April 12, 2017 / 2:25 PM / in 3 months

Novo Banco bond swap implies losses, but sale seen on -minister

3 Min Read

LISBON, April 12 (Reuters) - Portugal's finance minister said on Wednesday he was confident the sale of Novo Banco will go ahead despite the prospect of further losses for bondholders in a debt swap, which is part of the sale agreement with U.S. fund Lone Star.

The sale of Novo Banco, which was carved out of Banco Espirito Santo (BES) in Portugal's biggest ever bank failure in 2014, is encountering increasing headwinds as bondholders who faced earlier losses have challenged the operation in the courts.

Portugal has until August to sell Novo Banco, the country's third largest bank, or it could face liquidation under an agreement with Brussels.

The central bank and the government reached an agreement last month with Lone Star to sell Novo Banco, but the deal falls short of recovering 4.9 billion euros ($5.2 bln) injected in the rescue operation of BES in 2014. In that rescue, Novo Banco was left with the healthy operations of BES, which became a 'bad bank' for the debts that led to its collapse.

Novo Banco is now owned by the country's bank resolution fund, which is funded by all banks operating in Portugal.

"It's true that the talks involving the Resolution Fund and the buyer are still on, and we have every expectation that the deal will be concluded," Finance Minister Mario Centeno told parliament.

Under the terms of the deal with Lone Star, Novo Banco will first have to swap 500 million euros of senior bonds for new bonds to reinforce its common equity Tier 1 capital ratio.

"Losses for bondholders is one of the pieces of the deal that the Bank of Portugal reached with Lone Star," Centeno said, adding that the swap will be a voluntary exchange and is aimed at preserving Novo Banco.

Last week Moody's Investor Service said that any debt exchange announced in the sale of Novo Banco would be seen as distressed. The ratings agency downgraded Novo Banco senior debt one notch to Caa2, implying very high credit risk.

This week bondholders led by U.S. fund BlackRock filed an injunction to block the sale over a prior, 2015 decision by the country's central bank to transfer 2.2 billion euros to a bank for bad loans, which has already led to losses for bondholders of 1.5 billion euros.

$1 = 0.9427 euros Reporting By Sergio Goncalves, writing by Andrei Khalip, editing by Axel Bugge and Susan Fenton

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