DBRS Places Novo Banco’s Senior Long-Term Ratings of CCC (high) URN

DBRS Ratings Limited (DBRS) has today placed the senior ratings of Novo Banco, S.A.’s (NB or the Bank) Under review with Negative Implications (URN). These include the Issuer, Senior Long-Term Debt and Deposits rating of CCC (high), and the Short-Term & Deposit rating of R-5. DBRS has confirmed the Critical Obligations Ratings (COR) at BB (low) / R-4, with Stable Trend. Please see full ratings table at the end of this press release.

The placing of the senior debt ratings Under review with Negative Implications (URN) reflects DBRS’s view that the risk for the Bank’s bondholders has increased following the announcement of a liability management exercise involving senior bondholders as part of the agreement to sale NB announced on March 31, 2017.

On 31 March, 2017 the Portuguese government in representation of the sole shareholder of NB, the Resolution Fund (RF) announced an agreement to sell a 75% stake in the Bank to an American fund, Lone Star. The transaction is also subject to a liability management exercise of senior debt, prior to Lone Star’s capital injection, to reinforce NB’s capital position.

The sale also requires regulatory approvals including from the European Central Bank and the European Commission. According to the Ministry of Finance's communication, Lone Star has agreed to buy a 75% stake with the condition of injecting EUR 1 billion fresh capital over the next three years upon closure of the deal. Of this total, EUR 750 million will be injected upfront once the sale is approved. A further EUR 250 million will be injected by Lone Star over the next three years. The RF will retain a 25% stake in NB.

During the review period, which could last longer than 3 months, DBRS will focus on the terms and conditions of the liability management exercise which are still unknown at this stage. DBRS would likely view any liability management exercise as a distressed exchange if the terms of the exchange are disadvantageous to bondholders. In such an event, DBRS anticipates that the Bank’s senior debt ratings would be downgraded to “D” to reflect the fact that according to DBRS’s methodology the offer is considered as coercive for the senior debtholders and the notes have defaulted as per DBRS’s Default Definition, which include securities described as a Distressed Exchange. The issuer rating would likely be considered as Selective Default. As per DBRS‘s default definition, DBRS would consider that the issuer has failed to satisfy an obligation on a debt issue but DBRS views this as being “Selective” if the issuer is expected to continue to meet obligations in a timely manner on other securities and/or classes of securities.

The Critical Obligations Ratings were not lowered along with the senior debt and deposit rating and remains at BB (low) / R-4. This reflects DBRS’ expectation that, in the event of a resolution of the Bank, certain liabilities related to critical activities (such as payment and collection services, obligations under covered bond program, payment and collection services, etc.) have a greater probability of avoiding being bailed-in and being included in a going-concern entity.

RATING DRIVERS

The ratings are currently Under Review with Negative Implications. Any upside pressure is unlikely in the short term. However, a successful sale of the Bank together a fresh capital injection could have positive implications.
Separately, DBRS has also withdrawn the BBB (low) rating on the Senior and Unsubordinated Notes Guaranteed by the Republic of Portugal as this debt has been repaid/cancelled.

Notes:
All figures are in Euros unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations (July 2016). Other applicable methodologies include the DBRS Criteria: Support Assessments for Banks and Banking Organisations (March 2017), DBRS Criteria: Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities (February 2017), Critical Obligations Rating Criteria (February 2017) and Guarantees and Other Forms of Support (February 2017). These can be found can be found at: http://www.dbrs.com/about/methodologies

The sources of information used for this rating include company documents, the European Central Bank, the European Banking Authority, the Bank of Portugal and SNL Financial. DBRS considers the information available to it for the purposes of providing this rating to be of satisfactory quality.

DBRS does not audit the information it receives in connection with the rating process, and it does not and cannot independently verify that information in every instance.

This rating is under review. Generally, the conditions that lead to the assignment of reviews are resolved within a 90 day period. DBRS reviews and ratings are under regular surveillance.

For further information on DBRS historical default rates published by the European Securities and Markets Authority (“ESMA”) in a central repository, see: http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

Ratings assigned by DBRS Ratings Limited are subject to EU regulations only.

Lead Analyst: Maria Rivas, Vice President – Global FIG
Rating Committee Chair: Elisabeth Rudman, Managing Director, Head of EU FIG

Initial Rating Date: 5 August 2014
Most Recent Rating Update: 20 December 2016

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