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LONDON, June 26 (IFR) - Time is running out for the liability management exercise on which the sale of Portugal's Novo Banco hinges, potentially derailing the process ahead of an August deadline.
The market had broadly expected terms for the LME to emerge in June. Designed to generate at least €500m of capital, it is a crucial part of the package agreed with private equity firm Lone Star, which has agreed to buy a 75% stake in the "good bank" carved out of failed Banco Espirito Santo.
Recent media reports said the LME terms have been set and are pending approval by regulators. However, a consortium of bondholders threw a potential spanner in the works in late May, offering to buy the bank themselves.
"I wouldn't underestimate what the bondholders could do to make this situation significantly more complicated," a market source told IFR.
The LME was never going to be straightforward. Billed as voluntary, the issuer must entice bondholders to sign up to an exercise that will impose sufficient losses on them to raise the requisite capital.
The source reckoned 50%-60% of the bonds are in the hands of sophisticated investors, with the remainder held by retail.
"I think it's going to be very difficult to generate €500m of new capital with the current position of the bondholders," he said. "It's going to be difficult for anyone to agree the execution of an LME with only the participation of retail."
The delay in the LME's implementation saw Moody's last Monday extend the review for downgrade on Novo Banco's Caa1 long-term deposit and Caa2 senior debt ratings.
"If the LME fails to succeed, there is an increased risk of a resolution or liquidation for the bank with consequent losses for creditors," the ratings agency said.
Details of the bondholders' offer have not been made public, but the source reckoned the terms could represent a better outcome for Novo Banco.
"The bondholders' proposals to own the bank is phenomenally interesting," he said.
"It capitalises the bank in a much stronger way and becomes politically almost like a privatisation. I'm sure there are people moving into the camp of no LME. It's a really interesting chess game, and one that could set precedent for decision making and for future resolutions across Europe."
An investor, however, pointed out that Lone Star may be able to commit more capital down the line if needed. And though the August deadline is fast approaching, there is still time to attempt the LME.
"The issue we have seen with Co-op Bank is that it's maybe better to have only one shareholder with deep pockets and tight management control, compared to a group of distressed bond investors who become part of an equity consortium and don't really put pressure on management in implementing reforms," the investor told IFR.
The Co-operative Group handed control of its banking arm to creditors in 2013 in order to seal a £1.5bn rescue, but has since struggled to return to health. The lender said on Monday that it was close to agreeing a financial rescue package with leading investors that would shore up its capital base.
The European Central Bank declined to comment on developments at Novo Banco. Lone Star and the Resolution Fund did not respond to requests for comment. (Additional reporting by Alex Chambers, editing by Matthew Davies)