Force's consultations with parties affected by the proposed liberalization of capital controls are ongoing.