Capitalisation of the Three Principle Icelandic Commercial Banks and Basis of Agreement with Creditors

• Re-capitalisation of the banks
• Proposed ownership of Islandsbanki and New Kaupthing by Glitnir and Kaupthing respectively
• Lower than anticipated capital cost to taxpayer
• Important step in re-establishing strong banking system

The Government of Iceland is pleased to announce that it has determined the basis for the capitalisation of the three new banks (Islandsbanki, New Kaupthing and New Landsbanki) created following the collapse of the main Icelandic commercial banks in October 2008. It has also reached heads of agreement with the Resolution Committees of the old banks in relation to how compensation for the transfer of net assets into the new banks will be achieved. In respect of two of the new banks, Islandsbanki and New Kaupthing, this includes a conditional agreement for the old banks to subscribe for majority equity interests in the new banks.

The Ministry of Finance's negotiating team, led by Thorsteinn Thorsteinsson and its adviser Hawkpoint, have run a process which has involved regular consultation and dialogue with the old banks' Resolution Committees and their advisers. The Government has also sought to involve creditor representatives in these discussions. The process has involved provision of information and access to the new banks to allow Resolution Committees, their advisers and creditor representatives to conduct due diligence.

Commenting on the agreement reached, Steingrímur J. Sigfússon, the Minister of Finance of Iceland said:

"Our agreements announced today are a major step forward in the re-establishment of a strong banking system. They allow for the recapitalisation of the banks, potentially at a significantly lower cost to the taxpayer than originally envisaged, and we believe will result in a fair and equitable outcome for all stakeholders. Not only do today's announcements provide a firm basis for further progress, they also benefit customers of the new banks and the Icelandic economy in general. I look forward to the successful conclusion of this process."

Agreement with the Resolution Committees of the old banks
The heads of agreement cover the basis and terms on which the new banks will be capitalised and the terms on which compensation arrangements will be finalised with the Resolution Committees.

The Government on behalf of each of the new banks and the Resolution Committees have made separate joint announcements.

Islandsbanki and New Kaupthing
The Government has conditionally agreed with the Resolution Committees of Glitnir and Kaupthing that they should have majority ownership of the new banks in order to facilitate their independent development. This would involve them capitalising Islandsbanki and New Kaupthing as part of the compensation agreement. It is envisaged that shares in Islandsbanki and New Kaupthing will be held by Glitnir and Kaupthing. The Government will continue its involvement in Islandsbanki and New Kaupthing through significant capital support and Board representation.

These arrangements remain subject to, inter alia, due diligence, finalisation of documentation, creditor consultation and the approval of the Icelandic Financial Supervisory Authority, the FME. In the event that Glitnir and Kaupthing do not complete the subscription for shares in the new banks, the Government will retain full ownership. However, the Government would provide both Resolution Committees with options to acquire the majority of the Government's shares after it has earned a reasonable return on its investment.

Landsbanki
The Government and the Resolution Committee of Old Landsbanki have agreed to a further period to allow completion of due diligence by the Resolution Committee, its advisers and creditor representatives and the finalisation of the terms of a bond instrument to be issued by New Landsbanki in connection with compensation. It is envisaged that this bond instrument will be issued by 14 August 2009 in tandem with the capitalisation by the Government referred to below. The parties have also agreed a process to conclude all negotiation of other compensation to be provided to Old Landsbanki.

The ongoing operations of the new banks will be unaffected by today's announcements, but following capitalisation, it will allow them to operate more normally within the financial markets.

Capitalisation of the new banks
Based on the agreements entered into with the three Resolution Committees, the Government is now in a position to capitalise all three of the new banks. It is expected that this will take place on 14 August 2009 and will be achieved by the issue of new Government bonds to the new banks. Each bank waill be prudently capitalised with a core tier 1 ratio of approximately 12 per cent.

The agreements reached with the Resolution Committees mean that with effect from 14 August 2009, the new banks will be in a position to finalise their opening balance sheets as at October 2008 and will be appropriately capitalised to the satisfaction of the FME. They will also be in a position to complete the audits for the year to 31 December 2008.

The Government believes the agreement today is an important step towards meeting its goal of re-establishing a strong banking system for the long-term.

Lower than anticipated capital cost to taxpayer
In aggregate it is expected the total capitalisation will amount to approximately ISK 270 billion. In the event that both Glitnir and Kaupthing complete their subscription agreements as described above, this would be reduced to approximately ISK 200 billion. These levels of capital commitment are significantly lower than the estimated commitment of ISK 385 billion at the time of the original transfer in October 2008, leading to lower fiscal cost and impact on gross state debt than that previously envisaged.

Next steps
The heads of agreement signed with the Resolution Committees also set out agreed timetables for the next stages in the negotiations regarding compensation to creditors. These comprise further due diligence by the Resolution Committees, their advisers and creditor representatives, finalisation of the terms of compensation instruments to be issued to the Resolution Committees, preparation of audited accounts and other materials to be provided to creditors of the old banks for the purpose of any creditor consultation and meetings.