Portugal Imposes Losses on Some Novo Banco Senior Bonds

  • Central bank ordered transfer of notes to Banco Espirito Santo
  • Transfer of senior securities to help capitalize Novo Banco

Portugal’s central bank is imposing losses on some senior bondholders at Novo Banco SA, the good bank that emerged from the breakup of Banco Espirito Santo SA last year.

The central bank ordered it to transfer about 2 billion euros ($2.2 billion) of bonds to the bad bank, which is being liquidated. The five affected bonds mature in July 2016, May 2017, January 2018, January 2019 and June 2024, the Bank of Portugal said in a statement on Tuesday.

“This measure was needed to ensure that the losses from Banco Espirito Santo are absorbed firstly by shareholders and creditors and not by the financial system and taxpayers,” according to a statement.

Novo Banco has 5.4 billion euros of senior unsecured debt, according to CreditSights Ltd., and the move raises investor concerns that some creditors are being treated differently. The bank may have targeted these bonds because they were issued under Portuguese law, making an international legal challenge more difficult, according to analysts from CreditSights and TwentyFour Asset Management in London, which owns some of the 2017 notes.

The 750 million euros of 2.625 percent notes due May 2017 fell to 7.3 cents on the euro on Wednesday from 92 cents before the decision was announced, according to data compiled by Bloomberg.

Senior bonds and deposits were spared losses when they were transferred to the new entity in August 2014. European state aid rules don’t allow further use of the country’s Resolution Fund, which received a state loan last year to bail out Banco Espirito Santo.

The transfer will help capitalize Novo Banco after the European Central Bank’s stress tests in November showed a 1.4 billion-euro shortfall under the adverse scenario. Portugal’s central bank said at the time that Novo Banco would address the gap with a plan that would include selling assets.

Novo Banco said in a separate statement on Tuesday that the move will increase it’s common equity Tier 1 ratio, a measure of its ability to absorb losses, to about 13 percent from 9.4 percent at the end of June.

The Bank of Portugal said it considers the separation of assets and liabilities at Novo Banco and Banco Espirto Santo to be complete and that it will ask the European Central Bank to revoke the bad bank’s banking license so that legal liquidation can begin.

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