(Adds detail on basis of challenge, companies involved,
background on BES split)
By Laura Noonan
LONDON Aug 20 Junior bondholders of Portugal's
Banco Espirito Santo have selected law firm Shearman &
Sterling to represent them in a challenge to the terms of the
bank's rescue and will open discussions with the Bank of
Portugal later this week, a source familiar with the situation
A dramatic restructuring plan agreed on Aug. 3 moved most of
Banco Espirito Santo's business into the newly created Novo
Banco, which was bolstered by 4.9 billion euros ($6.5 billion)
of capital from the country's bank resolution fund.
Claims of junior bondholders and shareholders were left in
the original bank, along with troubled lending to the bank's
founding Espirito Santo family, which had helped push BES to a
ruinous loss of 3.6 billion euros for the first half of the
Junior bondholders owed 750 million euros by the Portuguese
lender are unhappy with the terms of the split and feel they
would have fared better if the bank had been liquidated, several
sources told Reuters.
Under Portuguese law, a bank's restructuring must not be
worse for any creditor than closure. The Bank of Portugal told
Reuters on Aug. 12 that the principle had been upheld in BES'
A group of those bondholders agreed on Aug. 12 to appoint
Shearman & Sterling to explore avenues to have the terms of the
rescue changed, a source familiar with the discussions said.
Shearman & Sterling could not immediately comment.
The source said the first step will be to send a letter to
the Bank of Portugal and other relevant parties outlining the
bondholders' concerns. These letters will be sent in the next
day or two, he said.
The group, which includes holders of about half the
outstanding bonds, is open to a consensual restructuring of the
deal or a legal action.
A key concern is the way the assets staying with the bad
bank were selected, in particular the decision to give the new
bank 3 billion euros of interbank loans to Banco Espirito
Santo's Angolan subsidiary at a valuation of zero.
The bondholders feel that loan should have been left with
the original BES since the original bank had to take the full
write-off for the amount.
The Bank of Portugal told Reuters on Aug. 12 that the
decision to write off the full amount of the credit line did not
"reflect, in any way, a lack of expectations of recovering the
(Euro = $1.3258)
(Reporting by Laura Noonan; Editing by Chris Reese and Jan