Experimental feature

Listen to this article

00:00
00:00
Experimental feature
or

Portugal has struck a deal with Lone Star on the sale of Novo Banco, in which the US private-equity fund will acquire 75 per cent of the country’s third-largest lender in return for a capital injection of €1bn.

Carlos Costa, governor of the Bank of Portugal, said on Friday that Portugal’s bank resolution fund, Novo Banco’s sole shareholder, would retain the other 25 per cent. Lone Star will initially provide €750m in new capital and the remainder within three years.

The deal is the culmination of more than two years of efforts to sell Novo Banco, the so-called “good bank” salvaged from the collapse of Banco Espírito Santo in a €4.9bn bailout in 2014.

Under the agreement, the resolution fund — a public body that is jointly financed by all of Portugal’s banks — is committed to injecting fresh capital into Novo Banco if its capital strength falls below regulatory requirements, the Bank of Portugal said in a statement.

This clause will only be triggered, however, if the capital shortfall results from impairments on designated problem loans held in a so-called side bank, from which Novo Banco has been selling off non-core assets.

Novo Banco will also swap €500m of senior bonds for new bonds to strengthen the bank’s common tier one equity ratio, the central bank said.

The resolution fund has already spent €4.9bn on rescuing Novo Banco, €3.9bn of which came from a state loan. The sale of a 75 per cent stake to Lone Star in exchange for fresh capital means it will not recover any of this outlay from the deal.

However, the government has ruled that banks will not have to make any extraordinary contributions beyond their regular payments to the resolution fund, giving them several decades to make up the shortfall. The resolution fund will later be able to sell its 25 per cent stake in Novo Banco in an effort to recoup some of the loss.

Novo Banco has moved non-core assets into a “side bank” from where it is selling off international holdings, non-strategic loans, real estate and restructuring funds. The value of the side bank fell from approximately €10.4bn to €8.9bn in 2016 through impairments and disposals. The bank plans to reduce this value to below €5bn, representing about 12 per cent of total assets.

Non-listed Novo Banco has recognised impairments totalling about €5bn since 2014. Coverage of bad debts stands at more than 60 per cent. It has cut its loans-to-deposits ratio from 180 per cent to about 110 per cent and repaid €3.5bn in governmental guarantee bonds

Antonio Costa, Portugal’s Socialist prime minister, said the deal would have no direct or indirect impact on the former bailout country’s public accounts nor involve any cost for taxpayers.

If the government had chosen to nationalise Novo Banco, he said, the state would have had to inject €4bn-€4.7bn of fresh capital into the lender and would have been exposed to “limitless” liabilities in the future.

Lone Star would not be able to distribute dividends at Novo Banco for five years to ensure that funds raised from any asset sales would be used to strengthen the bank’s capital, Mr Costa said.

Copyright The Financial Times Limited 2017. All rights reserved.
myFT

Follow the topics mentioned in this article

Follow the authors of this article

Comments have not been enabled for this article.