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Belgium : Commission approves Portuguese restructuring plan and support for sale of Novo Banco, completing 2014 resolution of Banco Espirito Santo.

The European Commission has approved, under EU State aid rules, Portuguese aid for the sale of Novo Banco. The measures will allow the new private owner to launch its ambitious restructuring plan aimed at ensuring the long-term viability of the bank, while limiting distortions to competition.

Commissioner Margrethe Vestager, in charge of competition policy said: "Portugal has decided to sell Novo Banco to a new private owner, who will restructure the bank to return it to viability. We have approved Portugal's plans to grant State aid to Novo Banco under EU rules, based on the bank's far-reaching restructuring plan and measures taken to limit distortions to competition. Now it is important that the new owner successfully enacts the plan, so that that the bank can support the Portuguese economy."

In August 2014, Portugal decided to put the bank Banco Esprito Santo (BES) into resolution under the Portuguese resolution framework and determined the strategy for its resolution. To enable an orderly resolution, Portugal designed a number of support measures, including State aid for the transfer of certain BES assets to a bridge bank Novo Banco.

In this context, the Commission approved these support measures under EU State aid rules, in particular the Commission's 2013 Banking Communication. BES shareholders and subordinated debt holders contributed fully (almost 7 billion) to the costs of the resolution in line with burden-sharing requirements, limiting the amount of State capital needed by the bridge bank. Another aspect that enabled the Commission to approve the aid was Portugal's commitment to sell the bridge bank Novo Banco to limit distortions to competition. This means that the sale of Novo Banco, concerned by today's decision, completes the 2014 resolution of BES.

More specifically, in its decision today, the Commission has assessed three issues under EU State aid rules: a) the competitiveness of the sales process of the bridge bank; b) Portuguese plans to grant additional State aid to finalise the BES resolution and bridge bank sale; and c) the viability of the entity resulting from the sale of the bridge bank.

a) Competitiveness of sales process

Under the 2014 Decision, Portugal committed to carry out an open and competitive sales process for the bridge bank Novo Banco. The sales process itself and the choice of the best bid were entirely the responsibility of Portugal.

In March 2017, Portugal announced that it had signed a share purchase agreement with private equity fund Lone Star with contingent aid measures. The Commission has now verified that Portugal's process for the sale of the bridge bank Novo Banco was indeed open and competitive, offering the same conditions to all bidders, and that Portugal had selected the best available bid, that of Lone Star.

b) Additional measures to finalise the resolution of BES and support the sale of its bridge bank Novo Banco

The private buyer, Lone Star, negotiated and agreed with Portugal on the conditions for the sale of the bridge bank Novo Banco. In particular:

Lone Star would inject 1 billion in capital into Novo Banco and committed to implement an in-depth restructuring of the bank. In addition, Novo Banco plans to raise 400 million on the market by means of issuing Tier 2 capital instruments.

In turn, the Portuguese Resolution Fund agreed that: if and when the capital ratio falls below a threshold due to losses on a legacy asset portfolio, it would inject capital of up to 3.89 billion; if the issuance of Tier 2 capital instruments cannot be completed successfully from private means, it will subscribe the remainder (the amount of which is offset against its commitment to inject capital).

Finally, only to the extent that capital needs arise under severe adverse circumstances, which cannot be addressed by Lone Star or other market players, Portugal will provide limited, additional capital. A decision to grant State aid lies entirely with the Member State concerned. The Commission's role is limited to assessing the compatibility with EU State aid rules of such planned support, notified by Portugal to the Commission.

The Commission's assessment showed that BES' shareholders and subordinated debt holders already contributed fully to the costs of the BES resolution as required by burden-sharing rules. Furthermore, Portugal and Lone Star submitted a far-reaching restructuring plan for Novo Banco, including several measures to limit distortions of competition, such as by divesting non-core business activities and other downsizing, as well as commitments to prevent distortive commercial behaviour by the bank. Finally, Novo Banco's senior management is subject to a salary cap (covers the total remuneration package and corresponds to 10 times the average salary of the bank's employees), as required under EU State aid rules. On this basis, the Commission concluded that the Portuguese support measures are in line with EU State aid rules.

Viability of the resulting entity

EU State aid rules provide that the viability of the entity resulting from the sale of a bridge bank has to be assessed by the Commission. Under its restructuring plan, Novo Banco will further advance its operational restructuring to focus on its core business activities and pursue strict efficiency targets. It will also improve its credit risk management to strengthen the bank's solvency and resilience. Taken together, the Commission concluded that the restructuring plan and the commitments restore the viability of the bank and enable the bank to overcome its legacy burden.

Background on applicable EU rules

Under EU law, if a bank enters into resolution, it is the responsibility of the competent resolution authority to determine the resolution strategy. It is for the Member State to decide whether or not to grant State aid, and in what form.

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Publication:Mena Report
Geographic Code:4EUPR
Date:Oct 12, 2017
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