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Goldman to Contest Decision Over Banco Espirito Debt - Analyst Blog

The legal tussle continues between The Goldman Sachs Group, Inc. (GS) and the Portuguese bank, Banco Espirito Santo (“BES”) over the $835 million debt repayment.  The Wall Street banking giant is set to give a tough fight to the Portuguese bank following the latter’s restated stance on the transfer of debt.

On Tuesday, Goldman stated that it will contest Bank of Portugal’s decision to keep the Banco Espirito debt in BES – the “bad bank” that was created from the split of Banco Espirito in Aug 2014.

Bank of Portugal argued that evidence presented by Goldman failed to eliminate the doubts based on which the central bank took its decision in Dec 2014. The central bank was not convinced that Oak Finance Luxembourg SA – through which Goldman made the $835 miilion loan to Banco Espirito – acted independently.

The Story So Far

In Jul 2014, Goldman made an $835 million loan through a special purpose vehicle called Oak Finance to Banco Espirito.  Against the four year amortizing loan, Oak Finance had issued $835 million in notes that were purchased by Goldman and a group of its clients.

However, Banco Espirito collapsed and this resulted in a €4.9 billion ($6 billion) bailout by the central bank in Aug 2014. Per the rescue plan, Lisbon-based Banco Espirito was spilt into two wherein the sound assets – primarily the deposits, senior debt and other healthy assets – were transferred to newly formed bank “Novo Banco,” while the problem assets remained with the “bad bank” – Banco Espirito Santo – which will gradually shut down.

The $835 million debt was moved to Novo Banco and hence Novo Banco stood liable for meeting the obligation. Goldman was previously assured by Bank of Portugal regarding the transfer of these obligations to Novo Banco.

However, Novo Banco stated in a Dec 23 regulatory filing that the Bank of Portugal has reversed the decision of transferring the Oak Finance liability to Novo Banco. Hence, the liability will remain with Banco Espirito.

The Confirmation of Decision

In its latest statements, Bank of Portugal claims that Oak Finance’s investment was on behalf of Goldman, which was a shareholder of BES. Hence, legally the loan stays in BES. The central bank stated that transfer of the debt to Novo Banco  will pose the risk of hurting public interest. It also stated that further doubts will be settled in court.

Goldman’s Response

Goldman plans to seek “all appropriate legal remedies without delay.” The company claims that Bank of Portugal’s decision was “based on factual errors and violates basic principles of due process and fairness.” Specifically, Goldman owned only 1.6% voting rights in the BES, which is less than the stipulated 2%, which would have entitled the bank to be a reference shareholder.

Bottom-Line

The confirmation of decision on the part of Bank of Portugal is likely to inflict huge losses upon Goldman and its clients.  Goldman had earlier stated that it will cause damages to multiple investors, including pension funds.

Though nothing can be inferred conclusively about the future outcome, we look forward to the efforts being taken by Goldman to resolve the issue.

Currently Goldman carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the finance space include Customers Bancorp, Inc. (CUBI), Provident Financial Holdings, Inc. (PROV) and BGC Partners, Inc. (BGCP). All three stocks sport a Zacks Rank #1 (Strong Buy).


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GOLDMAN SACHS (GS): Free Stock Analysis Report
 
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