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NZ Super Fund joins action against Portugal's central bank

NZ Superannuation Fund joins legal action against Portugal's central bank, writes off loan exposure

By Fiona Rotherham

Feb. 19 (BusinessDesk) - The New Zealand Superannuation Fund is one of eight investors taking legal action against the Bank of Portugal after it was forced to write off a US$150 million exposure to a loan arranged by Goldman Sachs.

The fund, Goldman Sachs and other noteholders are taking action in the Portugese courts seeking to overturn a December decision by the country’s central bank to unexpectedly reverse the fate of an US$825 million Oak Finance loan made to Banco Espirito Santo weeks before the Portugese lender collapsed amid allegations of fraud.

Superfund chief executive Adrian Orr said the loan exposure is now valued as being worthless as it may take some time to resolve through the courts and it has written off two-thirds of the amount in its December performance figures. While the investment was significant in dollar terms, it represents only 0.7 percent of the overall $27 billion super fund, he said. The writedown means instead of returning 17 percent over the past 12 months as at Jan.31, the fund has returned 16.71 percent.

The four-year loan was arranged by investment bank Goldman Sachs through a finance vehicle called Oak Finance Luxembourg SA which issued bonds to investors in July last year. The bondholders included a range of global institutional investors and pension funds, including the NZ Superannuation Fund. The US$784 million bonds were secured against the US$834 million loan obligation from BES.

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It helped Portugal’s second-largest bank finance a refinery in Venezuela owned by local oil company which was a major creditor of the bank. Goldman Sachs intended to sell down most of the loan through Oak Finance but ended up being stuck with some of the debt.

Less than a month after the bonds were issued, Bank of Espirito’s financial situation worsened and its chief executive detained for questioning on suspicion of fraud and money laundering. In August the Bank of Portugal reorganised BES’s operations and assets, including all senior unsecured debt, to a new state-supported “good” bank called Novo Banco, which is up for sale. Goldman Sachs said it had written confirmation from the Bank of Portugal this included the Oak Finance loan but the central bank then changed its mind.

It decided that interactions by any party that had held two percent or more equity in BES in the two years preceding the transfer to the good bank would remain with the bad bank. In December it re-transferred the Oak Finance loan back to BES with retrospective effect and reaffirmed that view yesterday. The central bank’s position is that Goldman Sachs, as a shareholder above that two percent threshold, shouldn’t benefit from a bailout through claims it is owed.

But Goldman Sachs says the 2 percent stake was temporary and amassed on behalf of different clients through a separate part of its business. It said the Bank of Portugal’s decision is based on factual errors and violates basic principles of due process and fairness.

“We intend pursuing all appropriate legal remedies without delay,” it said in a written statement.

Orr said the Bank of Portugal’s decision, based on a view that Goldman Sachs was both an associate of BES and had, in fact, made the loan, was wrong and unprecedented.

‘We note that Novo Banco continues to have the benefit of the money that we lent,” he said. “It will also be of considerable concern to any investor that the Bank of Portugal has not treated all senior debt holders equally. It could have significant on-going repercussions for the banking sector in Portugal.”

Orr said the providing liquidity through such deals is one of the lower risk investments the fund makes and is standard practice for institutions like the fund. It has been doing so for the past five years, investing around 2.5 percent of the fund’s overall net asset value. But the returns have been worth it, adding 1.4 percent per annum to the fund’s value, including the Oak Finance write-off, he said.

And Orr said the legal wrangle won’t put off the fund from pursuing the credit strategy in future.

The fund takes out credit protection insurance on this type of activity so it’s covered in the event of failure. That cover was moved to Novo Banco in the same way the Oak Finance bonds were but the International Swaps and Derivatives Association has said that cover has to stay in Novo Banco along with the majority of the senior debt, despite the loan being transferred back.

“While bond failures are not uncommon in the investment world, the circumstances of this case are highly unusual. First, we have been treated unequally and unlawfully. Second, our default insurance appears to have inadvertently rendered ineffective due to the retrospective decision,” Orr said.

The fund remains confident it has a strong legal case and has informed the Minister of Finance about the problem, though it operates and is governed independently from the government.

According to a report from the Financial Times, hedge funds Third Point and BTG Pactual have filed a lawsuit in an EU General Court in Luxembourg challenging the terms on which Banco Espirito Santo was rescued by the European Union, alleging that the bailout was done too quickly and was unfair.

(BusinessDesk)

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