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Questions raised as NZ Super sues Portugal’s central bank over US$150m loss

Green Party queries “speculative” investment by long-term investor

The NZ$27bn (€17.8bn) New Zealand Superannuation Fund is facing political questions following its decision to take legal action against the Bank of Portugal over a decision by the central bank that has jeopardized a sizeable investment the fund made in a special purpose vehicle (SPV) created by Goldman Sachs.
The complicated case dates back to early July, when Goldman provided a US$834m loan to Banco Espirito Santo (BES) so that BES could finance an oil refinery in Venezuela. Goldman then set up a special purpose vehicle (SPV) called Oak Finance to issue US$784m in bonds backed by the original loan to investors, including NZ Super. NZ Super invested US$150m and expected a return, the scheme said, “north of 1% annualised pure net profit.”
Several weeks later, it emerged that BES was on the brink of collapse following €4.2bn in losses incurred during the first half of 2014. The bank was quickly rescued by the Bank of Portugal, which split BES into a “bad bank” (i.e. holder of debts whose repayment is questionable) and a “good bank” named Novo Banco.
The case has alarmed the New Zealand Green Party. “The Fund is a long term investor, so questions need to be asked about why it invested such a large amount of money into a financial product that Moody’s called speculative,” Co-leader Russel Norman said today (February 20). “Such a large and unusual loss deserves a closer look. Taking these high-risk investments with our money is probably not appropriate.”
Novo Banco was recapitalised with €4.9bn in funds from the European Stability Mechanism (ESM), the emergency loan facility set up by members of the euro zone during Europe’s debt crisis. Meanwhile, Portuguese authorities detained BES Chief Executive Richard Salgado on suspicion of fraud, money-laundering and document falsification.He was released on bail but forced out as CEO in September. Now Goldman and NZ Super claim that during the bailout, the Bank of Portugal promised that Oak Finance’s debt would be transferred to Novo Banco and not left with the bad bank. Yet in late December, Goldman and NZ Super say, the bank broke with that promise by ruling that institutions that owned 2% or more in BES before the bailout would be kept separate from Novo Banco. According to the central bank, this included Goldman Sachs.
Goldman and NZ Super argue that the decision is factually incorrect, as the US investment bank did not hold 2% of the voting shares in BES. Instead, Goldman’s exposure to BES consisted of 1.6% of BES’ voting shares and another 0.67% worth of “cash settled swaps” that had no voting rights.
“The Bank of Portugal’s decision is very disappointing given their prior written assurances that senior debts such as the Oak Finance loan had moved from Banco Espírito Santo to Novo Banco,” said Adrian Orr, CEO of NZ Super, in a statement. “Novo Banco also confirmed in writing that the Oak Finance loan had been transferred as one of its liabilities.”
NZ Super says it is one of several investors in Oak Finance’s debt that will challenge the central bank’s decision in court. The others were not disclosed. Said a spokesman: “At this point, while we believe we have a very strong legal case, the Fund has taken a conservative view and written down the value of the bonds to nil.”
Earlier this month, the Greens – the third largest political party in the parliament with 14 seats – called on the fund to divest from fossil fuels, “starting immediately with coal”. It said the fund currently has $676m in fossil fuel companies, or around 2% of its assets. Link