26 August 2016 by pdonnat
After Portugal’s state-owned bank Caixa Geral de Depositos’ recapitalization plan early in the week, we had a brief respite on the Portuguese banks. However, the situation at Banco Novo is unclear. Banco Novo is the good bank created in August 2014 out of Banco Espirito Santo (BES) - transferring BES’s good assets. Two years later, Banco Novo’s short dated senior debt is now trading at distressed levels - around 70cts on the dollar. The CDS is trading at 30% upfront plus 5% for a one year protection. This CDS is one of the most technical and, let’s say, controversial special situations of the CDS market, with contracts outstanding under 2 different rules (2003 and 2014) already offering different definitions of what constitutes a credit event not to mention the further complication even if under 2014 rules of what is determined to be a Government intervention or not (ref Banco Novo transfer of bonds announced end-15)). According to the attached Grapple, the probability of a credit event within a year has moved from 25% to 50% over the last month. The situation is turning sour. For an outsider, buying a pool of assets from a distressed bank is an investment decision whilst buying a distressed bank’s stress resilience could be more like an act of faith.