Fourteen big-hitting institutional investors have hired feared British lawyers at Clifford Chance to sue the Bank of Portugal to recover their Novo Banco investments.
Funds including Black Rock and Pimco are among 14 institutional investors which will challenge the decision made by the Bank of Portugal’s Governor, Carlos Costa, at the end of 2015 to all but wipe out the value of senior bonds by moving them back to the bombed-out shell of BES.
The legal process against the Portuguese central bank accompanies a time of increasing uncertainty for holders of these senior bonds who worry that what is left of BES will be declared bankrupt and they will lose the entire investment, as opposed to current losses of around 90%.
Novo Banco was created in August 2014 after Banco Espírito Santo went bust and whose toxic assets were placed in a 'bad bank' BES which lingered on to sell off anything saleable.
At the end of December 2015, five issues of Novo Banco senior bonds totaling €2 billion were shifted over to BES in a move that pushed Portugal’s credibility further into the mire and raised serious questions in Europe and the US as to Costa’s credibility and future.
The bond shift, approved and endorsed by the Bank of Portugal, shook capital markets in Europe while the European Central Bank and the Portuguese government swiftly distanced themselves from the decision.
The institutional investors currently nursing massive paper losses complain that they have been discriminated against because they are based outside Portugal as Portuguese investors holding similar bonds have not suffered similar losses.
The move by Costa boosted Novo Banco’s balance sheet by €1.985 billion and has made the bank a better prospect in the current sale road-show which, bizarrely, is starting in New York.
The senior bonds still lie with BES which has little hope ever of paying off the investors, losing as it did, €9 billion in 2014 and now being dependent on selling off a mish-mash of failed and toxic assets.
Clifford Chance is an experienced and feared legal firm and the case will be heard in London, giving the investors a fighting chance that justice will be done.
Should Carlos Costa lose the case and compensation be awarded, the Portuguese taxpayer yet again will be picking up the tab as he heads off to a long and well-funded retirement.
