Novo Banco: the State gives a 4 billion guarantee to Lone Star

  • ECO News
  • 3 April 2017

Lone Star will inject one billion and control 75% of Novo Banco. The fund will also benefit from a public guarantee, through the Resolution Fund, of almost four billion euros to cover credit's risk.

Raquel Sá Martins / ECO

It is done: Lone Star will acquire 75% of Novo Banco for a symbolic price and will inject one billion euros in the bank’s capital. In addition, the State will hold 25% of NB‘s shares, through the Resolution Fund and, at the same time, it will provide a “guarantee” of almost four billion euros on the troubled assets, which belong to Novo Banco‘s side bank, ECO found through sources involved in the negotiations.

At issue with this sale is a sort of second resolution of Novo Banco: when the new sale process was opened, on January 2016, there was an informal separation of NB‘s operations, between core operation and side bank. The side bank incorporates toxic assets and other credits and operations which are not considered in the bank’s core operation, and by the end of 2016, it was worth around nine billion euros.

Segregating the two areas made it possible to identify the need for guarantees concerning the risks of NPLs and also the need to sell below those assets’ value, accounted for in NB’s balance, since the side bank has to be sold within the next five years, a demand made by the European DGComp.

It is within this context that Lone Star waived the State’s counter-guarantee, but not a guarantee from the Resolution Fund. That guarantee will be of almost four billion euros, through a “contingent mechanism” which will work as a ceiling to be used according to existing needs. The final impact of this mechanism will fall on the Portuguese financial system, due to the increase in NB‘s exposure and the fact that taxpayers will have to finance the execution needs of the Resolution Fund. If Novo Banco were not to be sold until the third of August, the alternative will be its liquidation.