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UPDATE: NOVO BANCO SENIOR BONDHOLDERS FACE HUGE LOSSES
LONDON, Dec 30 - The transfer of almost €2bn of Novo Banco's senior debtback to bad bank Banco Espirito Santo will impose huge losses on investors,shocking those who thought their holdings were safe.
The five series of bonds will be transferred to help Novo Banco meet capitalrequirements set by the European Central Bank after it detected a shortfall of€1.4bn last month.
The Bank of Portugal on Wednesday said the transfer would boost Novo Banco'sbalance sheet by €1.985bn.
Prices of the targeted bonds plummeted from the mid 90s to around 10 onWednesday morning, according to CreditSights analysts.
'This is a fairly unexpected twist to the Novo Banco saga - the choice ofbonds seems fairly arbitrary, and the recovery value for holders of those bondsis likely to be close to zero,' the analysts wrote in a note.
The affected bonds are the 6.875% Jul 2016s, 6.9% Jun 2024s, 4.75% Jan2018s, 4% Jan 2019s and 2.625% May 2017s, reversing their transfer from BES lastyear when it was split into good and bad banks. Shareholders and subordinatedcreditors remained in the bad bank.
Portugal's market regulator suspended trading in the bonds on Tuesday.
Market participants think the remaining Novo Banco bonds will rallysignificantly given the capital shortfall has now been solved, which should pavethe way for the sale process to continue next year.
The bank's Common Equity Tier 1 ratio will stand around 13% after thetransfer, it said in a statement.
The Bank of Portugal said there would be no further transfer of assetsbetween the two banks.
It added that the measure was necessary to ensure losses from BES wereabsorbed first by shareholders and creditors, not by the banking system ortaxpayers. That is in line with steps taken by regulators since the crisisaiming to remove the burden of failing banks from the taxpayer.
But a legal challenge seems likely, particularly around whether or not thebondholders of the five series targeted rank pari passu with other seniorbondholders.
Mark Holman, CEO of 24 Asset Management, warned that the case couldpotentially hinder future bank recoveries by shaking investors' faith in 'basicrules'.
'We had assumed that at the point of non-viability or at the point of acapital shortfall, anything could happen - even events that we had never seenbefore. However we did also assume that certain protocols would be adhered to.The equal ranking language that sits in every prospectus is a core value that wenever thought would be broken,' said Holman.
'However, in the event of bail-in the central bank claims the right tochange all the rules, including this one.'
Why those particular five bonds were chosen remains unclear. All were issuedout of the bank's Lisbon headquarters rather than international branches,fuelling speculation that it was easier to transfer them from a legal point of view.
LONDON, Dec 30 - The transfer of almost €2bn of Novo Banco's senior debtback to bad bank Banco Espirito Santo will impose huge losses on investors,shocking those who thought their holdings were safe.
The five series of bonds will be transferred to help Novo Banco meet capitalrequirements set by the European Central Bank after it detected a shortfall of€1.4bn last month.
The Bank of Portugal on Wednesday said the transfer would boost Novo Banco'sbalance sheet by €1.985bn.
Prices of the targeted bonds plummeted from the mid 90s to around 10 onWednesday morning, according to CreditSights analysts.
'This is a fairly unexpected twist to the Novo Banco saga - the choice ofbonds seems fairly arbitrary, and the recovery value for holders of those bondsis likely to be close to zero,' the analysts wrote in a note.
The affected bonds are the 6.875% Jul 2016s, 6.9% Jun 2024s, 4.75% Jan2018s, 4% Jan 2019s and 2.625% May 2017s, reversing their transfer from BES lastyear when it was split into good and bad banks. Shareholders and subordinatedcreditors remained in the bad bank.
Portugal's market regulator suspended trading in the bonds on Tuesday.
Market participants think the remaining Novo Banco bonds will rallysignificantly given the capital shortfall has now been solved, which should pavethe way for the sale process to continue next year.
The bank's Common Equity Tier 1 ratio will stand around 13% after thetransfer, it said in a statement.
The Bank of Portugal said there would be no further transfer of assetsbetween the two banks.
It added that the measure was necessary to ensure losses from BES wereabsorbed first by shareholders and creditors, not by the banking system ortaxpayers. That is in line with steps taken by regulators since the crisisaiming to remove the burden of failing banks from the taxpayer.
But a legal challenge seems likely, particularly around whether or not thebondholders of the five series targeted rank pari passu with other seniorbondholders.
Mark Holman, CEO of 24 Asset Management, warned that the case couldpotentially hinder future bank recoveries by shaking investors' faith in 'basicrules'.
'We had assumed that at the point of non-viability or at the point of acapital shortfall, anything could happen - even events that we had never seenbefore. However we did also assume that certain protocols would be adhered to.The equal ranking language that sits in every prospectus is a core value that wenever thought would be broken,' said Holman.
'However, in the event of bail-in the central bank claims the right tochange all the rules, including this one.'
Why those particular five bonds were chosen remains unclear. All were issuedout of the bank's Lisbon headquarters rather than international branches,fuelling speculation that it was easier to transfer them from a legal point of view.
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