The Luxembourg subsidiary of Icelandic bank Kaupthing will shed certain assets before being taken over by a Libyan consortium, according to market reports.

The government of Luxembourg and a consortium of investors led by a Libyan sovereign wealth fund entered into a memorandum of understanding aiming to sustain the continuity of the activities of Kaupthing Bank Luxembourg S.A. 

The memorandum of understanding outlined that the depositors, whose cash deposits were frozen since October 9, 2008, would recover their entire savings at the end of the transaction but only after certain conditions were met.

The most important of these conditions include being the restructuring of the interbank financing of Kaupthing Bank Luxembourg S.A., which requires the agreement of the current interbank creditors; and  the approval by Kaupthing Bank, mother company of Kaupthing Bank Luxembourg S.A., to dispose of its shares.

Under the restructuring details, the Luxembourg arm of the Icelandic bank would be split into two new entities. The first, New Bank, would be taken by the Libyan African Investment Portfolio investor. It would keep hold of Kaupthing Bank Luxembourg's private clients, a majority share in the life insurance company Kaupthing Life and Pension, and €350 million of cash support.

The other bank, the securitization firm, would pool private banking and corporate loans, claims related to litigation and certain receivables. It will also inherit liabilities to the Luxembourg state and the Luxembourg Association for Deposit Guarantees (AGDL) which had intervened to prop up Kaupthing Luxembourg.

The plan is subject to the vote of certain creditors and court approval.

Kaupthing Luxembourg was placed in suspension of payments last October following the collapse of Iceland's financial sector. Deposits in both Luxembourg and Belgium have been frozen ever since.

In December the government announced a deal with the Libyan investment group.

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