Bank of Portugal Postpones Sale of Novo Banco, a Credit Negative
Last Tuesday, Bank of Portugal (BoP) announced that it had postponed the sale of Novo Banco S.A. (B2/B2
developing, caa21
) because the three binding offers that the central bank received did not meet its
expectations. The postponement is credit negative for the bank because the lack of a sale risks delaying key
decisions such as the implementation of restructuring measures that would improve the bank’s very weak
credit profile.
The postponement also increases the risk of a potential wind down of Novo Banco’s assets if a sale of the
bank, currently owned by the Portuguese Resolution Fund, does not occur before August 2016. In Tuesday’s
announcement, BoP stated that the European Commission’s (EC) deadline for selling Novo Banco could be
extended. However, the current resolution plan for Novo Banco stipulates an August 2016 deadline, which is
24 months since its inception as a bridge bank following the collapse of its predecessor Banco Espirito Santo
(BES, unrated). If BoP cannot find a buyer by August 2016, unsold assets would have to be wound down and
the authorities would revoke Novo Banco’s banking license.
A delay of Novo Banco’s sale is also credit negative for Portugal’s banking system because it points to the
challenges that BoP faces in getting a sale price sufficient to reimburse the Portuguese government for a
€4.5 billion loan that it granted to the Resolution Fund and used to recapitalize Novo Banco. If the loan is
not entirely reimbursed by sale proceeds, Portuguese banks could be required to bear a portion of any sale
shortfall given that they are liable for financing the Resolution Fund.
In late 2014, BoP, as the Portuguese resolution authority, started to promote the sale of Novo Banco with
an aim to close the process by September 2015. However, because the three bidders with binding offers did
not meet BoP’s price expectations, BoP failed to reach a sale agreement. BoP did not provide details on
when the process will resume, but said that it will be subject to the disclosure of Novo Banco’s additional
capital requirements required by the European Central Bank as part of its supervisory review and evaluation
process, which we expect to take place before the end of the year.
Despite making progress in deleveraging, Novo Banco’s first-half 2015 financial results confirmed the
difficulties facing the bank to preserve its capital base amid deteriorating asset quality and ongoing losses.
The bank’s risk absorption capacity remains weak and is constrained by its inability to tap the markets to
raise capital given its status as a state-owned bridge bank. Under state-aid rules, the EC prohibits any further
public capital injection into Novo Banco, which leaves the bank reliant on restructuring measures to
improve its solvency. Successfully selling Novo Banco to a financially strong buyer with an interest in
preserving the bank’s franchise would enhance its financial profile and business prospects and support its
recovery. The delay in the sale and the persistent weak credit profile is likely to affect investor interest in the
bank and diminish the probability that BoP will sell it at a satisfactory price.
Last Tuesday, Bank of Portugal (BoP) announced that it had postponed the sale of Novo Banco S.A. (B2/B2
developing, caa21
) because the three binding offers that the central bank received did not meet its
expectations. The postponement is credit negative for the bank because the lack of a sale risks delaying key
decisions such as the implementation of restructuring measures that would improve the bank’s very weak
credit profile.
The postponement also increases the risk of a potential wind down of Novo Banco’s assets if a sale of the
bank, currently owned by the Portuguese Resolution Fund, does not occur before August 2016. In Tuesday’s
announcement, BoP stated that the European Commission’s (EC) deadline for selling Novo Banco could be
extended. However, the current resolution plan for Novo Banco stipulates an August 2016 deadline, which is
24 months since its inception as a bridge bank following the collapse of its predecessor Banco Espirito Santo
(BES, unrated). If BoP cannot find a buyer by August 2016, unsold assets would have to be wound down and
the authorities would revoke Novo Banco’s banking license.
A delay of Novo Banco’s sale is also credit negative for Portugal’s banking system because it points to the
challenges that BoP faces in getting a sale price sufficient to reimburse the Portuguese government for a
€4.5 billion loan that it granted to the Resolution Fund and used to recapitalize Novo Banco. If the loan is
not entirely reimbursed by sale proceeds, Portuguese banks could be required to bear a portion of any sale
shortfall given that they are liable for financing the Resolution Fund.
In late 2014, BoP, as the Portuguese resolution authority, started to promote the sale of Novo Banco with
an aim to close the process by September 2015. However, because the three bidders with binding offers did
not meet BoP’s price expectations, BoP failed to reach a sale agreement. BoP did not provide details on
when the process will resume, but said that it will be subject to the disclosure of Novo Banco’s additional
capital requirements required by the European Central Bank as part of its supervisory review and evaluation
process, which we expect to take place before the end of the year.
Despite making progress in deleveraging, Novo Banco’s first-half 2015 financial results confirmed the
difficulties facing the bank to preserve its capital base amid deteriorating asset quality and ongoing losses.
The bank’s risk absorption capacity remains weak and is constrained by its inability to tap the markets to
raise capital given its status as a state-owned bridge bank. Under state-aid rules, the EC prohibits any further
public capital injection into Novo Banco, which leaves the bank reliant on restructuring measures to
improve its solvency. Successfully selling Novo Banco to a financially strong buyer with an interest in
preserving the bank’s franchise would enhance its financial profile and business prospects and support its
recovery. The delay in the sale and the persistent weak credit profile is likely to affect investor interest in the
bank and diminish the probability that BoP will sell it at a satisfactory price.
