LISBON--Portugal's Novo Banco, which kept the good assets of
collapsed Banco Esprito Santo SA, will propose that retail clients
holding certain bonds of its former bank convert their investments
into deposits so they can recover them in full, according to people
familiar with the offer.
The move is the first from Novo Banco to reimburse retail
clients who invested in debt from Espirito Santo entities that are
now bankrupt.
The bonds in question were issued by Banco Espirito Santo,
incorporated into different financial products and sold at higher
prices to retail clients of the bank. The operations were described
by Bank of Portugal as part of a fraudulent funding scheme between
companies within the Espirito Santo empire.
Under the proposal, which is expected to be presented to clients
next week, Novo Banco will offer customers who decide to sell their
investments in the market to convert that revenue into a deposit
that offers an average 2.75% interest rate over three years, with
clients being allowed to take their money after the first year.
Then, it would convert 75% of the difference between their initial
investment and the revenue from the sale into a deposit that offers
a 4.25% interest rate over 10 years.
Bank of Portugal and the Portuguese markets regulator have
approved the offer, according to the people. Amounts involved in
the offer weren't disclosed.
Banco Espirito Santo's troubles started in May, when it
disclosed an audit ordered by the Portuguese central bank found
irregularities in the accounts of its parent, Espirito Santo
International SA. The conglomerate and some of its units filed for
creditor protection in July.
Portuguese regulators have since found Banco Espirito Santo's
exposure to the parent and units was bigger than expected,
triggering a 3.6 billion-euro ($4.6 billion) first-half loss that
ate up a considerable part of the lender's capital, spurring its
rescue.
In early August, Banco Espirito Santo was split into a "good
bank," called Novo Banco, and a "bad bank." Novo Banco took the
deposits, good assets and a capital injection totaling EUR4.9
billion from a domestic resolution fund run by the Bank of Portugal
and the government. The "bad bank" received the toxic assets of the
lender, including its exposure to souring loans and securities from
its troubled parent.
Write to Patricia Kowsmann at patricia.kowsmann@wsj.com
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