Must-know: The birth of Novo Banco SA

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Novo Banco SA

Banco Espirito Santo (BKESY), also known as BES, is 20% owned by Espirito Santo Financial Group. The lender’s largest outside shareholders include France’s Credit Agricole SA (CRARY)—owner of a 14.6% stake—and Brazil’s Banco Bradesco SA (BBD) which has a 3.9% holding.

BES has received a series of creditor-protection filings by concerned units since its parent company, Espirito Santo International (or ESI), allegedly defaulted on a debt payment. Espirito Santo was accused of accounting discrepancies in early July. The company reported first-half losses of $4.82 billion against an anticipated loss of ~$2.68 billion. The company’s on-hand capital cushion couldn’t make up for the record loss.

BES bailout

Recent developments

On July 10, BES—one of the biggest banks in Portugal—stalled its shares and bonds trading because of ESI’s alleged defaulted on a debt payment. As a result, BES saw its shares plunge 17.2% on July 10 while ESI and Portugal’s benchmark stock index, PSI-20, dropped 8.92% and 4.2%, respectively.

BES shares slumped 67% in July as three parent companies linked to the Espirito Santo family requested protection from creditors. Concern grew that the bank may have to inject additional capital into its Angola unit. On July 30, the banks’ shares dropped 10.6%, to touch their all-time low.

The default

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The failed Portugese lender had issued close to $1 billion in junior bonds when Portugal was in deep recession. The S&P had issued a warning against BES debt. Also, BES reported a quarterly loss. The bonds carried a rich coupon of 7.125%. This reflected the substantial risk. These bonds were hit the worst after the BES bailout.

The bailout

The European Union (or EU) and the International Monetary Fund (or IMF) had let Portugal borrow close to $105 billion in 2011 under the three-year program that ended in May. A share of that loan—close to $16 billion—was kept back to help banks in need. The Bank of Portugal saw that BES was in distress. It stepped in to bail out the bank through ~$6.6 billion in capital insertion.

As a result of the Bank of Portugal’s assistance:

  • The Bank of Portugal will take control of Banco Espirito Santo’s assets and deposit-taking operations by transferring them to a new company, Novo Banco SA. It will inject money from its Resolution Fund into the new company.
  • Banco Espirito Santo is going to become the bad bank compared to the new good bank. It will be left with all the toxic assets.
  • Shareholders and owners of the bank’s junior debt will be left with Banco Espirito Santo’s most problematic assets, including loans to other parts of the Espirito Santo Group and the lender’s stake in BES Angola.
  • Deposits and all senior bondholders are fully preserved.
  • Banco Novo’s managers will search for private investors to buy significant stakes in an adequate amount of time.

The Global X FTSE Portugal 20 ETF (PGAL) retreated 3.99% on the news of the bailout. PGAL’s underlying index is designed to reflect broad-based equity market performance in Portugal. The index is composed of the top 20 companies that reside in, principally trade in, or have revenues from Portugal. The companies include Energias de Portugal SA (EDPFY)—with a 21.22% fund allocation—and Galp Energia SGPS SA (GLPEY) with a 14.02% allocation.

The next part of this series details about how the BES bailout impacted the market.

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