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Document Type

Case Study

Case Series

Ad hoc Capital Injection

Abstract

Banco Espírito Santo (BES) was the second-largest private bank in Portugal in 2014, with assets of EUR 80 billion (USD 81 billion). A capital increase of EUR 1.1 billion to the BES was concluded on market terms in June 2014. The Bank of Portugal (BOP) adopted a resolution measure for BES on August 3, 2014, to safeguard financial stability by protecting all depositors and ensuring continuation of operating activities of the bank. The Portuguese Resolution Fund provided equity capital of EUR 4.9 billion to a bridge bank, Novo Banco, with 100% public ownership and the expectation of sale to private investors in two years. The Resolution Fund was capitalized by a loan of EUR 3.9 billion from the Portuguese state and contributions of EUR 1.0 billion from the private banking sector. Novo Banco was initially expected to be sold to private investors no later than December 2016. In 2015, the BOP’s decision to bail-in EUR 2.2 billion of senior bonds led to uncertainty for the senior unsecured debt of European banks. In 2017, the BOP and the Resolution Fund sold a 75% stake in Novo Banco to Lone Star, a US-based private equity fund, in return for a commitment to inject EUR 1.0 billion of new capital into Novo Banco. Portugal also committed to a Contingent Capital Agreement (CCA) with Lone Star, for a maximum size of EUR 3.9 billion to provide additional capital injections to Novo Banco if the Tier 1 ratio dropped below 12%. Novo Banco received EUR 3.4 billion of capital injections by the Resolution Fund between 2018 and 2021, thereby receiving EUR 7.3 billion of total capital injections from the state since 2014. In February 2023, the European Commission (EC) declared that the resolution process was over and was successful in returning an important bank to viability. As of November 2023, the government of Portugal and the Resolution Fund continue to hold a joint 25% stake in Novo Banco with a book value of EUR 1.1 billion (GOP holds 12% and the Resolution Fund holds 13%).

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