BRUSSELS (The Deal) -- Portugal's central bank late Sunda took control of Banco Espirito Santo in a European Commission-approved, 4.9 billion euro ($6.6 billion) rescue that will force shareholders and junior debtholders to shoulder losses.
Under the plan, problem assets -- including loans to other parts of the beleaguered Espirito Santo Financial Group and the lender's stake in Banco Espirito Santo Angola -- will be placed in a "bad bank," with a new lender, dubbed Novo Banco, taking the "good" assets.
"Shareholders, subordinated debt holders as well as board members and former board members directly involved in the more recent events, and not the taxpayers, will be called to shoulder the losses incurred by a banking business they failed to adequately oversee," Portugal's Finance Ministry said in a statement.
The remaining assets, including all deposits with Banco Espirito Santo, will be integrated into Novo Banco, whose 4.9 billion euros in equity capital is fully underwritten by the Bank of Portugal's Resolution Fund.
The Resolution Fund will finance the rescue with a temporary Treasury loan, to be replaced later by interbank loans. Bank of Portugal Governor Carlos Costas has said that government funds would be used only as a last resort, referring to the unused 6.4 billion euros from Portugal's 2011 international bailout led by the European Union.
Novo Banco will be subject to the central bank's supervision and obliged to comply with all legal and regulatory rules applicable to Portuguese lenders, Banco de Portugal said late Sunday.
The central bank insisted that nothing changes for the customers. "The measure ensures the continuity of the institution's activity, being the best to protect the depositors and other customers of the institution and financial stability," it said.
The European Commission quickly approved the plan, which it said is adequate to restore confidence in financial stability and to ensure the continuity of services and avoid potential systemic effects.
"In its assessment, the Commission acknowledged that that a disorderly resolution of BES could create a serious disturbance in the Portuguese economy and that the creation of the Bridge Bank is suitable to remedy that disturbance," it said shortly after midnight local time on Sunday.
To limit distortions of competition, Novo Banco's business will be limited and a "prudent pricing policy" implemented, the EC added.
The rescue move came three days after Banco Espirito Santo posted a first-half net loss of 3.58 billion euros and reveald that its common equity Tier 1 ratio had fallen below Portugal's minimum requirement.
The lender, an affiliate of three Espirito Santo Group companies currently under court protection from creditors, also said that writedowns and contingency costs reached 4.24 billion euros.
Banco Espirito's second-quarter net loss amounted to 3.49 billion euros as it increased lending to the Espirito Santo Financial Group and its subsidiaries, namely ES Financiere and ES Bank Panama. As of June 30, the exposure amounted to 927.6 million euros, compared with 416.2 million euros on March 14 and 301.3 million euros at the end of 2013.
Luxembourg's commercial court has accepted requests for protection from creditors made by Espirito Santo Group companies Espirito Santo Financial Group SA, Luxembourg-based Rio Forte Investments SA and Espirito Santo International SA.
Espirito Santo International owns 39% of Espirito Santo Financial Group SA, which is Banco Espirito Santo's largest shareholder with a 20% stake.
On Sunday, the Bank of Portugal noted that there was increasing pressure on Banco Espirito Santo cash flows, and that problems at the bank endangered the stabilitiy of the national payment and financial systems.
Banco Espirito Santo is Portugal's third-largest banking group, with 80.2 billion euros in assets and 36.7 billion euros in customer deposits as of June 30, according to the European Commission. Banco Espirito Santo operates in 25 countries and employs almost 25,000 people.