DBRS Takes Various Actions on Novo Banco After Completion of LME

DBRS Ratings Limited (DBRS) has taken various rating actions on Novo Banco, S.A. (NB or the Bank) following the announcement on October 4, 2017 of the results of the senior debt liability management exercise (LME). This includes downgrading the Long-Term Senior Debt ratings to Default (D) and the Long-Term Issuer Rating to Selective Default (SD). Following these actions, DBRS has withdrawn these ratings. Subsequently DBRS has assigned to NB a new CCC (high) Long-Term Issuer Rating and a new CCC (high) Long-Term Senior Debt rating and both ratings are Under Review Positive. Please see full ratings table at the end of this press release.

NB’s Long-Term Senior Debt rating has been downgraded to D to reflect the fact that DBRS views the LME to be a distressed exchange. Given the weak position of the Bank, DBRS considers that a failure to receive the capital injection generated by the LME alongside the Lone Star acquisition, would have meant the Bank not complying with minimum regulatory capital requirements. Subsequently, it could have led to the application of resolution measures to NB, and have had negative implications for the Bank and senior bondholders. DBRS recognises that the Bank, the Resolution Fund and Lone Star also had the flexibility to go ahead with the LME transaction even if it did not meet the minimum bondholder acceptance level, as was ultimately the case. However, DBRS considers that the possibility of the Bank being resolved if the LME and Lone Star acquisition failed to be completed, represented in itself a sufficient degree of coercion to bondholders for DBRS to consider the LME a distressed exchange.

At the same time, the downgrade of the Long-Term Issuer Rating to SD reflects the fact that as a result of the Distressed Exchange and in accordance with DBRS’s Default Definitions, the Issuer has failed to satisfy an obligation on a debt issue, but DBRS considers this to be “Selective” as the issuer is expected to continue to meet its obligations on other classes of securities. The CCC (high) Long-Term Deposits rating, and the R-5 Short-Term Deposits, Short-Term Debt and Short-Term Issuer ratings have been confirmed as these ratings were not affected by the LME.

DBRS also confirmed NB’s Critical Obligations Ratings (COR) at BB (low) / R-4, with a Stable Trend. The confirmation 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 would be included in a going-concern entity.

With the assignment to NB of a new CCC (high) Long-Term Issuer Rating and a new CCC (high) Long-Term Senior Debt rating all of the Bank’s senior ratings are now at the same level as they were prior to the announcement of the LME exercise, reflecting DBRS’s view of the limited impact of the LME on NB’s franchise, and the expected sale of the Bank to the American fund, Lone Star. The Intrinsic Assessment is also CCC (high) and the Support Assessment remains SA3.

DBRS has also placed the Bank’s Long and Short-Term Issuer, Debt and Deposit ratings Under Review with Positive Implications. The review will focus on the impact of any potential changes in the Bank’s fundamentals and strategy as a result of the impending sale to Lone Star, including the planned EUR 750 million capital injection which was an integral part of the acquisition agreement. On October 11, 2017 the European Commission approved, under EU State aid rules, Portuguese aid for the sale of Novo Banco. Following this, the completion of the sale of a 75% stake of the Bank to Lone Star is expected to take place in the near future.

The completion of the LME was one of the conditions to move forward with the agreement signed by Lone Star to acquire 75% stake in the Bank. On October 4, 2017, NB published the results of the Tender Offer on various senior bonds issued by the Bank. The transaction is expected to generate around EUR 500 million of capital in the form of capital gains and interest savings. NB announced that Lone Star and the Resolution Fund have agreed that the final outcome satisfied the completion of the LME conditions, despite the minimum participation conditions not being met. Around 57% of bondholders accepted to exchange the bonds. DBRS notes that the senior bondholders were offered cash, as well as the possibility to deposit that cash in 3-5 years fixed-term deposit accounts.

RATING DRIVERS
The ratings are currently Under Review with Positive Implications. During this period, DBRS will review the completion of the acquisition by Lone Star and its potential implications for NB’s franchise, profitability, funding and capital. A key factor in the review will be the impact on the Bank's asset quality as a result of the contingent capital mechanism being provided by the Resolution Fund to a portfolio of assets for up to EUR 3.9 billion.

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). Other applicable methodologies include the DBRS Criteria: 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 SNL Financial, the European Central Bank (ECB), the European Banking Authority (EBA), company reports 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.

Generally, the conditions that lead to the assignment of a Negative or Positive Trend are resolved within a twelve month period. DBRS’s outlooks and ratings are under regular surveillance

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: 28 July 2017

DBRS Ratings Limited
20 Fenchurch Street
31st Floor
London
EC3M 3BY
United Kingdom
Registered in England and Wales: No. 7139960

Information regarding DBRS ratings, including definitions, policies and methodologies, is available on www.dbrs.com.