+++ V.I. (FT) Portugal offers investors in Novo Banco compensation to quell anger

(FT) Portugal’s central bank has offered to partly compensate Novo Banco bondholders who lost money when their securities were transferred to a “bad bank” last month in a bid to ease tensions with the government and furious international investors.

The move is seen as an attempt to repair reputational damage caused by losses suffered on almost €2bn of bonds which provoked threats of lawsuits.

One investor present at a meeting with the central bank of Portugal last week said the offer was “better than nothing” but it would not stop bondholders taking legal action because it would only cover part of their losses.

“The offer of compensation seems clearly aimed at mending some of the damage done by turning a contested judgment into a better one,” a senior Lisbon-based banker said.

The central bank of Portugal last month moved five out of 52 senior Novo Banco bond issues to the “bad bank” that it had set up to hold the lender’s toxic assets after a bailout of Banco Espírito Santo in mid-2014.

Investors who suffered losses on Novo Banco bonds in the final week of 2015 are threatening to sue Portugal’s central bank. They say that it discriminated against them by only imposing losses on certain bondholders and not others.

The dispute has cast a cloud over Europe’s new regime for rescuing failing banks, which came into force at the start of this year. The new rules aim to bail in bondholders of troubled banks rather than using taxpayer funds to bail them out.

At a meeting with the Portuguese central bank last week, it told investors of plans to set up a fund backed by the country’s bank resolution vehicle. This is funded by all the country’s banks, to partially cover the losses on the bonds.

The “no creditor worse off” commitment from the central bank is designed to ensure that an investor’s losses are no greater than if BES had been liquidated in 2014. The Lisbon authorities have hired Deloitte to calculate a liquidation value of BES.

The resolution fund is the controlling shareholder in Novo Banco after injecting €4.9bn to rescue it from the ashes of BES, which collapsed amid allegations of fraud. The Bank of Portugal did not initially respond to requests for comment.

Prices of bonds issued by some Portuguese and Italian banks have fallen this year amid fears that similar losses could be imposed on them. An increase in the yield of Portugal’s 10-year debt and a drop in its stock market index, which hit a three-year low on Wednesday, are partly seen as a reaction to the losses imposed at Novo Banco.

The Bank of Portugal’s bail-in decision has sparked criticism beyond the investors affected. António Costa, the Socialist prime minister, said penalising creditors 18 months after a bank resolution was “very bad” for confidence in the financial sector.

The European Central Bank has also distanced itself, saying it had “neither requested nor approved a bail-in of senior bondholders”. The decision had been taken “exclusively by the Bank of Portugal under its national resolution powers”.

DBRS, the rating agency, described the selective bail-in as “potentially increasing reputational risks for the Portuguese banking sector, which could impact investor sentiment and confidence in Portuguese banks.”Portugal-offers-investors-in-Novo-Banco-compensation-to-quell-a