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Banco Popular bondholders file new suit against EU body in European Court

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Banco Popular bondholders file new suit against EU body in European Court

Bondholders who lost money in failed Spanish bank Banco Popular Español SA have filed a lawsuit in the European Court of Justice against EU authorities for deciding not to conduct a definitive valuation of the lender, according to a legal document seen by S&P Global Market Intelligence.

Lawyers for the bondholders, Algebris Investments (UK) LLP and Anchorage Capital Group LLC, filed the suit on Jan. 4. The bondholders argue that the EU body for winding down banks, the Single Resolution Board, is breaking EU rules because they require the SRB to provide a final valuation of the bank.

Popular was wound down by European authorities and sold to Banco Santander SA for €1 on June 7, 2017, in what was a test case for new anti-crisis rules. While the authorities hailed it as a success, investors who lost some €3 billion have launched 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, or ECJ.

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.

Protection for bondholders

As the SRB's resolution of the bank was based on "provisional valuations," EU regulations require the SRB to commission a definitive valuation "as soon as practicable," the filing said.

Such a valuation is intended to benefit creditors, the bondholders argue in their filing, and one of its purposes is "to inform the decision to write back creditors’ claims or to increase the value of the consideration paid" in terms of the single resolution mechanism.

The valuation provides "crucial protection" for bondholders because provisional valuations may not always be accurate, the bondholders said in their filing.

"It is highly likely on the facts of this case that an ex-post definitive version ... carried out without any time pressure, would be highly likely to result in a different and higher valuation of the bank, such as to justify the write back of the Applicants' AT1 and T2 bonds and/or to increase the consideration paid by Santander," the filing said.

The bondholders also argue that the SRB has breached EU rules by failing to provide a reason for not publishing the definitive valuation.

Definitive valuation 'unnecessary'

In the filing, the bondholders said two requests to the SRB on why it would not conduct a final valuation, the SRB referred them to a letter it had written to Deloitte, which carried out Popular's provisional valuation, explaining why it would not need the auditor's services for a definitive one.

"The SRB’s letter to Deloitte notified the latter that the SRB considered it unnecessary for Deloitte to prepare a definitive valuation ... 'without prejudice to any potential guidance of the Court of Justice of the European Union'," the filing said.

Algebris and Anchorage belong to an ad hoc group of bondholders who are involved in legal action in Spain, elsewhere in the EU and New York. Some of the bondholders contracted consultancy AlixPartners to conduct an independent valuation, which concluded that the bank would have generated €3.4 billion in cash after a seven-year insolvency after repaying €2 billion lost by bondholders.

The bondholders' latest legal action follows that of Aeris Invest Sàrl, an investment firm belonging to Chilean billionaire Andrónico Luksic. The Luxembourg-based firm filed a similar suit with the ECJ on Oct. 5.

The SRB did not respond to a request for comment.