Contingent Capital Agreement Novo Banco
Banco de Portugal today chose LONE STAR to complete the sale of Novo Banco. The resolution fund therefore signed the contractual documents for the transaction. The signing of the agreement presupposes compliance with the deadline for the sale of Novo Banco set out in Portugal`s commitments to the European Commission. Upon completion of the transaction, Novo Banco`s status as a bridge institution will cease. This was not the first time novo Banco had asked for help from the resolution fund. The new application, if approved, would bring the FdR`s total Novo capital injections since 2017 to €2.978 billion. Following the capital injection, LONE STAR will hold 75% of Novo Banco`s share capital and the resolution fund will hold 25% of the share capital. Under the terms of the agreement, LONE STAR will contribute a total of €1,000 million to Novo Banco, including €750 million. CCA would be triggered when certain ratios for the bank fell below certain thresholds or when the bank recorded losses on certain assets, requiring the ToR to inject capital to replenish the bank`s capital ratios. “DBRS Morningstar currently assesses Novo Banco`s long-term issuer rating at B (high) with a negative trend. Improving the capital position is a key factor in ratings, so DBRS Morningstar will continue to track developments around the CCA and capital support, as well as any other impact on the bank`s strategy and balance sheet,” said Nicola De Caro, Senior Vice President of the Global Financial Institutions team. All capital injections to be made under this conditional mechanism shall benefit from a buffer resulting from the allocation to be made under the Agreement and shall be subject to an absolute ceiling.
This commentary summarizes recent developments in relation to Novo Banco, S.A. (NB or the Bank) and the capital support received under the Conditional Capital Agreement (CCA). The agreed conditions also include a conditional capital mechanism under which the resolution fund, as a shareholder, undertakes to make capital injections if certain cumulative conditions are to be met regarding: (i) the performance of a particular portfolio of assets and (ii) the future capitalisation of the bank. As of December 2019, however, it had already cost the public €7.8 billion – and there is much more to come: €914 million under the provisions of the conditional capital agreement and €1.6 billion under an agreement with the European Commission for the “case scenario” (which has always been very likely). The damning conclusions appear to have been dismissed by the Bank of Portugal, but a source for the court replied: “The contradiction is simply between what has been announced and reality.” This is a further step towards stabilizing the domestic banking sector, which benefits from the diversification of funding sources resulting from the entry of new investors. This development also strengthens the credibility of the banking sector through the success of an open, transparent and competitive sales process with an international reach. The closing of the sale is subject to customary regulatory approvals (including the European Central Bank and the European Commission) and responsibility management for Novo Banco`s senior bonds and subject to bondholder approval following the creation of CET1 for an amount of at least €500 million. The bad news is that the bank has announced that it will request €1.037 billion from the Portuguese Resolution Fund (ToR), the country`s public body supporting the Bank of Portugal`s resolution efforts. The sale of Lone Star`s stake in Novo Banco was “subject to the usual approvals,” the Bank of Portugal said, meaning the European Central Bank (ECB) and the European Commission had to give their blessing. But it didn`t take long for the bank to need the injections.
In 2019, it said the previous year`s losses prompted it to raise $1.149 billion. EUR in the framework of the CSF at the FdR. The European Commission or the ECB seem to have given little thought to the consequences of the sale of Novo Banco`s stake in Lone Star. Their short-sightedness led the Portuguese taxpayer to pay at least part of the bill. As a result, the court concluded that there was indeed “a lack of transparency in communicating the impact of the BES decision and the sale of Novo Banco (to the US equity fund Lone Star) on the sustainability of public finances”. The sale met with no resistance. The European Commission approved it in October 2017 “on the basis of the bank`s extensive restructuring plan and measures to limit distortions of competition”. A prominent writer in Correio da Manhiah concludes: “The Portuguese paid a high price for being European guinea pigs for the dissolution of a large bank. Nearly seven years after the IMPlosion of BES, the judiciary has yet to bring those responsible to justice. This is just another sad chapter in the history of tragedies in Portugal. Last year, when Novo Banco said it needed money, the FdR said there was little it could help and that the state would provide up to €850 million.
This is a development that comes after years in which the left-wing Bloco de Esquerda party has done everything possible to show how deceived the Portuguese electorate has been. The episode casts a bad light on these public institutions that are supposed to act in the public interest. Novo Banco was founded in 2014 and consists of the good parts of Banco Espírito Santo, which was decided this year. The Portuguese state owned everything until the arrival of Lone Star, retaining 25% after the sale. Last week, when the President of the ForR told Parliament that he had predicted that Novo Banco would need an injection of €1.037 billion, he noted that the ForR only had to contribute up to €255 million and that the state would have to raise the remaining €850 million. This seems to indicate that the FdR has never had nearly the €3 billion it might need. It had to be inevitable that part of the contribution would come from government loans. In short, Lone Star is a beneficiary of Portuguese State aid.
After all the timely political turn, Portugal`s Court of Auditors has said it: it is the country`s taxpayers who are paying the bill to pay “Novo Banco” to “bail out Novo Banco” contrary to the promises of the governments of Passos Coelho and Antã³nio Costa. Worse still, the final bill to secure the so-called “good bank” built from the beS (Banco Espãrito Santo) disaster could reach 10.3 billion euros. Now the bank is approaching the limit it can get from the FdR, and its latest results show that it may well reach that limit. If regulators want private institutions to take their mandate more seriously, they need to think about how their decisions can prevent public money from flowing into private pockets. The reasons for these injections stem from the sale of a 75% stake in the bank to the US private equity fund Loan Star in 2017. Last week, Portuguese lender Novo Banco published its 2019 annual results, posting losses of 1.067 billion euros, a 25% improvement over the previous year. The agreed terms shall also provide for mechanisms to protect the interests of the Resolution Fund and to align incentive and monitoring mechanisms, notwithstanding restrictions imposed by State aid rules. .
Recent Comments