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Hedge funds contest BES bailout decision
From the Financial Times of Sun, 14 Dec 2014 03:40:11 GMT

A group of investors who lost hundreds of millions of euros in the collapse of Banco Espírito Santo has filed a lawsuit challenging the European Commission’s decision to approve Portugal’s bailout of the bank.

The lawsuit, filed on Friday at the European Union’s Court of Justice in Luxembourg, could cast doubt over Portugal’s plan to sell Novo Banco, the main entity to emerge from the wreckage of BES.

The investors, including Dan Loeb’s hedge fund Third Point and Brazilian investment bank BTG Pactual, have already filed a legal challenge against the Portuguese central bank over its restructuring of the distressed lender.

The €4.9bn rescue of BES protected taxpayers and senior creditors by leaving them in a “good bank”, now called Novo Banco, but left shareholders and subordinated creditors in a “bad bank” holding only toxic assets.

The investors’ latest lawsuit contests the European Commission’s decision to give the green light to the state aid proposal put forward by Portugal to rescue BES on August 3.

Ultimately the funds, including distressed debt investors GoldenTree Asset Management, Beach Point Capital and EJF Debt Opportunities, hope to recover some or all of the €375m they invested in a €750m subordinated debt issue from BES a year ago.

In their application for annulment of the state aid approval, which has been seen by the Financial Times, the investors argue that the European Commission acted with “unprecedented haste” and “committed numerous manifest errors of law” in making its decision.

“Had the Commission carried out even a cursory investigation, it would have found that its key factual assumptions were wrong,” said the lawsuit. In particular, it said it was wrong to assume that no private capital could have been raised to restructure BES, as the investors say they were prepared to put more money into the bank to protect their positions.

“This is the first occasion, in the history of the financial crisis, that a restructuring measure for a financial institution within the EU has been notified to and approved by the Commission in the course of a single day,” it adds.

The investors, whose lower tier 2 bonds are now worth about 10 cents in the euro, say the Commission should have opened a formal investigation into the bailout. They are expected to submit a request for an expedited procedure to prevent Portugal completing the sale of Novo Banco, which could happen next year.

However, Lisbon lawyers said the Bank of Portugal was expected to defend its decision as being in the public interest and the only viable solution after the European Central Bank withdrew liquidity financing from BES when it reported a first-half loss of €3.6bn in July.

“If BES had been allowed to fail and go into liquidation, it could have had a devastating systemic effect” on the whole banking sector, José Berberan Ramalho, a deputy governor of the central bank, recently told a parliamentary hearing into the collapse of the Portuguese lender.

Mr Loeb, founder of the hedge fund Third Point, is famed on Wall Street for his sometimes vitriolic style of activism, in which he publicly berates the objects of his anger. He made large returns for his fund by investing in Greek sovereign debt at a time when many believed the country would be forced out of the eurozone.

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