NZ Super Fund challenges European senior bank debt precedent

Bernard Hickey
The New Zealand Superannuation Fund is concerned its loss of US$150 million in the collapse of Portugal's Banco Espirito Santo has set a precedent endangering protections for holders of senior bank debt under Europe's new bank resolution laws.

The sovereign wealth fund with NZ$28 billion under management launched legal action last week to recover funds it lent to BES in July last year through a vehicle called Oak Finance. The deal was arranged by Goldman Sachs and protected by credit default swap insurance.

After the collapse of BES, the Bank of Portugal subsequently reversed the placement of senior debt into a "good bank", breaking the connection of the debt with the CDS and voiding the contract.

NZ Super Fund chief executive Adrian Orr told Parliament's Finance and Expenditure select committee on Thursday that, if initial legal action failed, the Fund could go to the European Court of Justice to reverse the precedent.

"The European Parliament introduced bank resolution laws in the middle of last year and one of those key issues was that all senior debt holders should be treated equally and clearly we haven't been," Orr said.

"You had a tearing within the same loan class, where certain institutions were treated differently from other institutions and depositors," he said.

"Now that is very unique and I don't know, in terms of bank resolutions worldwide, where that has every occurred. And nobody, in my view, could have foreseen that action by the Bank of Portugal," he said.

"It is an incredibly unfortunate precedent. If you have a situation where senior debt holders can be treated differently, then there is no such thing as a senior debt holder anymore."

Orr described the Bank of Portugal's actions as setting a disastrous precedent for holders of European senior debt.

"But the most important and challenging thing here is that future senior debt holders. If this decision stays where it is, it means that future debt holders' credit ratings will be related to the arranger of that debt's credit rating between now and any time in the future," he said.