to the annual general meeting of shareholders
The Directors of EFG Eurobank Ergasias S.A. (the “Bank”) propose to the General Meeting of Shareholders of the Bank the issue of a callable convertible bond of up to €500 million, through private placement, waiving pre-emption rights of existing shareholders.
This report has been prepared for submission to the Annual General Meeting of June 19th, 2009, or any adjournment thereof, as per art. 3a par. 1c of c.l. 2190/1920 in combination with art.13 par. 10 of the same law.
More specifically, the Directors would like to inform the Bank’s shareholders of the following issues:
A. Reasons for waiving pre-emption rights
The Directors recommend waiving pre-emption rights of existing shareholders to subscribe to the issue of the aforementioned callable convertible bond of up to €500 million, which will be placed with at least one special purpose foreign subsidiary of the Bank. The subsidiary/subsidiaries will then issue hybrid, callable securities, exchangeable with the Bank’s shares, which mirror the terms and conditions of the bond issue. These hybrid instruments will be privately placed in the Greek and International markets. The reasoning for the proposal for existing shareholders of the Bank to waive pre-emption rights is as follows:
The issue of the convertible bond to a special purpose company with the waving of pre-emption rights of existing shareholders is necessary in order for the said company to issue, in turn, hybrid, Tier 1 instruments. The issue of these instruments is to the benefit of the Bank as they will strengthen its capital adequacy and therefore:
- Improve the Bank’s credit rating, thereby facilitating the raising of new capital at low cost.
- Enable the restructuring of the Bank’s own funds through repayment of other existing, higher cost instruments, when allowed by the economic conditions and subject to relevant approvals.
- Facilitate the further extension of credit to the Bank's customers and the Greek economy in general.
In such an economic climate, the issue of a financial product with the proposed features for private placement is deemed appropriate as:
- Achieves a significant reduction in the securities’ interest rate, thereby reducing the economic cost for the Bank. A key feature of the current financial crisis is the preference of investors for low risk investments. Therefore, the right of conversion to Eurobank ordinary shares enables the holders of these securities to convert their investment into liquid assets, thus reducing the uncertainty of their investment. The Bank introducing an attractive product to the market, aims at its placement with a lower annual return.
- Facilitates the success of the issue. In the last few months, the investors’ preference in subordinated debt is extremely limited or, at times, practically non-existent. The issue of the securities for private placement provides the necessary flexibility to complete the placement within a short time period and enables the Bank to exploit potentially favourable circumstances in the current, volatile market conditions. Moreover, in case of conversion, it enables the expansion of the Bank’s shareholder base, without diluting the rights of the existing shareholders.
- A possible conversion- which could take place in 5 years and only in case the Bank does not redeem the callable bond, further to the distribution of increased dividends to ordinary shareholders (above the minimum provided by law), - shall not affect the capital base of the Bank.
Consequently, given the below proposed conversion price as well as the conditions for the exercise of the conversion rights, the waiving of pre-emption rights is appropriate, necessary and consistent, aiming at the aforementioned benefits for the Bank while not affecting in substance the financial position of shareholders as:
- The economic rights of the existing shareholders in the Bank’s assets are not diluted as any conversion will be calculated on the market rates at the time of conversion on which any shareholder may acquire the Bank’s shares; as opposed to a capital increase with significant discount, which apparently leads to dilution by reducing the existing shareholders’ participation in the Bank’s net assets.
- There will be no significant impact on the share price from this issue; as opposed to a capital increase, which requires a significant discount to the share price in order to be successful, especially in the present economic climate.
B. Justification for the issue price of new shares
In respect of the issue price of new ordinary shares of the Bank which will result on conversion, the Directors recommend the following:
The price at which the new shares will be issued, will be based on the share market price during the period immediately preceding the conversion, at a relatively small discount (for liquidity reasons), in order, as presented above, to ensure the success of the issue and to protect the economic rights of the existing shareholders.
The Board will decide on the final price or the conversion ratio prior to the issue of the callable convertible bond, in accordance with the prevailing market conditions at the time of the issue. In any case, the price cannot be lower than the nominal value of the share or higher than €50.
Taking into consideration all the above, the Board of Directors believe that the benefits to the Bank and its shareholders from the issue of the callable convertible bond to the aforementioned subsidiary justify existing shareholders waving their pre-emption rights and therefore, recommends the issue of the loan under the above terms.
Athens, 25 June 2009