By Margot Patrick and Patricia Kowsmann
LONDON-- Goldman Sachs Group Inc. is squaring up for a fight
with the Bank of Portugal over repayment of an $835 million loan
made to Banco Espírito Santo weeks before the Portuguese lender's
collapse.
The four-year loan, arranged by Goldman Sachs through a finance
vehicle called Oak Finance Luxembourg SA, had been transferred in
August to Novo Banco, the "good bank" carved out of Banco Espírito
Santo. Last week, the Bank of Portugal decided that transfer was a
mistake, and that the loan should instead remain at the "bad bank"
that kept the Banco Espírito Santo name and its worst assets.
The decision means Goldman Sachs and its clients could lose
hundreds of millions of dollars from investments in Oak Finance
notes backed by the loan, since assets at the bad bank are
estimated to be worth less than $100 million in liquidation. The
Bank of Portugal's move also puts at a disadvantage junior
bondholders at Banco Espírito Santo who are already embroiled in
legal efforts to improve their own potential payout.
A Goldman Sachs spokeswoman said the Bank of Portugal's
unexpected announcement would harm its clients and financial
markets generally, and that it plans to pursue "all appropriate
remedies."
Banco Espírito Santo failed in August after the central bank
started untangling a web of cross-funding between the bank and
other companies in the vast Espírito Santo family empire. The Bank
of Portugal and the Portuguese prosecutor's office are currently
conducting separate probes into the matter, and authorities in at
least three other countries are investigating individuals and group
companies over alleged wrongdoing.
The Oak Finance transaction stood out in the wreckage of Banco
Espírito Santo, both for its timing and because of the companies
involved.
As first reported by The Wall Street Journal in September,
Goldman Sachs set up Oak Finance to help Banco Espírito Santo cover
a financing agreement with China's Wison Engineering and Venezuela
state energy monopoly Petróleos de Venezuela SA, or PdVSA. Wison
Engineering had been hired by PdVSA for an oil refinery project in
Puerto la Cruz on Venezuela's coast, and Banco Espírito Santo had
provided PdVSA with letters of comfort, according to the prospectus
for the Oak Finance notes.
Both Wison and PdVSA were themselves under strain as the deal
was being put together. Wison warned this year that it could go out
of business after its founder and controlling shareholder was
caught up in a broad corruption probe by Chinese authorities. PdVSA
has been trying to raise cash and is increasingly seen as
vulnerable to defaulting on its debt because of worsening
Venezuelan finances. PdVSA had also been identified as a major
holder of debt issued by Espírito Santo companies, much of which is
now worthless.
Oak Finance made the $835 million loan to Banco Espírito Santo
in early July as the Portuguese bank was struggling to raise
funding elsewhere. Oak Finance then issued $835 million in notes
against the loan that were bought by Goldman and a set of its
clients, including several hedge funds and pension funds.
Novo Banco was due to make its first payment on the Oak Finance
loan, for $52.9 million, on Dec. 25, according to the Oak Finance
prospectus. Under the terms of the deal, that money would have been
used for an initial repayment to the Oak Finance noteholders.
"Four months ago, when Novo Banco was created, we sought
confirmation from the Bank of Portugal that debts such as the Oak
Finance obligations would be transferred to NB," the Goldman Sachs
spokeswoman said. "On August 11, a senior representative of BoP
explicitly confirmed to us in writing the transfer of these
obligations. In addition, Novo Banco also confirmed in writing that
Oak Finance had been transferred as one of its liabilities.
"The BoP's unexpected public announcement earlier this week to
retroactively return these obligations contravenes market
expectations and damages multiple investors, including pension
funds, who were offered these investments in reliance on these
prior representations," the Goldman Sachs spokeswoman said. "Absent
the central bank's reconsidering its position in light of the
damage it will be causing to our clients and financial markets, we
plan on pursuing all appropriate remedies."
A Bank of Portugal spokesman on Monday said the Oak Finance
decision was made to comply with European rules forbidding a
rescued bank from taking on obligations to shareholders owning 2%
or more of the entity. Goldman Sachs owned more than 2% of Banco
Espírito Santo at the end of July, according to the spokesman and a
filing that month by the American investment bank. The spokesman
said the decision was announced to Oak Finance early last week
after it was able to confirm Oak was indeed a Goldman Sachs
vehicle.
Removing the Oak Finance loan boosted the balance sheet of Novo
Banco, which is in the process of seeking a buyer, by 548.3 million
euros ($666.5 million), according to a Dec. 23 statement by Novo
Banco. The Wall Street Journal reported earlier Monday that at
least four companies are interested in pursuing bids for the
bank.
Write to Margot Patrick at margot.patrick@wsj.com and Patricia
Kowsmann at patricia.kowsmann@wsj.com
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