Bloomberg: creditors resist Novo Banco’s bond exchange

Some creditors are planning to reject the bond exchange offer in Novo Banco (NB) which involves losses, in a decisive week for the future of the transition bank. If this exchange operation fails, the bank will not be sold to Lone Star and liquidation will be on the table. News agency Bloomberg considers “the Portuguese government and creditors of the nation’s weakest bank are playing a game of chicken”.

The discussion concerns the voluntary bond exchange aiming to reinforce NB’s capital by 500 million euros. This is one of the vital conditions for closing the sale deal with the North-American fund Lone Star. ECO had previously disclosed that the bond exchange proposal had been given to international funds and that the Bank of Portugal and NB’s administration will wait for international funds before presenting the final proposal. According to Bloomberg, some investors will strongly resist the proposal. However, a spokesman for a group of bondholders including Pimco stated this Monday: “Since last week, there have been constructive discussions”, adding that the parties “are working to find something that protects our investors and the bank”.

Pimco, the largest investment management fund in the world which moved a proceeding against the Bank of Portugal, along with other creditors from NB, will reject any agreement which inflicts more losses, a source close to the situation told Bloomberg.

XAIA Investment is also included in that group of creditors who enforced a legal proceeding against the Bank of Portugal because of the losses they suffered with BES’s debt. They will “wait and see if the sale falls through or if they are indeed bluffing”, stated Jochen Felsenheimer, the fund’s director. They did not disclose if they will participate in the offer, in spite of having the bank’s debt in their portfolios and hedging contracts protecting them from losses.

Tom Kinmonth, from ABN Amro Group, considers this to be “a matter of principle”. “The money we’re talking about is relatively small, but it’s become a larger thing of who blinks first”. Filippo Alloatti, senior credit analyst at Hermes Investment Management in London, which decided against buying the notes, stated: “The risk is that Lone Star pulls out and the rescue deal fails”.

Jerome Legras, investor from Axiom Alternative Investments, mentions the possibility of difficulties in the agreement because of the assessment Novo Banco makes of the bonds in its own balance, which pressures bondholders to accept even lower prices for the exchange offer: “It’s much harder to generate capital when the book value is already discounted”, Legras stated.

As for Ever Capital Investments, the society will maintain the long-term bonds in their portfolio waiting to have a larger increase as soon as the sale of Novo Banco is finally concluded.