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Portugal to sell Novo Banco to US private equity firm Lone Star

Portugal's central bank has agreed to sell a controlling stake in Novo Banco SA to U.S. private equity firm Lone Star Funds for a €1 billion ($1.07 billion) capital injection.

Dallas-based Lone Star will inject €750 million into the bank at deal close and another €250 million within three years under the terms of the deal, according to a March 31 press release. Novo Banco will also swap about €500 million in debt for new bonds to improve its capital ratio.

Lone Star will take a 75% stake in the company while a resolution fund will hold the remainder.

Novo Banco was created in 2014 as the "good bank" of Banco Espírito Santo after the latter's collapse under the leadership of former CEO Ricardo Espírito Santo Salgado. Novo Banco was bailed out with an injection of €4.9 billion from Portugal's banking resolution fund under an agreement with the EC.

The Wall Street Journal reported that the arrangement leaves Portuguese taxpayers exposed to potential losses, a situation the central bank had worked to avoid.

"This is another step in stabilizing the national banking sector," the Bank of Portugal said in the statement, adding that it provides a significant reinforcement of capital for the bank.

The deal will require approval from the European Central Bank and the European Commission.