DBRS Extends the Review of Novo Banco’s Rating

DBRS Ratings Limited (DBRS) has today extended the review on Novo Banco, S.A.’s (NB or the Bank) Long-Term Issuer, Long-Term Senior Debt and Long-Term Deposits rating of CCC (high), and the Short-Term Issuer, Short-Term Debt and Short-Term Deposit ratings at R-5. These ratings remain Under Review with Negative Implications (URN). The review on the ratings was originally initiated on April 13, 2017, when the Bank announced a Liability Management Exercise (LME) to the bondholders of senior debt with the aim to generate EUR 500 million of capital. This is a key requirement to achieve the sale of 75% stake of the Bank to Lone Star. At the same time, 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.

Today’s extension of the review follows the announcement by NB of further information on the conditions of the LME on July 25, 2017. DBRS expects to conclude the review upon completion of the LME, which is expected to be completed by October 4, 2017 at the latest.

DBRS anticipates that upon completion, the LME will be viewed as a distressed exchange. This reflects that DBRS considers that bondholders are being compelled to consent to the exchange because failure to do so would likely lead to the withdrawal of the acquisition offer by Lone Star. In DBRS’s view, this could potentially have negative implications for the Bank and senior bondholders, as it could lead to the application of resolution measures to NB.

As a result, the Bank’s Long-Term Senior Debt rating will likely be downgraded to “D” upon completion of the transaction. The Long-Term Issuer rating will likely be considered as Selective Default “SD”. The latter reflects that as per DBRS‘s default definition, DBRS would consider that the issuer has failed to satisfy an obligation on a debt issue but 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. If the tender offer is not successful, DBRS anticipates that the Issuer and Senior Debt ratings could also be downgraded to reflect the increased risk of losses for holders of the Long-term Senior debt as one of the means to support the capital position of the Bank.

On March 31st, 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 subject to the LME raising over EUR 500 million to reinforce NB’s capital position, prior to Lone Star injecting the further capital required. Under the conditions of the LME, as announced earlier this week, NB’s senior bondholders are being offered cash, as well as the possibility to deposit that cash in a 3-5 years fixed-term deposit. The senior debt involved in the LME has been issued by the London and Luxembourg branches of the Bank as well as NB Finance.

The confirmation of the BB (low) / R-4 Critical Obligations Ratings 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. Given the ongoing LME and the uncertainty surrounding its impact any upside pressure is unlikely in the short term.

Notes:
All figures are in EUR unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations (May 2017) and DBRS Criteria: Guarantees and Other Forms of Support (February 2017). This can be found can be found at: http://www.dbrs.com/about/methodologies

The sources of information used for this rating include SNL Financial, company disclosures and the Bank of Portugal. 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 and US regulations only.

Lead Analyst: Maria Rivas, Vice President – Global FIG
Rating Committee Chair: Elisabeth Rudman, Managing Director, Head of EU FIG, Global FIG
Initial Rating Date: 5 August 2014
Most Recent Rating Update: 14 July 2017

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