Government of Iceland Dec 2010

On 8 December 2010, our client the Government of Iceland (the "Government") reached an agreement with the governments of the UK and the Netherlands (the "UK and NL") regarding the reimbursement of the amounts due from the Icelandic deposit guarantee fund (the "TIF") to the UK and NL.

Background
Following the collapse of Landsbanki, the Icesave parent, in October 2008, the UK and NL reimbursed depositors of UK and NL customers for their deposits in Icesave. The resulting claim against the TIF was £2.3bn to the UK and €1.3bn to the Dutch, which was structured as a loan to the TIF and mainly to be paid using the recoveries from the bankrupt Landsbanki estate. In July 2009, a deal was agreed between the Government and the UK and NL on the terms of the loan with a maturity of 15 years and an interest rate of 5.55%. Although the deal was approved with amendments by Parliament, the President of Iceland in December 2009, in response to massive popular protest, vetoed the bill triggering a referendum which was held in early March 2010, where the deal was rejected.

The main political parties in Iceland established a core negotiating team with the objective of negotiating a new improved deal. After protracted negotiations, a new agreement was announced on 9/12/10.

Key terms

• loan moved from PIK to cash pay for the first 7 years but its duration thereafter was set by its amount then outstanding up to a further 30 years
• interest rate reduced to 3% on the Dutch obligation and 3.3% on the UK obligation for a blended interest rate of 3.2%
• interest rate holiday for the first 9 months
• Post Jun-2016 interest rates determined by then prevailing rates used for export guarantee funding as published by the OECD
• Limited state liability to (a) payment of interest as it accrues until June 2016, and (b) the shortfall which has not been recovered from the LBI estate after that time
• Ceiling on annual payments after 2016 of 5% of Treasury revenue of the preceding year

The agreement is subject to ratification by Iceland's parliament but is already seen as much more attractive than the previous deal.

Canaccord Genuity was appointed to advise the negotiating team and played a key role in determining the relevant interest rate and repayment structure. The agreed loan terms are highly attractive relative to other sovereign lending to European states interest rate is well below both the UK's published cost The settlement may result in Iceland's credit rating returning to investment grade.

The process involved complex high profile negotiations with the British Treasury and Dutch Finance Ministry. Key challenges also included uniting all different parties on the Icelandic side, in particular the opposition parties to secure the necessary political backing when entering the negotiations.