Super Fund’s $US150m loan dumped in toxic Portuguese bank

Super Fund chief executive Adrian Orr says the fund has written down its investment in Banco Espirito Santo to zero pending legal action.

LATESTQuestions linger over Super Fund’s lost $US150m

The NZ Super Fund says it will sue Portugal's central bank over a $US150 million loan investment that has ended up in a bad bank of toxic assets.

The $27 billion government-backed pension fund says it’s one of a number of investors taking legal action in relation to the Bank of Portgual’s decision to place €853 million of loans in a so-called “bad bank” that was carved out of Banco Espirito Santo after its bail-out in August amid allegations of fraud.

The loans were arranged last July by investment bank Goldman Sachs through an entity it created called Oak Finance Luxembourg.

The Super Fund was issued $US150 million of notes by Oak Finance but now faces significant losses on the investment following the Bank of Portugal's decision to "retrospectively" return the loan to Banco Espirito Santo after it was earlier purportedly placed in the so-called "good bank" Novo Banco. 

Super Fund chief executive Adrian Orr says the fund has written down its investment to zero as a provision but stresses that it represents a "small proportion" of the overall fund, which is "well diversified and continues to perform well."

He tells NBR the fund had insured its investment with a credit default swap (CDS) issued by Goldman Sachs, but that had now been "negated" because of the transfer of the loan into the bad bank.  

Mr Orr says the fund is taking legal action to try and overturn the Bank of Portugal's December decision, which he says was wrong and "illegal."

Bank of Portugal this week said the Oak Finance loan was put in the bad bank because it had "serious and well-grounded reasons to consider that Oak Finance acted for the account of Goldman Sachs International."

This was based on its view that Goldman Sachs was both an associate of Banco Espirito Santo and an arranger of the loans, due to the Wall Street firm having taken an equity stake in Banco Espirito.

However, Mr Orr says the Bank of Portugal's interpretation is wrong because Goldman Sachs held less than 2% on behalf of clients and not on its own account.

"Legally, the loan arranger's shareholding in Banco Espirito Santo should not be the basis for treating the Oak Finance loan as related party lending," Mr Orr said in a statement distributed this evening.

Mr Orr has major concerns about the treatment of the Oak loans, considering prior written assurances that "senior debts such as the Oak finance loan" had been moved into the good bank.

"We note that Novo Banco continues to have the benefit of the money we lent.

"It will also be of considerable concern to any investor that the Bank of Portugal has not treated all senior debt holders equally. We understand that holders of senior bonds arranged and underwritten by at least one other financial institution have remained with Novo Banco when, unlike the position of the Oak Finance loan, the bonds were subscribed by a related party of a substantial shareholder in Banco Espirito Santo."

Asked why the Super Fund had taken such an investment when Banco Espirito was visibly in trouble, Mr Orr tells NBR ONLINE it was part of the fund's liquidity investment strategy, which has otherwise been very successful. Furthermore, the credit default swap should have protected the investment. He considered the loan to be at the "low end" of the fund's risk profile.

"This is a very standard, insured, investment activity globally that keeps the financial world liquid. the Bank of Portugal's actions, however, in treating the Oak Finance loan differently to all other senior debt obligations, appear to have had the effect of negating this insurance.

"The Bank of Portugal's retrospective decision puts our liquidity provision activities with respect to Portugal and potentially other jurisdictions at risk, given the apparent unreliability of debt provision and credit protection policies."

Goldman Sachs is also taking legal action, while Portuguese regulators are said to investigating the financial arrangements surrounding Banco Espirito Santo at the time of its collapse. 

Tune in to NBR Radio after 10am Friday morning for an expert panel discussion on the at risk Super Fund’s $US150m Loan: www.nbr.co.nz/radio


RAW DATA: Background material, timeline, Q&A and statements

Q+A (PDF)

Media Statement (PDF)

Timeline (PDF)

Background reference (PDF)

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