January 14, 2016 / 5:45 PM / 3 years ago

Bond holders team up to challenge bail-in for Portugal's Novo Banco

LISBON, Jan 14 (Reuters) - Private bondholders of Portugal’s Novo Banco senior debt have teamed up to challenge a recent central bank move that makes their investments nearly worthless, and might sue various commercial banks that sold them the bonds.

A coordinator of the group told Reuters the debt holders formally registered a Lisbon-based association, grouping 55 investors with a total 7 million euros worth of bonds, on Wednesday, and now have up to 90 days to file a lawsuit.

On Dec. 29, during the holiday lull, the Bank of Portugal decided to transfer nearly 2 billion euros in bonds from Novo Banco back to “bad bank” Banco Espirito Santo, from which Novo Banco was carved after a 4.9 billion-euro state rescue in 2014 .

Although the association represents a tiny part of the overall investment, its class action, if successful, could block the Bank of Portugal decision for other bond holders.

The European Central Bank has distanced itself from the Bank of Portugal decision, saying it neither requested nor approved the move.

Some investors criticised the move, arguing it discriminated against some bondholders while sparing others, and analysts say other lawsuits are likely.

“Our association has no option but to file suits against the Bank of Portugal decision in court. And we do not rule out other suits against retail banks that placed the bonds with their clients, which could constitute fraud as managers promised risk-free investment,” said the coordinator.

The association argues that the fact that only bonds falling under Portuguese jurisdiction were chosen for the “bad bank” means unequal treatment of creditors, while a “fair solution would be to apply a small haircut to all senior creditors”.

“The Bank of Portugal has avoided hitting debt under British jurisdiction, where it would be easier for big funds to sue ... apparently it did not know that there are small Portuguese retail investors with these products.”

Commerzbank analysts said in a recent note that unequal treatment within a class of bonds, effectively giving most retail bondholders preferential treatment over largely foreign institutional ones, was worrying and threatened creditor safeguards under the European bank resolution regime.

They expected investors to pursue legal challenges. (Writing By Andrei Khalip, editing by Axel Bugge, Larry King)

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