The Bail-Ins Are Back! Portugal Slaps Senior Bank Bondholders With €2 Billion Loss

A little over a week ago, Portugal announced that for the second time in less than two years, Lisbon would be forced to bailout a large lender. 

This time around it was Banif, the country’s seventh-largest banking group which ran into trouble when it couldn’t repay a previous government cash injection (so really, this was a bailout of a bailout). 

Ultimately, the issue had to be resolved ahead of the new year, when new rules on bank resolutions that would have imperiled uninsured depositors go into effect across Europe. The €2.2 billion cash injection for Banif is set to add at least one percentage point to the country’s budget deficit which is already well wider than Brussels’ target thanks in part to the fact that the cost of last year's Banco Espirito Santo (BES) capital injection had to be placed on the government’s books after Portugal failed to sell Novo Banco (the “good” part of BES) in order to pay back the taxpayer money spent on the bailout.

The auction process for Novo Banco - which at one point drew the interest of “China’s Warren Buffett” - fell apart late in the summer after Chinese bidders became cautious in the wake of the country’s market meltdown and US private equity was reluctant to bid for an entity with a mountain of NPLs and an uncertain future. In short, it wasn’t clear if Novo Banco would need more capital. Well, it turns out that under the ECB’s “adverse scenario”, the bank would need to plug a €1.4 billion hole and so, out of options, Lisbon has decided to effectively bail-in senior bondholders. 

Some €2 billion in bonds will be transferred to BES (which will be liquidated) from Novo’s books. The move immediately raises the bank's Tier 1 ratio to 13.4% from 9.4% previously. If you own anything on this list, you just had a bad morning:

Taking the hit will be institutional investors who bought minimum lots of €100,000. 

When BES was bailed out, senior bondholders and depositors were protected while junior debtholders and anyone stuck with the equity were, well, screwed. As was the case with Banif, if Portugal had waited until the new year dawned, uninsured depositors would have been at risk in any attempt to shore up Novo’s books ahead of a plan to restart the auction process. Ultimately, someone had to pay to make this "good" bank turned bad "good" again.

Here's a look at what happened to Novo Banco 2017s in the wake of the announcement:

And for those wondering just which institutional investors are holding those, here's a list (note that Allianz and BlackRock are right at the top):

“This measure was needed to ensure that the losses from Banco Espirito Santo are absorbed firstly by shareholders and creditors and not by the financial system and taxpayers,” the Bank of Portugal said, in a statement. 

Novo Banco initially said the shortfall identified by the ECB last month would be addressed "with a plan that would include selling assets." Here's what The Bank of Portugal said when the stress test was concluded:

As announced by Banco de Portugal on 15 September, the Board of Directors of Novo Banco has already been empowered to present a plan to strengthen its solvency and implement strategic reorganisation. The plan will include measures to address the shortfall within an appropriate time frame. Amongst others, those measures included the following, to be implemented in the short term with the support of Banco de Portugal and Fundo de Resolução:

  • Sale of Novo Banco’s shareholding in GNB Vida - Companhia de Seguros, S.A.;
  • Sale of other shareholdings which are perceived to be non-core for the bank’s business.

In other words, the idea was to sell "assets" in order to fill the gap on the way to selling the bank itself. Well, someone apparently determined that it would be more efficient to simply force bondholders to fund a capital injection. As WSJ notes, the move represents the first time senior bondholders are on the hook for a banking bailout in the country.

But no one should be worried - well, no one except all of the institutional investors who just got wiped out - because Portugal swears this is the last time capital will have to be injected in Novo Banco. In other words, the sale process will be smooth sailing from here.

Of course the fact that the bank resorted to a bail-in rather than individual asset sales seems to suggest otherwise. As does this: