August 16, 2017 / 3:49 PM / 2 years ago

UPDATE 1-Novo Banco offers bondholders high swap deposit rates

(Adds comments by CEO)

By Sergio Goncalves

LISBON, Aug 16 (Reuters) - Portugal’s state-rescued bank Novo Banco has offered bondholders high deposit rates that would cover any investment losses as it seeks to persuade them to sell back their bonds at a discount in a debt restructuring needed to complete the bank’s sale to a U.S. fund.

A group of bondholders has opposed the terms of the restructuring, threatening to block it. A failure to sell Novo Banco would lead to the bank’s liquidation and deal a blow to the country’s financial system, which is still recovering from two bailouts in 2014 and 2015 and other liquidity problems.

Interest rates on the proposed fixed-term deposit accounts vary from 1 percent a year on very long-term, mostly zero-coupon bonds, to 6.84 percent on the shortest 2019 maturity bonds that will be repurchased at 82 percent of the face value.

The deposit accounts will be made available to bondholders willing to deposit the amounts received for the bonds tendered or redeemed in the swap, excluding any accrued interest, the bank said in a statement released late on Tuesday.

“It is a fair offer because at the end of the day we are asking bondholders to give up only future profits,” Novo Banco Chief Executive Antonio Ramalho told Reuters.

“They lose the interest, mitigate their losses, recovering the invested amount ... Obviously I am optimistic about the results,” he added.

Ramalho explained that the deposit rate is lower for zero-coupon bonds as they will be bought at a premium compared to market prices and will allow for the full recovery of invested amounts despite a steep discount from face values.

Depending on the bond series, deposits can be made for between three and five years.

Last month the bank launched a so-called liability management exercise aiming to raise 500 million euros from the swap that will run until Oct. 2 and that targets 36 bond series worth a total of 8.37 billion euros at face value. Discounts to face value proposed in the swap range from 11 to 90 percent.

The operation is a condition of the sale of 75 percent of Novo Banco to U.S. private equity investor Lone Star, which was agreed in March. The government has said it hopes to conclude the sale by November.

Novo Banco was carved out of Portugal’s biggest ever bank collapse in 2014 after a 4.9 billion-euro rescue of Banco Espirito Santo.

According to IFR, a Thomson Reuters unit, a group of Novo Banco bondholders have built up a 2.5 billion-euro block representing around 30 percent of the notes at face value being targeted in the swap and have said they want to hold talks with the lender before agreeing to any exchange offer.

The bondholder group says it does not support the LME as it currently stands and has enough bonds to block the proposal.

Novo Banco requires 75 percent of the total targeted amount to agree to the offer for it to go ahead. (Reporting By Sergio Goncalves and Andrei Khalip; Editing by Greg Mahlich)

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