By Margot Patrick and Patricia Kowsmann
LONDON-- Goldman Sachs Group Inc. and several of its clients
stand to lose hundred of millions of dollars from a loan made to
Banco Espírito Santo SA just weeks before the Portuguese lender
collapsed in August, after the Bank of Portugal said the claim
won't be honored by Novo Banco, the "good bank" carved out of
BES.
Novo Banco said it was told by the Bank of Portugal last week
that it wouldn't have to repay $835 million owed to financing
vehicle Oak Finance Luxembourg SA, in a reversal of an earlier
decision by the central bank. The loan will instead remain an
obligation of the "bad bank" that kept the Banco Espírito Santo
name and its worst assets.
Goldman Sachs, which set up Oak Finance and bought notes issued
by the vehicle against the loan, said it plans on "pursuing all
appropriate remedies."
As problems were mounting at the Portuguese bank and other
companies linked to the Espirito Santo family last summer, Oak
Finance made a $835 million, four-year amortizing loan to Banco
Espírito Santo and issued notes against it in early July. The
proceeds of the loan were earmarked for an oil refinery project in
Venezuela that Banco Espírito Santo had previously agreed to
finance, according to a prospectus.
When Novo Banco was carved out of Banco Espírito Santo on August
3, the Oak Finance-linked loan went with it. The Bank of Portugal
and Novo Banco confirmed in writing that month to Goldman Sachs
that the obligation would transfer to Novo Banco, according to a
Goldman Sachs spokeswoman. Based on that same information, Moody's
Investors Service affirmed a B3 rating on the Oak Finance notes on
September 2.
"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. On August 11, 2014,
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. 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," the Goldman Sachs spokeswoman said.
A Bank of Portugal spokesman on Monday said the Oak Finance
decision was made to comply with European rules that forbid a
rescued bank to assume obligations from shareholders who own 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.
Novo Banco was due to make its first repayment on the loan, for
$52.9 million, on December 25, according to the Oak Finance
prospectus. Under the terms of the deal, that money would then be
used to make an initial repayment to the Oak Finance noteholders,
including Goldman Sachs and a set of hedge funds and pension funds
who bought the notes.
The Oak Finance transaction, first reported in The Wall Street
Journal in September, raised eyebrows because of its timing so soon
before the bank's collapse, and because of the circumstances of the
loan.
According to the Oak Finance prospectus, the borrowed funds were
for purposes including trade financing for China's Wison
Engineering on a project for Venezuela's state energy monopoly
Petróleos de Venezuela SA, or PdVSA, at its Puerto La Cruz
refinery. PdVSA is a major holder of debt issued by Espirito Santo
companies, much of which is now worthless, and is increasingly seen
by investors as vulnerable to defaulting on its debt amid broader
concerns about Venezuela's finances.
Removing the Oak Finance loan boosted the balance sheet of Novo
Banco, which is in the process of seeking a buyer, by EUR548.3
million, according to a Dec. 23 statement by Novo Banco. The bad
bank has limited assets that are unlikely to cover any substantial
repayment of the Oak Finance loan.
Write to Margot Patrick at margot.patrick@wsj.com and Patricia
Kowsmann at patricia.kowsmann@wsj.com
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