Winterbrook Capital has filed a claim in the English high court against Novo Banco, escalating the London hedge fund’s tussle with the Portuguese lender over bonds it says are in default.

Winterbrook Capital sent letters to the board of Novo Banco last month outlining several events of default that the fund believes have been triggered on the bank’s senior bonds. The London-based firm publicly announced its claim last week, as the Portuguese bank was in the middle of raising €400m of risky subordinated bonds.

Court filings show that Winterbrook filed a claim against the issuer of Novo Banco’s senior bonds in the English high court on June 27. The London hedge fund is represented by US law firm Boies Schiller Flexner.

“Upon learning of the offer of the new notes, Winterbrook issued a claim in the English courts alleging the occurrence of events of default under the notes it claims to hold,” a spokesperson for the bank told the FT. “Novo Banco believes that the claims asserted are without merit and intends to defend them vigorously.”

Winterbrook could not be immediately reached for comment.

Despite the fresh challenge, the lender raised the €400m of Tier 2 bonds at a yield of 8.5 per cent on Friday.

Novo Banco was created out of the failure of Portugal’s Banco Espírito Santo (BES) in 2014 and is already the subject of long-running litigation from international investors including BlackRock and Pimco, which lost money due to a controversial debt transfer at the end of 2015.

Winterbrook is arguing that the bonds are in default due to unintended consequences of the Bank of Portugal’s rescue of BES, which saw the central bank carve up its assets into a surviving good bank and a run-off bad bank in 2014 and 2015. 

Hedge funds have increasingly looked to profit from complicated quirks in the law relating to European bank bonds, with Caius Capital this week stepping up pressure on UniCredit to convert €3bn of complex instruments into common equity. 

Winterbrook’s argument centres on a $835m loan to BES from a Luxembourg special purpose vehicle set up by Goldman Sachs called Oak Finance, according to a person familiar with the matter.

The loan — made little over a month before the central bank rescued BES in August 2014 — is already the subject of litigation from Goldman, the New Zealand Superannuation Fund and other investors that lost money. 

Winterbrook argues that the central bank’s decision that this loan should remain at the bad bank impacts the guarantee of Novo Banco’s senior bonds, meaning that an event of default has been triggered.

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