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BlackRock, Pimco shun Portuguese bank bond

BlackRock and Pimco are refusing to take part in the first bond sale by a Portuguese bank in more than a year, because of a legal battle with the country’s central bank over losses sustained in 2015.

Caixa Geral de Depósitos, the state-owned Portuguese bank, is this week courting investors in London and Paris, as it seeks to sell a €500m subordinated bond, in what would be a return to the debt market for the country’s troubled banking sector.

Pimco and BlackRock, two of the world’s largest asset managers, have ruled out buying the bond because of losses they incurred via another Portuguese lender, Novo Banco, in late 2015, according to people with knowledge of the matter. Senior Novo Banco bonds held by institutional investors were transferred to a so-called “bad bank”, effectively wiping out their value, while other bonds held mainly by Portuguese investors were left untouched.

A year ago a group of 14 bondholders, including Pimco, BlackRock and Elliott Management, launched legal action against Banco de Portugal, the country’s central bank, which approved the transfer of the bonds to the bad bank. The lawsuit is still ongoing, the people said. BlackRock and Pimco declined to comment.

Novo Banco was created from the failure of Espirito Santo in 2014, and Portuguese banks have not accessed bond markets since losses were imposed at the end of 2015. The decision by Pimco and BlackRock underlines the challenges still facing Portuguese borrowers following the incident.

CGD has hired Deutsche Bank, Barclays, JPMorgan and Citi for the bond sale, and on Wednesday marketed the bond in Paris after two days doing so in London. Bankers hope to sell the bond this week, and say the London roadshow attracted interest from more than 100 investors.

As well as potentially reopening bond markets to Portuguese lenders, the sale is a critical moment for CGD, which is fully owned by the government. If the bank pulls off the sale, the government will inject €2.5bn of capital into CDG as allowed under conditions set by the European Commission.

The bond will count as additional tier 1 (AT1) capital — the riskiest class of bank debt, making it highly exposed to losses at times of distress. The €100bn European AT1 market fell sharply in price early last year, in part due to concerns over Novo Banco, as well as regulatory uncertainty and broader weakness in financial stocks.

Since then, the market has staged a dramatic recovery. Investors in AT1 bonds who bought at last February’s lows have made returns of more than 30 per cent so far.

The rally in bank capital bonds has fuelled demand for riskier peripheral debt. Earlier in March, Bankia, the state-owned Spanish bank that became a symbol of the country’s financial collapse, attracted nearly €5bn in demand for a €500m “tier 2” subordinated bond.

Government bond yields on 10-year Portuguese debt have risen more than 1.5 percentage points since the beginning of 2016. They are trading at 4.15 per cent, compared with 1.77 per cent for Spain, where yields have scarcely changed over the same period.

The Novo Banco losses came just before the introduction of rules for resolving bank failure in Europe, which came in at the start of 2016 and aim to shift the burden of losses to senior creditors.

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