Financial Problems of Municipalities

The Nationalisation of Banco Espirito Santo – The Aftermath

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The Bank of Portugal announced on Sunday 3 August 2014 that it applied its powers under the Decree law No 31/2012 of 10 February 2012 (the “Resolution Law“) to split Banco Espirito Santo (“BES“) into a “good bank” and “bad bank” (the “Restructuring“) and to transfer certain of BES “good” assets and liabilities to “Novo Bank”.

Following the release by BES of its half year results, it was apparent that the financial stability of BES was more questionable than many had suspected.  A rapid decline in BES’s share and subordinated bond price followed and on the weekend of 2 and 3 August, the Bank of Portugal must have come to the conclusion that its earlier plea for a private sector recapitalisation was unrealistic. On 3 August, the Bank of Portugal publicly announced the split which left certain assets with BES, which also retained the subordinated debt. The senior bonds and many of the quality assets of BES were transferred to Novo Bank.

In view of the European Central Bank’s ongoing asset quality review, the BES case was seen as a test case in Europe. This client alert looks at some of the recent history of the Espirito Santo group and BES and considers what will happen in the aftermath of the nationalisation of BES and following the filing by certain Espirito Santo holding companies for controlled management (gestion contrôlée) in Luxembourg.  Specifically, this client alert considers:-

  1. the background and recent history relating to BES and the Espirito Santo group;
  2. the limited legislative tools available to the Bank of Portugal under the Resolution Law;
  3. what the effects of the use of the Resolution Law will have on BES stakeholders; and
  4. what the next steps are likely to be in relation to Espirito Santo International (“ESI“), Rio Forte Investments (“Rio Forte“) Espirito Santo Financière SA (“ESFIL“) and Espirito Santo Financial Group (“ESFG“) that have filed for a controlled management process in Luxembourg.​

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Summary of Puerto Rico Public Corporation Debt Enforcement & Recovery Act

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On June 28, 2014, the Commonwealth of Puerto Rico adopted the Puerto Rico Corporations Debt Enforcement & Recovery Act, Act 71-2014 (the “Debt Enforcement Act”), enabling certain Commonwealth public corporations in financial distress to restructure their debt obligations. The Debt Enforcement Act establishes a debt enforcement, recovery and restructuring regime for public corporations and other instrumentalities of the Commonwealth economic emergency. The goal of the new law is to balance the interests of creditors and other stakeholders with the interest of the Commonwealth to protect its citizens and to enable the financially distressed public corporations to continue to provide essential government services such as the delivery of electricity, gas and clean water.  Read More.

Following Chapter 9 Plan, Monoline Insurer Must Continue to Make Payments on Old Bonds

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Earlier this month, Judge Judith J. Gische of the Appellate Division of the Supreme Court of New York, First Judicial Department found that ACA Financial Guaranty Corporation, as bond insurer, must make future, post-confirmation principal and interest payments on municipal bonds issued pre-bankruptcy.  The Court required these payments despite the fact that the bonds were exchanged for new bonds and cancelled under the municipality’s chapter 9 plan.  The Court held that “neither the plan of debt adjustment nor the discharge of the bond debt in the bankruptcy proceeding changed the obligations under the parties’ contracts of insurance.”  This decision is an unequivocal win for holders of distressed municipal bonds wrapped by monoline insurance policies and makes clear that insurers must continue to extend coverage to bondholders after a municipal issuer files for chapter 9 and obtains a discharge of the bond debt in bankruptcy.  This outcome may impact negotiations and potential resolutions in Detroit’s chapter 9 case and other recent municipal bankruptcies and distressed scenarios, such as Puerto Rico.    See Oppenheimer Amt-Free Municipals v. ACA Fin. Guar. Corp., 2013 N.Y. App. Div. LEXIS 5688, at *4 (N.Y. App. Div. 1st Dep’t Sept. 3, 2013).

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