The European agency in charge of winding down troubled banks has breached EU rules on banking resolution by failing to conduct a definitive valuation of Banco Popular Español SA, according to lawyers for bondholders who were wiped out when the agency stepped in to manage its failure in June 2017.
In a Nov. 16 letter to the Single Resolution Board, lawyers for the bondholders — Algebris Investments (UK) LLP and Anchorage Capital Group LLC — say the SRB must, under EU rules, carry out "as soon as practicable" a final valuation of the lender because the SRB used a provisional valuation to wind down the bank.
They also argue that the SRB had stated in its provisional valuation its intention to conduct a final valuation if the lender was resolved. The report is designed to give a complete valuation of a lender and help investors understand why they lost money and whether they would be eligible for compensation.
The SRB did not respond to a request for comment.
Popular was wound down by European authorities and sold to Banco Santander SA for €1 on June 7, 2017, in the EU's first banking resolution since new postcrisis rules were implemented. While the authorities hailed it as a success, investors who lost €3 billion disagree, leading to legal action against the European Commission and the Single Resolution Board, the EU agency in charge of winding down banks, in the European Court of Justice.
The SRB has been criticized for a lack of transparency over Banco Popular's resolution, something which it denies and much of the legal action against the SRB hinges on a provisional sale-of-business valuation, conducted by auditor Deloitte, which valued the bank at between €1.3 billion and a negative €8.2 billion.
European Court of Justice
The lawyers had already written to the SRB on Oct. 3 asking the SRB to confirm a Sept. 5 report by Spanish news website, Vozpopuli, which stated that the SRB had written to the ECJ to inform it that it would not be making a financial valuation.
An ECJ spokesman was unable to comment, saying written statements between parties are not made public.
In the Oct. 3 letter, the lawyers also ask the SRB to make the ECJ letter public and to explain why it will not proceed with a definitive valuation. In a reply on Oct. 25, SRB Chair Elke König said the agency cannot answer the lawyers' questions because of the legal proceedings and "that document as well as its alleged content form part of the file in ongoing litigation proceedings" before the ECJ. The SRB refers the bondholders to letter it wrote to Deloitte, which carried out the initial valuations, on Aug. 2 saying it would not need the auditor's services for a final valuation.
"The SRB considers that, in light of the circumstances of the resolution of [Banco Popular], it is not necessary for an ex-post definitive Valuation 2 as referred to in Article 20(11) of Regulation (EU) ... to be prepared, in particular, since carrying out such as valuation could not have an impact on the concluded sale of [Popular] to Banco Santander that determined the market price of [Popular] as an entity in an open, fair and transparent process."
In their Nov. 16 letter, lawyers say the SRB's response "constitutes grave affront to the principle of transparency," adding that they are copying the letter and previous correspondence to the European Parliament and the European Ombudsman, an independent body that investigates allegations of maladministration against EU state institutions.
Under the EU Treaty, there is no exception "to publish and provide reasons for a decision on the basis that this is contained in a document submitted to the file of ongoing proceedings before the union's courts. Such reasoning on behalf of an EU agency beggars belief," the letter says.
They also complain that the Aug. 2 letter is not among the information on Banco Popular's resolution on the SRB's website and can only be found by doing a search for Deloitte.
Other investors seeking report
The bondholders are not the only Popular investors seeking a final valuation report.
Aeris Invest Sàrl, an investment firm belonging to Chilean billionaire Andrónico Luksic, filed a complaint on Oct. 5 with the European Court of Justice to overturn a decision by resolution authorities not to publish a final valuation report. The SRB informed the company, which lost its 3.45% stake in the bank, in a letter on Sept. 14 that it would not provide a final valuation for the bank.
The SRB had come under fire from its appeals panel, which ruled in June that the agency must make more documents public for plaintiffs engaged in legal challenges to fully understand how the SRB conducted the resolution. The SRB complied with the ruling Oct. 31.
Among the documents published, a letter from then Banco Popular Chairman Emilio Saracho dated June 4, 2017, indicates the SRB representatives had hinted at the possibility of sounding out investors potentially interested in a competitive bid for the bank if it were to be resolved. That, however, could cause a "significant negative consequences" for Banco Popular, "aborting all chances of a privately negotiated transaction" that the bank was pursuing.