A solution being worked on by the Bank of Portugal and Novo Banco could see those that unwittingly invested in Grupo Espírito Santo bonds receive around 40% back, spread over ten years.
The solution involves the total loss of capital initially invested but a possible 40% returned over time.
Both the Bank of Portugal and Novo Banco aim to arrive at a solution before Easter with a final proposal to be announced on March 24.
This is the day that Bank of Portugal governor Carlos Costa will be up before the parliamentary commission of inquiry for the second time to answer questions on his actions in the period before BES collapsed last August.
According to the outline of the proposal, investors could convert their GES bonds into Novo Banco bonds with a "haircut" of between 60% and 70%. In addition, customers will be ‘invited’ to make a further investment application in Novo Banco.
In general, for every €100,000 originally invested in GES bonds, pushed by BES bank staff as a safe investment, those investors already identified as ‘unskilled’ would receive between €30,000 and €40,000 of Novo Banco senior obligations with an interest rate of around 5% per year.
To access this solution the investors would have to throw in a further 20% of the capital they initially invested to buy Novo Banco securities, or CoCo bonds.
CoCo bonds, also known as contingent convertibles and contingent convertible notes, are slightly different to regular convertible bonds in that the likelihood of the bonds converting to equity is "contingent" on a specified event, such as the stock price of the company exceeding a particular level for a certain period of time.
Whatever the final solution, the current proposal is for a loss of more than half of the capital initially invested.
The size of the loss will depend on the underlying security the investors unwittingly invested in, as for example Rioforte bonds are worth more than those of Espírito Santo International.
For this scheme to work, the final proposal must have the agreement of the investors which seems a big step when taking into account the myriad of court cases pending from investors claiming repayment of the full amount invested, blaming regulatory failure on a grand scale.
