The NZ Superannuation Fund said yesterday it was fighting the Bank of Portugal’s switch of a senior debt obligation from Banco Espírito Santo’s “good bank”, Novo Banco, back to the toxic side of the bank.
Espírito Santo was split in 2 last August, when it received a €4.4 billion bailout.
NZ Super Fund chief executive Adrian Orr said the fund had written down its $US150 million exposure to the Oak Finance loan while it & other investors took the Bank of Portugal to court over its December decision to retrospectively return the loan to the toxic bank after transferring it & other senior debt obligations to the good bank.
Mr Orr said the dispute had wider ramifications: “In making this loan, the fund was providing liquidity to the Portuguese banking system. The fund was protected against the risk of Banco Espírito Santo defaulting through the purchase of credit insurance. This is a very standard, insured, investment activity globally that keeps the financial world liquid. The Bank of Portugal’s actions, however, in treating the Oak Finance loan differently to all other senior debt obligations, appear to have had the effect of negating this insurance.”
Mr Orr said the New Zealand Superannuation Fund had successfully undertaken the provision of liquidity, among other investment activities, over a long period. “This is a standard, low risk investment activity for institutions such as the fund.
“The Bank of Portugal’s retrospective decision puts our liquidity provision activities with respect to Portugal – and potentially other jurisdictions – at risk, given the apparent unreliability of debt provision & credit protection policies.
“It is concerning for investors in Portuguese banks that senior debt can be treated on a similar basis to equity & subordinated debt, solely by virtue of the debt arranger’s – not lender’s – shareholding in the bank.”
The Bank of Portugal based its decision on a view that investment bank Goldman Sachs, which arranged the loan, was both an associate of Banco Espírito Santo and had in fact made the loan.
“As Goldman Sachs has said publicly and to the Bank of Portugal, Oak Finance was an independent entity from Goldman Sachs International. We understand that at no point did Goldman Sachs hold a participatory interest in more than 2% of Banco Espírito Santo’s shares.
“Legally, the loan arranger’s shareholding in Banco Espírito Santo should not be the basis for treating the Oak Finance loan as related-party lending.”
The switch came after the Bank of Portugal gave written assurances that senior debts such as the Oak Finance loan had moved to Novo Banco. Novo Banco also confirmed in writing that the Oak Finance loan had been transferred as one of its liabilities.
Mr Orr commented: “We note that Novo Banco continues to have the benefit of the money that we lent.
“It will also be of considerable concern to any investor that the Bank of Portugal has not treated all senior debt holders equally. We understand that holders of senior bonds arranged & underwritten by at least one other financial institution have remained with Novo Banco when, unlike the position with the Oak Finance loan, the bonds were subscribed by a related party of a substantial shareholder in Banco Espírito Santo.”
Attribution: Fund release.