Re-Transfer Of Liabilities From Good Bank Novo Banco To Bad Bank BES – Another Test Case For The Banking Recovery And Resolution Directive ('BRRD'*)?

A case of table tennis between the 'good bank' and 'bad bank'

Readers interested in the BRRD2 will no doubt have been following the ongoing travails of the Portuguese good bank (Novo Banco, S.A. ("Novo Banco")) / bad bank (Banco Espirito Santo, S.A. ("BES"))3.

The latest news hitting the headlines was on 29 December 2015, when Banco de Portugal ("BDP"), acting as Portuguese resolution authority, announced (the "2015 Resolution") that it had re-transferred five Portuguese law-governed senior unsecured bonds (the "Affected Liabilities") from Novo Banco back to BES (the "Re-Transfer"). The Re-Transfer occurs some 16 months after BDP had resolved to transfer the very same Affected Liabilities from BES to Novo Banco.

By way of reminder, Novo Banco was created as a "bridge bank" in connection with resolution powers exercised by BDP over the troubled BES in August 2014 (the "2014 Resolution"). As part of the 2014 Resolution, the Affected Liabilities (along with BES's other senior ranking liabilities), were transferred from BES to Novo Banco. Novo Banco was established specifically to take over those parts of BES that BDP considered viable, so as to enable a continuation on a "business as usual basis". This would facilitate BES (now only containing the non-viable parts of the business) being wound down in an orderly manner. The holders of the Affected Liabilities (the "Holders") would no doubt have been relieved that their assets were transferred to Novo Banco.

The Re-Transfer set out in the 2015 Resolution seems to have been influenced by the litigation before the English Court involving an English law-governed loan also transferred from BES to Novo Banco under the 2014 Resolution4. The English Court held that the 2014 Resolution was a valid exercise by the BDP of a resolution action pursuant to the Portuguese legislation implementing the BRRD in Portugal, and as such must be recognized (pursuant to article 66 BRRD) in the UK, but the court also held that a "ruling" subsequently made by the BDP with respect to the same loan did not constitute an exercise of a "resolution action" within the meaning of the BRRD. The "ruling" was that a previous transfer of the governed loan from BES to Novo Banco was never in fact made. The court held that since the "ruling" did not constitute the exercise of a resolution action, it did not qualify for recognition status within the scope of Article 66(6) BRRD. Unlike the transfer of the loan the subject of that English litigation, the Affected Liabilities in the 2015 Resolution are explicitly subject to a re-transfer formally authorised by a BDP board resolution. It is further interesting to note that only Portuguese law-governed bonds are the subject of the Re-Transfer while the instrument in the English litigation was English law-governed.

On 14 November 2015, BDP announced in a press release that, according to ECB Banking Supervision stress tests, Novo Banco had a shortfall (the "Shortfall") of EUR 1,398 million in the adverse stress test scenario (CET1 ratio of 2.43%, compared with a 5.5% threshold), estimated for end-20175. In the press release of 29 December 2015 (the "December Press Release"), BDP announced that effecting the Re-Transfer of the Affected Liabilities solved the Shortfall for Novo Banco.

Not surprisingly, the Holders are unhappy about the...