“Chaos” averted as experts give Novo Banco bond dump the all-clear

Following tense meetings between international banks, a panel of three lawyers has unanimously agreed that the controversial Novo Banco bond dump, pushed through by the Bank of Portugal late last year, did not constitute a credit event. This means the “chaos” predicted by certain banking experts will not be sparked and bond holders affected by the dump have lost a key round in the battle to recover their money.

Where this leaves bondholders – a number of them ‘small investors’ who claim they were duped into thinking their money would be safe – remains to be seen, but Bloomberg Business suggests the decision “may erode the appeal of credit default swaps” under new banking rules.

For now, the Bank of Portugal decision to retroactively ‘dump’ €2 billion worth of senior bonds into the toxic BES bank – in order to make Novo Banco look better for sale – is being contested by almost every bondholder affected, some of which are financial giants like PIMCO and BlackRock Inc.

Only yesterday, financial papers were suggesting a decision on whether or not the dump constituted a credit event would not come before Friday.

Bloomberg’s financial writer Mark Gilbert had predicted a “yes” vote to a credit event would have caused “chaos” as it would have sparked defaults on as many as 50 other Novo Banco bonds, but it might have given ruined investors ‘hope’ that the decision will be overturned.

For now, law firms Clifford Chance and PLMJ have been hired by affected bondholders to fight the issue through the courts, adds the website.

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