The committee members of the International Swaps and Derivatives Association have ruled on the status of the €2 billion in Novo Banco bonds controversially transferred back to BES where their value plummeted.
Heavyweight global asset management funds have been highly critical of the decision of the Bank of Portugal to move five classes of senior bonds from the relative safety of Novo Banco, back to BES where their value plummeted overnight.
The central bank’s decision caused the five bonds to slump from 90 cents to around 10 cents as the BES ‘bad bank’ is judged unlikely ever to have the funds to repay the debt. The bonds have risen to about 25 cents on the hopes that there may be some assets at BES for distribution but this is by no means certain.
Investors demanded that the International Swaps and Derivatives Association (ISDA) classified Bank of Portugal's Carlos Costa's move as a ‘credit event’ - when an institution defaults on a significant transaction. If a credit event was judged to have happened, insurance policies will be triggered.
A panel of lawyers now has ruled a credit event had not taken place. This backed up the majority view of the ISDA’s leaders who had referred the problem to lawyers.
Eleven members of the ISDA’s committee voted that no credit event had occurred, one short of the 12 needed for a ruling. The other four members said an event had taken place. The question was only the third to be referred to external panel of lawyers by the ISDA.
The lawyers concluded, “A transfer is not essentially similar to a cancellation, conversion or exchange. We have therefore concluded that the ‘No’ position is the better answer.”
The decision means that hopeful investors are not able to claim on insurance policies that would have covered their losses on the bonds.
The two Costas, Prime Minister António and Bank of Portugal’s Carlos, will be mightily relieved. The PM had already distanced himself from any fall-out, saying he was "apprehensive about the systemic effects" of the bond switch.
The Bank of Portugal was not certain which way the decision would go as it already had appointed Deloitte to assess bondholders' losses with a view to compensation.
Carlos Costa’s gamble has paid off as Novo Banco is €2 billion more attractive to buyers at the stroke of a pen with massive losses shifting to bondholders now back at 'bad bank' BES.
Costa ordered the highly controversial bond transfer after a European Central Bank stress test showed a €1.4 billion capital shortfall at Novo Banco whcih he aims to sell later this year.
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