Banco Espirito Santo _A Decade on, a Bank’s Creditors Are Still Waiting to Recoup Losses - Bloomberg

A Decade on, a Bank’s Creditors Are Still Waiting to Recoup Losses - Bloomberg

Welcome to The Brink. We’re Irene Garcia Perez and Lucca de Paoli in London, where we caught up with the corpse of Banco Espirito Santo. We also have the latest on Chinese developers and Steward Health. Follow this link to subscribe. Send us feedback and tips at debtnews@bloomberg.net or DM on X to @irenegperez.

A Decade On

It’s 10 years since Banco Espirito Santo collapsed and had to be rescued by the Portuguese central bank. But for the big-name investors still hustling to get their money back, the fight has barely even begun. The Lisbon-based lender failed in early August 2014 under the weight of fraud and bad debts linked to companies held by the family-controlled Espirito Santo Group. It was split into two entities: a bad bank, still called BES, and a good bank called Novo Banco. The bad bank contains debts owed to some of the biggest players in the world of distressed debt investing, who are now stuck in a drawn-out legal process to try to recoup their funds. “This all stopped being funny about 10 years ago,” Joaquim Shearman de Macedo of law firm PLMJ, who is working for some of the creditors of the defunct lender, said in an interview with Bloomberg. “This is the worst resolution that ever went through in Europe.” Elliott and Silverpoint loaned BES money in the weeks before its collapse through a Goldman Sachs-arranged loan called Oak Finance. When the lender was split up the debt was consigned to the bad bank by the Portuguese government. Since then, the funds have been trying a number of different legal avenues to win compensation from the state. A ruling from the highest UK court in 2018 said the case must be held in Portugal. Now, the investors are attempting to bring Portugal to the negotiating table through a case at the International Centre for Settlement of Investment Disputes. Holders of €2.2 billion of bonds issued by BES, including Pimco and BlackRock, faced a similar fate after the debt was first moved to Novo Banco and later transferred to the bad bank.  Other investors, including Attestor, are aiming for big wins by litigating for a payout after buying those bonds at big discounts. One fund manager suggested in 2022 that the strategy could yield returns of as much as 600%.  Such wagers on the debt of collapsed finance firms are risky, but in the past some have proved lucrative. Last year, buyers of debt issued by SNS Reaal, another collapsed European lender, handed opportunistic buyers a windfall after the Dutch government was forced by a court to provide compensation to bondholders. Some of the funds that invested in the SNS notes when they were cheap generated returns of as much as 1,000%. Under a principle known as “No Creditor Worse Off,” bondholders and lenders that saw debts written off to help rescue a bank are due compensation if it can be shown that they would have received more in the event of a liquidation. In 2016, Deloitte calculated that BES creditors should receive 31.7% of the principle value of their debts if NCWO is applied.  With numerous cases moving slowly through the Portuguese legal system, both the bondholders and the Oak Finance creditors have received nothing. A spokesperson for Banco de Portugal said that so far the country's courts have "always confirmed the legality" of the central bank's resolution measures to deal with BES’ collapse. “Banco de Portugal is also strictly abiding by the law as regards the possible determination of compensation based on the 'No Creditor Worse Off' principle,” he said.