Novo Banco Transfers Management of Property Holdings to Company Owned by Lone Star

8 June 2018

Novo Banco transferred the management of thousands of properties, valued at hundreds of millions of euros, to Hudson Advisers. The U.S.-based Lone Star fund is the principal controlling shareholder of the company, which just set up shop on the top floor of a building in Lisbon owned by Novo Banco.

The management of approximately 9,000 properties still under Novo Banco’s control was passed to Hudson Advisers, which is headquartered in Dallas and run by John Graykeno, the founder (in 1995) and chairman of Lone Star. Baptized the “opportunistic millionaire” by the press, Graykeno renounced his American citizenship in 1999, becoming Irish in an attempt to pay fewer taxes. The management contract will maintain the assets on Novo Banco’s balance sheet, while transferring the management to the Texan vehicle, preparing for an eventual sale.

An official source at Novo Banco stated that “following its acquisition of Novo Banco, Lone Star hired Hudson Advisers to monitor and support the bank’s recovery plan.” The contract prohibits “the possibility of transactions between Lone Star and Novo Banco Group”, except contracts valued at “up to 7.5 million euros”. In addition, that source stated, without providing further details, that “we have two contracts with Hudson Advisors, one for the provision of real estate assistance and advice services, and another for general financial and strategic services.”

The transfer of assets from Novo Banco to Hudson did not go unnoticed within the institution that succeeded BES. After all, the portfolio includes about nine thousand properties, but also transactions worth hundreds of millions of euros between two related parties. That is to say: the bank had an agreement with Lone Star’s principal shareholder, which will charge commissions (within the limits mentioned) for its efforts. However, there is more: Hudson will receive a percentage of any possible sales of Novo Banco’s properties. In practice, it is a way for Lone Star to recover part of its investment in Novo Banco. The US fund did not pay the Resolution Fund, a state fund, for the acquisition, though it was required to inject one billion euros in capital.

Changes

The clamour surrounding the bank’s relationship with its shareholder rose sharply when it became known that Hudson had recently moved (with a lease) to the 9th floor of 26 Rua Castilho in Lisbon, where BES’s personnel department had once functioned. It is the same building that houses Novo Banco’s companies and services.

Hudson Advisers had previously occupied, on a transitional basis, the 7th floor of 28 Rua Barata Salgueiro Street, a building that also belongs to Novo Banco and is adjacent to its headquarters, and where, the BES Liquidation Commission once operated on the 6th floor. It should be noted that, concerning the separation of interests between related parties within the same financial group, the Bank of Portugal instructed the Caixa Económica Montepio Geral to separate its services from the services of the association, the bank’s owner.

The portfolio entrusted to Hudson Advisers contain assets that are considered problematic, that is, they are considered difficult to monetise and sell. That is the reason for the impairments that the bank registered, resulting in losses for the bank, which were partially offset by public funds. However, other assets are classified as having elevated potential. Included in this group is, for example, Novo Banco’s headquarters, located at the corner of Avenida da Liberdade with Rua Barata Salgueiro, in Lisbon, and valued at about 40 million euros.

Before buying Novo Banco, Lone Star was already looking at a 130,000-square-meter plot of land, located in Lisbon, between Amoreiras and 1 Rua de Artilharia, which had once belonged to the Portuguese Army. The property was taken over by Novo Banco in 2014, after the bankruptcy of the real estate developer, Vasco Pereira Coutinho, who owned Temple (insolvent), financed by BES. Temple’s plans for the land, including the construction of 65,000 square meters of housing; a similar amount of offices and a hotel, never came to fruition. This was the first of the properties to be delivered to Hudson to manage and monetise.

Within Novo Banco, the sale of the bank’s headquarters is considered certain, and the possibility of transferring its operations to a future office on Amoreiras is also being mulled. A critic of the fund said, with a heavy dose of irony, that: “If the Pereira Coutinho lot was in the area of the Avenida José Malhoa, when the time came for Lone Star to sell the bank, they could simply build a tunnel [a reference to the nearby headquarters of the Spanish bank Santander, which the European Central Bank is using in its strategy of creating large banking groups].”

In 2015, while Novo Banco was still owned by the Resolution Fund, four buildings (three of them from the 19th-century), located between Avenida da Liberdade and Rua Rosa Araújo, were sold to the U.S.-based Perella fund. The transaction amounted to 30 million euros.

It was this property, in fact, that former president of BES, Ricardo Salgado – accused by the Bank of Portugal of, among others, falsifying accounts, and who is suspected, by the Public Prosecutor, of having corrupted José Socrates – was planning to use for the expansion of the bank’s headquarters.

The future of art collection in doubt

The fate of BES’ former art collection is also causing a measure of controversy.  It includes paintings, photography, and rare coins and books.

Some of the works of art are on loan to Portuguese museums, but others currently “decorate” some of the properties that the bank is renting to third parties. The fund’s principal shareholder is also involved. In recent days, some of the bank’s employees have seen works of art being taken to the top floor at 26 Castilho Street, to be displayed at Hudson’s new offices.

The current Portuguese government and the Resolution Fund (funded by taxpayers) chose not to “save” the various collections Novo Banco inherited from BES (which it could have used to museums scattered throughout the country) when it transferred the bank to the American fund. That position follows that of the previous government of Pedro Passos Coelho, who gave instructions to sell the works of art that BPN had acquired. The most controversial was the Catalan painter Miró’s collection, which went on sale in London, though the sale was cancelled (and the collection given to the Serralves Foundation) after public protests, some by the socialists. Portuguese taxpayers risk losing approximately 20 billion euros with Novo Banco and BPN.

Lone Star took a position in Novo Banco on October 18, 2017, and, by taking 75% of the capital, it also took control. However, it did so only after receiving guarantees from the government. A €3.89-billion state capitalization mechanism was set up: the taxpayer-funded Resolution Fund (with 25%) could be called upon to compensate Novo Banco for any losses associated with the bank’s “toxic” assets or those resulting from the disposal of non-strategic operations (if impact the bank’s capital ratios) during a period of eight years.

Six months after the agreement was signed, the contingent capital mechanism was triggered, and taxpayers had to inject (through a loan to the Resolution Fund) €792 million into Novo Banco. This is because the bank reported losses of €1.395 billion in 2017 (two and a half months later), the worst result since August 2014 when the bank was created.

When he visited the Bank of Portugal to finalise the privatisation of Portugal’s third-largest bank, Lone Star’s Donald Quintin declared himself “enthusiastic about the future of Novo Banco.”

Original Story: Público – Cristina Ferreira

Photo: Rui Gaudencio

Translation: Richard Turner