LONDON, Jan 18 (IFR) - Institutional investors in Novo Banco, whose bonds were last month transferred back to Portuguese "bad bank" Banco Espirito Santo by the country's central bank, are forming a group to coordinate a challenge to the controversial decision.
"The senior noteholders are organised but there is no formal ad hoc committee yet. I expect that to be formalised in the next couple of days," said an adviser with knowledge of the discussions. The group is expected to then formally appoint legal advisers, and possibly financial advisers too.
Their complaint relates to the Bank of Portugal's decision on December 29 to transfer nearly 2bn in bonds from Novo Banco back to Banco Espirito Santo, making those investments nearly worthless.
The transfer was meant to plug a 1.4bn capital shortfall in Novo Banco identified by European regulators last year.
But investors holding the five senior bonds chosen for the transfer want to know why their bonds were selected for special treatment over other bonds. They could ultimately take any challenge to the European Court of Human Rights.
The adviser said it was likely both a local Portuguese lawyer and an international legal firm with experience in European Union law would be appointed by the group. "The bonds in question are all governed under Portuguese law but the issues involve questions about EU law," said the adviser.
Other creditors of BES who suffered similar treatment have already challenged the Bank of Portugal. Goldman Sachs has brought litigation in London against the central bank's decision to move its claims, via special purpose loan vehicle Oak Finance, back to BES from Novo Banco.
However, the claims of the senior bondholders were different as Goldman Sachs was considered linked with BES since it had a 2% stake in the group when it was resolved into the two entities in August 2014, the adviser said.
Any claims by the new group are not expected to be brought until after Novo Banco has been sold by the Portuguese authorities. "The Bank of Portugal's prime motive in all this is to sell Novo Banco. Then any litigation questions can be addressed," said the adviser.
Pimco and Blackrock are estimated to hold the majority of the bonds affected. The bonds now trade at around 15 cents in the euro but only around 100m are believed to have traded out into distressed debt funds.
Last week, 55 private Portuguese investors holding 7m of the bonds formed a group as well, with a view to suing those retail banks who sold them the bonds.
The European Central Bank said at that time it was not involved in the discussions.
The Bank of Portugal said on Friday it had reopened the sales process for Novo Banco. The authorities want to start liquidating BES as well, following the transfer of the additional bonds.
"The re-transfer of the five senior bonds announced in December 2015 addresses the bank's solvency shortfall and this might support renewed efforts to find a buyer," said James Longdon, co-head of EMEA financial institutions at ratings agency Fitch. (Reporting by Christopher Spink; Editing by Matthew Davies and Steve Slater)