Banco Popular was sold to its much larger rival Santander for a symbolic single euro © FT montage

Last week, a group of bondholders hired law firm Quinn Emanuel to explore litigation options over the failure of Banco Popular. The Spanish bank was put into resolution, its shareholders wiped out and its junior bonds written down to almost zero, before it was sold to bigger rival Banco Santander for a symbolic €1.

Here are the main the questions that investors in Popular’s junior bonds have been asking since its failure in early June, which are also likely to be at the heart of any subsequent legal action expected this summer.

What were the haircuts on Popular’s collateral?
Popular burnt through €3.6bn of central bank emergency liquidity in only two days. In the aftermath of its collapse, the European Central Bank’s vice-president Vitor Constâncio said Popular suffered from a “bank run” and the regulators’ decision to take action stemmed mainly from concerns around liquidity.

This came as a shock to investors who had grown used to seeing the ECB as the lender of last resort, such as when it advanced billions of euros in emergency liquidity assistance to Greek banks in 2015.

When banks receive funding of this type, they must pledge assets as collateral with the ECB. The central bank then applies a “haircut” to the assets. A haircut of 50 per cent, for example, means the bank could receive €1bn of funding for €2bn of pledged collateral. Investors claim that the haircuts on Popular’s collateral were excessively high.

“The ECB has liquidity everywhere; why didn’t they use it?” asks one Popular bondholder. In late June, Javier Alonso, deputy governor at the Bank of Spain, said he suspected the bank did not present all the collateral it had, but added that he could not “certify” this point.

How was the bank valued?
The bank’s failure was dealt with by an array of regulators, including the ECB, the Single Resolution Board in Brussels and the FROB, the Spanish vehicle for “orderly bank restructuring”.

If the bank had an equity value, its subordinated “tier 2” bonds would not have been wiped out, given that they rank above equity. But these bonds were converted to a symbolic equity value of just €1, which was bought by Santander.

According to a document published by the FROB, an unnamed “independent expert” assessed that the bank was worth negative €2bn under its “baseline scenario”. This figure is almost identical to the total value of the bank’s subordinated bonds, which were wiped out during the resolution, without touching the bank’s senior debt. “It exactly matched the value of the junior debt — not a penny more, not a penny less — how convenient,” said one bondholder.

While a PwC audit forced Popular to restate its 2016 annual accounts in April, it still pegged the bank’s net asset value — the difference between its assets and liabilities — at €10.8bn.

The sudden swing into negative equity in the FROB-commissioned reassessment of Popular’s books was largely driven by much higher provisions against its property portfolio — dramatically higher than provisions seen at other Spanish banks, which could have big implications for the Spanish non-performing loan market.

Why were offers of help not taken up?
Several investors state that a fully funded recapitalisation, organised by Deutsche Bank, was on the table several weeks before the resolution. Investors involved in funding this proposed recapitalisation say that the suggestion was never considered. Deutsche Bank declined to comment.

People who were involved in the talks about recapitalising Popular say its new chairman, Emilio Saracho, an investment banker who joined from JPMorgan Chase in February, seemed focused almost exclusively on trying to sell the bank to a rival. When that failed it was too late to find an alternative.

Investors and rival bankers also say that Spain’s BBVA made an informal approach about acquiring Popular last year before it was plunged into crisis. But this was rejected by Popular’s former chairman Angel Ron at a time when the bank’s market value was above €2bn. BBVA declined to comment.

Who withdrew their money from the bank and where did it go?
Popular’s official cause of death may have been a bank run, but there were no queues outside branches of nervous depositors looking to withdraw money. While people can move money online nowadays, the explanation given for the invisible bank run is that it was driven not by individuals, but by companies.

Several investors say there is evidence of local authorities and other government bodies pulling money out of Popular en masse a few days before its collapse. They add that there is no evidence of comparable increases in SME deposits at other Spanish banks.

Did the Spanish establishment turn on Popular?
What the bondholders seem to be lacking in their search for someone to blame for their losses in Popular’s resolution is a motive. Why would a bank chief executive, regulator or government deliberately drive Spain’s sixth-largest bank to the point of failure?

What they do have is a lot of theories, some of which smack of conspiracy. They point out that the SRB has been itching to handle its first bank failure since it launched 18 months ago. They point out that Spanish finance minister Luis de Guindos has long held ambitions for a top EU job in Brussels and the Popular crisis was an ideal way to prove his credentials.

One of the biggest losers from the resolution of Popular is the secretive and conservative Catholic association, Opus Dei, which is closely linked to the bank. Some investors suggested this may have made the bank a political target. But bankers say this is far-fetched, especially as the ruling conservative People’s party is historically closer to Opus Dei than the opposition socialists.


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