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Caixa Geral de Depósitos Hires Forensic Auditor for Sale of Vale do Lobo
20 November 2017
In principle, Caixa has an agreement to transfer Vale do Lobo to the ECS fund, but to shield the operation from any potential problems, it has asked PwC for a forensic audit of the entire sales process, from 2012 until now.
Vale do Lobo is both famous and infamous. After several attempts to sell the venture, since at least 2012, the Caixa Geral de Depósitos will transfer the luxury venture to the restructuring fund ECS, with the expectation of receiving about 200 million euros over three years. But to shield itself from potential criticism of the operation, the bank has asked PwC to conduct a forensic audit of the entire sales process.
CGD has agreed to deliver Vale do Lobo to ECS, which is run by António de Sousa and Fernando Esmeraldo, only requiring the bank’s board of directors to formalise the deal. Queried regarding the transaction, CGD refused to comment, invoking banking secrecy. The state-owned bank is the largest creditor of the company that controls Vale do Lobo, in addition to owning 25% of that firm, which, incidentally, is bankrupt and worthless. But BCP – the other relevant lender – has also reached an agreement with the fund. According to sources contacted by ECO, the deal is expected to be completed by the end of the year.
Caixa, as a shareholder and the company’s largest lender, has a dominant hand in whether the transaction goes ahead. The bank had two possible buyers for Vale do Lobo, as Expresso reported a few weeks ago. An international real estate fund, which has remained anonymous, and ECS. The decision was to go with the Portuguese national restructuring fund, in an operation that was different than what would have been structured with the international real estate fund. But sources from the state-owned bank say the difference between the two proposals was in the order of 100 million euros, to the advantage of ECS. In addition to the forensic audit, to avoid criticism, CGD’s management, led by Paulo Macedo, also decided to involve Banco de Portugal and the ECB in monitoring the operation. The Vale do Lobo deal demands all possible care and Macedo knows that every inch of the transaction will be scrutinised.
Let’s break it down: The international fund made an offer of €185 million for CGD and BCP’s outstanding loans, with an upside of €10-15 million depending on the results. And this week, in a further, unsuccessful effort to convince CGD, the fund increased its offer to 195 million euros total. But that would yield CGD about 150 million euros, the remainder going to BCP, payable in five annual instalments with an initial payment and then a two-year grace period. And with three different levels of guarantees: Vale do Lobo’s lots, a letter of credit from Citigroup and the fund itself, which will have assets of six billion euros. It was not enough to convince the state-owned bank, which has valuations leading it to believe that Vale do Lobo is worth between 200 and 250 million euros.
Caixa will thus transfer Vale do Lobo’s loans to an ECS fund that already has other properties, such as the Torres de Lisboa and the new building in Fontes Pereira de Melo (to complete construction). The ECS would then issue units that would be subscribed by CGD itself and which are, in practice, financing for ECS to buy that asset. Hence, this transaction corresponds in practice to a transfer or ‘parking’ of the undertaking and not to a real sale. It will then be up to ECS to manage Vale do Lobo and generate the capital gains to repay, in three years, the units that are now subscribed by Caixa. That fund, it should be noted, has other underwriters, such as the BCP and Novo Banco, who must accept the value to which Vale do Lobo will be ‘bought’ by the ECS.
A source who is knowledgeable of the process believes that Caixa will recover about 200 million euros from the 230 million it financed in 2006 from the operation. For this to happen, the ECS fund will earn money on the sale of Vale do Lobo and assets that are already part of the fund, namely the two office buildings in Lisbon. Another source from the international fund, in declarations to ECO, criticised the option for parking the assets and added that Caixa’s capital increase with public money was not intended to finance operations such as that. The same source also guarantees that Caixa will continue to be exposed to risk from Vale do Lobo and a potential real estate crisis in Portugal, which would not happen in the case of a sale to the international fund. “There’s always a risk,” a source from the state-owned bank answered, “and there are two solutions.”
Therefore, CGD’s management – which is seconded by that of BCP – has an opposite view. It believes in ECS’s capacity to recuperate the investment and cites its accomplishment with Salgados (Algarve), a CS venture that went under and was recovered. On the other hand, it emphasises the significant difference in discount rates (which accrue on profitability) between ECS and the international fund. And finally, it adds a reason concerning capital. If Caixa were sold under the implicit discounts under the international fund’s proposal, it would have to write off definitive losses, while the financial transaction with ECS has a more limited impact on the state-owned bank’s capital ratios.
A story that started badly and is taking some time to put to rights
Created in the early 1960s, the Vale do Lobo Luxury Resort is described by the company as one of the most important luxury resorts in Europe and the largest in Portugal. Destined to occupy 450 hectares in the municipality of Loulé in the Algarve, Vale do Lobo has two kilometres of beach and 1,500 properties.
Since 1965, when the first investment was made in the luxury resort for the construction of the golf course, Vale do Lobo has over the years received numerous awards and distinctions in the area of tennis and golf. However, everything would change.
In 2006, the Caixa Geral de Depósitos had a project to become a Vale do Lobo shareholder. That, at the time, pleased Armando Vara. “I was very excited about the project,” said CGD’s administrator at the time. Soon after, the institution became a shareholder of, and a lender to Vale do Lobo.
The project was led by Diogo Gaspar Ferreira, Rui Horta e Costa (at that time non-executive director of CTT) and a group led by Helder Bataglia (then leader of Escom, of the Espírito Santo Group). Today, all are defendants in the Operation Marquis, on suspicion of alleged irregular payments to José Sócrates, the then prime minister.
For the project, the developers initially invested 10 million euros, a much lower value than the loans extended by CGD, totalling 197 million euros. In addition to the extensive loans, as a shareholder, CGD invested another €30 million. With this injection, the bank then owned 25% of the company, Resortpart, which would manage Vale do Lobo.
Armando Vara was always confident about the project, arguing that the developers showed that they were reliable people with knowledge in the area. “There was no reason to doubt it,” he said. But three years later, problems started appearing. In 2009, Vale do Lobo began to fall behind on payments on CGD’s loans. But at this point, Caixa did nothing.
The financial institution had every right and power to demand the reimbursement of the 227 million invested, or could have even executed the guarantees it had on the shares in the tourist village. But, for some reason, it did not. Other sources assure ECO that the execution of the guarantees would have been difficult because of the way in which the legal agreement was structured. According to the Correio da Manhã, at the time, Caixa’s exposure was 282.9 million euros, 138.1 million in impairments.
And it was at the point, through the analysis of the data, that the Operation Marquis came into being. The Central Department of Investigation and Criminal Action (DCIAP) forged ahead with an investigation into the transactions and arrested Armando Vara in July 2015 on suspicion of the crimes of passive corruption regarding an illicit act, qualified tax fraud and money laundering.
The former CGD administrator denied all charges, arguing that the deal would have failed because of the subprime crisis in 2008, which affected the entire world economy. Armando Vara was joined by 27 other defendants under the auspices of the Operation Marquis, including José Sócrates.
But the former prime minister was quick to defend himself and to remove any suspicions regarding any actions might involve Vale do Lobo. “While serving as prime minister, I never gave any advice, or made any suggestions to anyone relating to the concession of credit” and “until 2015, when details of the case appeared in the media, I did not know the shareholders or the managers or anyone connected with such an undertaking. No one ever told me about Vale do Lobo as a matter of public interest or private concern,” he wrote at the time, in an opinion article.
Original Story: Economia Online – Rita Neto / António Costa
Translation: Richard Turner