Caixa Geral de Depósitos has managed to persuade international investors to buy €500 million of debt as part of Caixa’s recapitalisation process, but at high price with the bank undertaking to pay a whopping 10.75% interest rate.
With the prospect of such a high rate dangled in front of investors’ noses, even the warnings circulating around the market from Goldman Sachs to avoid the debt issue were not enough to stop the issue being oversubscribed.
In fact, €2 billion was suddenly available from investors trying to get a piece of the five-year debt action, described by one trader as ‘the bargain of the decade,’ with Caixa Geral described as ‘having a gun to its head.’ This is the most expensive bank debt issued since October 2013 when Banco Popular Español was forced by the market to pay 11.5%.
The bank still needs to issue a further €430 million and then the big ask, €2.5 billion from the Portuguese taxpayer, not that the taxpayer has any say in the matter.
Caixa Geral has debt rations among the poorest in Europe and is not expected to return to profitability until 2018.
Reuters reported today that Caixa Geral’s investment case is not helped by the broader economic picture in Portugal, a country described as "uninvestable" by one lender.
Fitch, expected to rate the new bond at B-, has a negative outlook on the country's banking sector, reflecting intensified pressure on capital from weak profitability and asset quality amid a highly indebted economy with low growth prospects.
Goldman Sachs is still hopping made at the shock transfer of senior bonds in 2015 from the rescued ‘good bank’ Novo Banco back to Banco Espírito Santo, which left Goldman and other bondholders nursing severe losses and continues to a long shadow over Portugal’s financial governance from the Bank of Portugal.
Rating agency DBRS has voiced concerns around the ‘challenges’ facing CGD's strategic plan for 2017 to 2020, particularly the targeted reduction of non-performing loans and management’s claim that the bank again will be profitable in 2018 after six straight years of losses.
Mariana Mortágua of Portugal’s Left Bloc argues that the €500 million debt issue "calls into question the financial interest" of the bank itself and the party does not want the bank to make the second issue, calling into question the involvement of the European Commission which has approved the recapitalisation plan.
"This debt issue is against the interest of the country," said Mortágua who reminded the markets that the Prime Minister, António Costa, assured parliament that he would always choose the country's interest when deciding what’s best for Caixa Geral.
If the second part of the debt issue is suspended, the bank can not proceed with the injection of taxpayer funds of €2.5 billion.
Comments
Banking chickens are coming home to roost all across the zone - 1 trilion euros of unrecoverable south European debt held by the ECB is just one recent example of the lunacy of attempting to link such disparate countries at vastly different levels of social development under the one currency. Deutche Banks 45 Trillion euros of very flaky derivatives is another.