September 21, 2017 / 11:39 AM / a year ago

Moody's warns of higher Novo Banco bondholder losses if sale fails

LISBON, Sept 21 (Reuters) - A failure to complete the sale of Portugal’s Novo Banco to U.S. fund Lone Star, which hinges on investors agreeing to sell back bonds at a discount, could lead to higher losses for senior bondholders, Moody’s Investors Service warned on Thursday.

A group of bondholders has opposed the terms of the state-rescued bank’s debt restructuring, threatening to block it.

The so-called liability management exercise (LME) was launched in July and will run until Oct. 2, aiming to raise 500 million euros from the buyback targeting 36 bond series worth a total of 8.37 billion euros at face value. Discounts to face value proposed in the swap range from 11 to 90 percent.

“If the LME is not successfully completed, the sale agreement would be breached,” Moody’s said in a research report.

“This would increase the risk of Novo Banco’s resolution or liquidation, potentially leading to higher losses for senior bondholders, while also potentially inflicting losses on junior deposits.”

The LME operation is a condition of the sale of 75 percent of Novo Banco to U.S. private equity investor Lone Star, which was agreed in March, in exchange for a 1 billion euro capital injection. The government has said it hopes to conclude the sale by November.

Novo Banco has the weakest asset quality among Portuguese banks, with bad loans making up a third of its loan portfolio, and its weak capital position means the recapitalisation is urgently needed.

According to Moody’s its tangible common equity was just 6.6 percent at the end of last year, well below Portugal’s average of 9.7 percent and 12.9 percent in the euro zone.

Novo Banco was carved out of Portugal’s biggest ever bank collapse in 2014 after a 4.9 billion-euro rescue of Banco Espirito Santo.

Novo Banco’s liquidation would deal a new blow to the country’s financial system, which is still recovering from two bailouts in 2014 and 2015 and other liquidity problems.

In the report, Moody’s said that Portugal’s top six banks have collectively made progress in improving their asset quality and capitalisation, but high volumes of problem assets combined with low profitability still represented big challenges. (Reporting By Andrei Khalip, editing by Axel Bugge; Editing by Elaine Hardcastle)

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