The scenario under which KBC's shareholding would increase from the current 25% to 55%, while the state ownership would be reduced from 58% to 35% could unfold if the state did not take part in the recapitalisation under changes to the banking act that parliament will vote on on Friday.

The letter, signed by two AUKN management board members, Marko Golob and Danilo Grašič, explains in detail a possible scenarios in the capital injection at NLB that the bank's shareholders will decide on on 27 June. In this way the pair responded to the concerns expressed by the opposition.

The proposal for the shareholders' meeting that was submitted by AUKN at the proposal of the Finance Ministry is for EUR 380m in authorised capital to be raised with the issuing of 5.5 million new shares at EUR 68.71 apiece to be exchanged for contingent convertible bonds (CoCo bonds).

These bonds are a hybrid between debt and equity and can under certain circumstances - if for example the bank's Core Tier 1 capital ratio falls below 7% of at a certain date - be converted into stock. To enable the use of such an instrument, the government changed the banking act.

NLB would also increase share capital by EUR 130m by issuing 1.89 million in fresh shares at the price EUR 68.71 apiece that would be sold without a prospectus.

AUKN explains that the two steps are interdependent. NLB needs first to raise Core Tier 1 ratio to 7% from the current 5.94%, which is below 6% required after last year's stress tests of European banks.

This would be secured with an increase in share capital by means of cash contributions in the amount of EUR 130m. The proposal is for KBC to swap an existing hybrid instrument issued by NLB a few years ago for NLB stock.

KBC would in this way increase its stake in NLB from 25% to 36%, while the shareholding of the state and affiliated shareholders would automatically be reduced to below 50%.

After the Core Tier 1 ratio increases to 7%, the mentioned EUR 380m in authorised capital would be secured with the issuance of CoCo bonds, which would in turn create the basis to issue new shares if the hybrid bonds were to be converted into stock.

After those two steps Core Tier 1 would be raised to 9.82%, AUKN said, adding that these were simulations under certain suppositions.

If CoCo bonds were bought only by KBC and if Core Tier 1 fell below 7%, the conversion of these bonds would result in an additional increase in the Belgian bank's share to 55%, while the state's share would fall to below 35%, AUKUN warns.

The agency argues that the likelihood of such "silent takeover" of NLB by KBC is high as NLB would probably need to make additional write-downs by the end of the year so that the likelihood of conversion of the bonds into stock would be high.

KBC's share would remain below 50% if the price of new shares was EUR 78.8 instead of EUR 68.71, or if the state bought a sufficient share of the CoCo bonds.

The letter goes on to argue about the systemic importance of NLB for the Slovenian economy, and that compared to other European countries Slovenia has so far spent relatively little money to help the banking sector. Moreover, the moment is not right for the sale given the low price of financial stock.

The two AUKN officials therefore urge MPs to thoroughly consider before empowering the government for direct decision-making at the NLB general meeting as envisaged in a draft order that will also be decided by parliament on Friday.