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Announcement:

Moody's extends the review for downgrade on Novo Banco's deposit and senior debt ratings

19 Jun 2017

Madrid, June 19, 2017 -- Moody's Investors Service has today extended its review for downgrade of the Caa1 long-term deposit and Caa2 senior debt ratings of Novo Banco, S.A. (Novo Banco) and its supported entities. The ratings review was initiated on 5 April 2017, following the announcement made by the Bank of Portugal on 31 March 2017 that as part of Novo Banco's sale process, a liability management exercise (LME) on senior bondholders will be undertaken with the aim of recapitalizing the bank by at least EUR500 million. The Bank of Portugal also announced that the private equity firm Lone Star (unrated) will acquire 75% of Novo Banco's capital after injecting EUR1 billion of capital, while the resolution fund will maintain 25% of the bank's shares.

Concurrently, Moody's has extended its review for downgrade of Novo Banco's long-term counterparty risk assessment (CR Assessment) of B3(cr). The bank's standalone Baseline Credit Assessment (BCA) stands at ca.

The extension of the review reflects the fact that Novo Banco's LME on senior bondholders is still in the process of being defined and implemented. Moody's expects to conclude the review on Novo Banco's ratings once the rating agency will have further visibility on the completion of the LME, which is a requirement that needs to be fulfilled before Lone Star can complete the acquisition of a majority stake in Novo Banco. If the LME fails to succeed, there is an increased risk of a resolution or liquidation for the bank with consequent losses for creditors.

RATINGS RATIONALE

Moody's decision to extend the rating review process is driven by the fact that Novo Banco's sale process remains in progress.

Novo Banco's standalone (BCA) of ca reflects Moody's view that the proposed LME on the bank's outstanding senior bonds (EUR3 billion at end-December 2016) to recapitalize the bank has the effect of allowing the issuer to avoid a likely eventual default according to Moody's definitions. The rating agency considers this offer to be a distressed exchange that will be made as a means to avoid Novo Banco's liquidation and close the sale process.

The sale of Novo Banco by the resolution fund before August 2017 was a condition imposed by the European Commission (EC) in compensation for state aid provided by the Portuguese authorities in 2014 when Novo Banco was created as a bridge institution following the collapse of Banco Espirito Santo, S.A. (unrated). Moody's understands that the sale agreement signed in March 2017 by the resolution fund and Lone Star is compliant with the EC's condition but still requires final approval by relevant authorities.

Novo Banco's ca standalone credit assessment also reflects the bank's very weak fundamentals given its very high and still growing stock of problem loans and the large losses that it continues to report (EUR797 million at end-December 2016). These will be in part mitigated by Lone Star's EUR1 billion capital injection and the establishment of the so-called contingent capital mechanism to recapitalize the bank under specific circumstances. However, these measures are not sufficient to prevent the proposed LME on the bank's senior debt to raise at least EUR500 million of Common Equity Tier 1 and hence the bank's default on its senior debt.

The bank's senior debt rating of Caa2 on review for downgrade reflects the rating agency's view that Novo Banco's senior debt bondholders will suffer losses under the proposed LME. Based on current available information that the offer would apply to about EUR3 billion of senior unsecured bonds, Moody's estimates that losses for these investors would be in the range of 10% to 20%. However, losses could be higher should the LME apply to a more limited stock of debt or fails to succeed, and the review for downgrade will consider the potential for further losses for these instruments once the rating agency has more information.

Moody's does not at present expect junior deposits, currently rated at Caa1, to incur losses. However, the review for downgrade on these ratings reflects the risk that losses could yet arise for Novo Banco's junior deposits should the announced measures prove insufficient to restore the viability of the bank, or fail altogether, thereby increasing the risk of a resolution or liquidation and consequent losses for depositors.

WHAT COULD CHANGE THE RATINGS UP/DOWN

Given the low standalone BCA, scope for further downgrade is limited, but it would likely be downgraded to c in the event that plans to recapitalize the bank through a LME on senior bondholders proves unsuccessful, which would mean the failure of the sale process to Lone Star. In such circumstances it is very likely that the resolution fund would place the bank into a resolution or liquidation process. This or the prospect of larger-than-expected losses on senior unsecured debt or deposits would likely result in lower ratings.

The BCA could be upgraded if the bank successfully completes the LME and demonstrates that its solvency has been materially improved after the sale to Lone Star without the prospect of further losses for creditors. A positive change in the BCA would likely lead to an upgrade in all ratings.

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings/analysis was Banks published in January 2016. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on www.moodys.com for the most updated credit rating action information and rating history.

Maria Jose Mori
VP - Senior Credit Officer
Financial Institutions Group
Moody's Investors Service Espana, S.A.
Calle Principe de Vergara, 131, 6 Planta
Madrid 28002
Spain
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Carola Schuler
MD - Banking
Financial Institutions Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Espana, S.A.
Calle Principe de Vergara, 131, 6 Planta
Madrid 28002
Spain
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
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