Novo Banco: Government approves credit to the Resolution Fund

  • ECO News
  • 3 October 2017

If Novo Banco's capital ratios fall, the Resolution Fund will be called in to inject capital. With what money? The Government approved a framework agreement with the fund to guarantee financing.

The Portuguese Government approved a framework agreement that guarantees that the Resolution Fund will have access to financing if necessary. In practice, with this agreement, the Fund (which will continue being one of Novo Banco’s shareholders) will keep access to liquidity. The money will be used to overcome any capital needs the institution headed by António Ramalho may have, after it is sold to Lone Star. That injection will happen every time the capital ratios decrease from a predefined threshold — in this case, of 12.5%.

In order to safeguard Portugal’s financial stability, the Council of Ministers’ Resolution published this Monday explained that “the Portuguese State signed a framework agreement with the Resolution Fund aiming to offer them the financial means to, if necessary, satisfy contractual obligations that may come from the sale of 75% of Novo Banco’s equity”. The Resolution Fund will continue owning 25% of NB’s capital.

Within the negotiation process with Lone Star, the Government had to approve the creation of a contingent capital mechanism, worth 3.89 billion euros, supported by the Resolution Fund (with a State “guarantee”), which will intervene if the bank’s capital ratios fall below a certain amount.

In order for this mechanism to be activated, two conditions have to be met:

  1. The toxic assets in Novo Banco need to have suffered a devaluation in comparison to their reference value (which will be determined when the sale is concluded);
  2. Novo Banco’s capital ratios need to also have lowered below a certain level, previously predefined in the sale contract — meaning these ratios are not necessarily equal to those demanded by the European Central Bank.

The reference value is a 12.5% ratio, but it can be lower. Any money injection will aim to replace the capital ratio at the level referenced in the contract — and not to compensate Lone Star for any losses with those assets.

The sale of Novo Banco is entering its final stage. Two bondholders’ general assemblies have been performed within the debt repurchase proposal — by which the bank wants to obtain a 500 million euros’ saving to reinforce the bank’s capital ratios. In addition to those general assemblies, and after the purchases made by institutional investors, Novo Banco has repurchased 73% of the securities goal.

This Monday was the last day available to accept the offer, and the final results should be announced this Wednesday. Nonetheless, the Portuguese newspaper Jornal de Negócios wrote that aside from Pimco and Pacific Investment, at least six other investment funds were interested in the offer: Trinity, Pivot Global Value, Hesia Investment Designated Activity Company, FMR Investment Management, River Birch and York Capital.

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