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Aggrieved Banco Popular bondholders train their sights on Banco Santander

Subordinated bondholders that were bailed-in as part of the ‘textbook’ resolution of Banco Popular last summer have opened up a new front in their legal efforts to either get the decision annulled or, failing that, get compensation for their losses.

Two groups of investors have now made court filings in New York seeking information from the purchaser of the stricken bank – Banco Santander.

It was perhaps only a matter of time before the bailed-in investors decided to go down this route.

As the sole owner of Banco Popular, Santander was an active and central participant in the resolution process and, in their view, must be in possession of documents and information that are very pertinent to understanding the basis on which the resolution was ordered by the Single Resolution Board (SRB).

Bondholders Pimco and Anchorage Capital have, therefore, made a court filing in New York seeking to obtain documents and information from Banco Santander pertaining to the purchase of Banco Popular for €1 in June 2017.

The filing was made on April 3, as a Section 1782 discovery application. This allows claimants in proceedings outside the US to seek evidence in aid of foreign proceedings, so long as the respondent has a presence in the US and is likely to have relevant documents – which Santander does.

“Santander was the principal beneficiary of the resolution action. It is only right that they be required to disclose key documents.”

– Richard East, Quinn Emanuel

The move was made in support of their ongoing legal actions at the EU General Court in Luxembourg and in criminal proceedings in Madrid.

A group of Mexican investors, represented by Kirkland & Ellis, filed a similar Section 1782 discovery application on March 5, and the two will likely be heard together in front of the same judge.

Pimco and Anchorage are part of a subordinated investor group that was formed to challenge the wind-up and sale of Banco Popular.

In addition to the two investors involved in this action, the group includes among others Algebris Investments, Ronit Capital and Cairn Capital. Together they held a material percentage of Banco Popular’s additional tier-1 and lower tier-2 bonds.

Pimco is understood to have had a €280 million position when Popular failed, while New York-based Anchorage is believed to have lost about $140 million from the collapse of the bank.

Three funds, Anchorage, Algebris and Ronit Capital, filed administrative claims at the EU General Court on August 17, 2017, seeking to overturn the resolution decision. On September 7, the group also filed administrative claims against Spain’s bank restructuring authority, FROB, that implemented the decision.

On January 29 this year, the bondholder group applied to join a criminal investigation by the Spanish National Court, which is examining claims of fake financial statements, market manipulation, false accounting and possible insider trading.

The bondholders are being represented by law firm Quinn Emanuel.

“We are making this application so that we have all the necessary evidence and facts from Santander to support our ongoing legal actions in Luxembourg and Madrid,” explains lead partner Richard East. “This is fundamental to a fair, just and transparent process. Santander was the principal and significant beneficiary of the resolution action. It is only right that they be required to disclose key documents about their involvement in the purchase of Banco Popular, which led to the loss of our clients’ investments.”

No party

Banco Santander is not a party to any of the legal procedures that the bondholder group is engaged in – but the bondholders want to understand what it knew and did leading up to the resolution.

They are looking for any evidence that can support rumours in Spain that Santander was poised to make a substantial bid for Popular but subsequently reduced its offer to €1 after a run on the bank in early June decimated Popular’s market value.

In the press conference announcing the acquisition on June 7, 2017, executive chair Ana Botín said that Santander had not presented any offer prior to the one following resolution of Popular.

The bondholders also want to understand what Santander knew about the private capital raise for Popular that the funds were involved in shortly before its collapse. Central to this, in the bondholders’ view, will be the question of why central bank emergency liquidity assistance was not given to the ailing bank.

The 1782 subpoena requests all documents related to Project Umbrella, launched in April, 2017, which created a list of all available Popular assets that could be presented to the Bank of Spain as collateral for a potential request for ELA by the bank.

Popular burned through €3.6 billion of ELA in two days before the bank was declared failing or likely to fail on June 6.

Pimco and Anchorage say they have now requested all communications showing the timing and frequency of requests for ELA made by Popular, all communications between Santander or Popular and the Bank of Spain and/or European Central Bank regarding the amount of ELA requested, and the collateral required to be posted by the Bank of Spain and/or the European Central Bank and all communications from the Bank of Spain and/or European Central Bank declining the provision of any ELA to Popular.

The investors claim that Popular had guarantees from the Spanish central bank that it would receive ELA.

Their position is that the run on the bank was started by the SRB and any ELA option was subsequently engulfed by the run on the bank. They are after any information from Santander that sheds light on the economics of Popular at the time of the resolution.

Price discovery

The two discovery actions are the first time that the investors in Popular have involved Santander in their actions. The larger bank has always been in their sights, however, because of the price at which it bought Popular.

The benefit of bringing this action in New York is that it requires US-style discovery, which is much broader than the disclosure available in Europe.

In the EU there is no ability to obtain disclosure from the SRB or the Commission: indeed, the SRB has only provided any information because of the tribunal ruling against them. They only published a redacted version of Deloitte’s initial valuation of the failed bank on February 2 after a decision from an SRB appeals board in December that certain sections of the report should be made public.

There is also no discovery available in Spain for the civil proceedings there, although there is narrow discovery available for the criminal proceedings.

What the bondholders really want to know is what the response inside Santander was to the leaks from the SRB that they allege prompted the run. Any evidence that suggests Santander believed that the problems were with the struggling bank’s liquidity rather than its solvency will, they believe, help the investors’ case against the SRB for declaring the bank failing or likely to fail.


Central to the bondholders’ grievances is the valuation of Banco Popular at negative €2 billion at the time of the sale to Santander – a figure that exactly matched the value of the subordinated bonds outstanding that were subsequently bailed in. A PwC audit of the bank in April 2017 put its net asset value at €10.8 billion.

Consultancy Deloitte prepared the valuation report for Popular and concluded that the bank was worth between €1.3 billion in a best-case scenario and negative €8.2 billion in a worst-case scenario. The negative €2 billion valuation was its best estimate.

The firm emphasized that this valuation was “highly uncertain and provisional”.

When the SRB authorized the sale of the bank to Santander on June 7, it stated that it considered Deloitte’s valuation as “decisive”. The negative €2 billion valuation for the purposes of the sale to Santander enabled the senior bondholders of the bank to avoid writedown.

The redacted valuation report that was made public on February 2 was the second valuation of Popular. The SRB has now instructed Deloitte to review the valuation – essentially valuing the bank for the third time. The aggrieved bondholders, unsurprisingly, believe that a third valuation should be conducted by a different entity.

Resolution regulations require only that the third valuation be distinct from prior valuations and be an independent and fair valuation – not that it must be conducted by a party without involvement in the process to date.

Whether or not the discovery actions will turn up anything at Santander that might assist the bondholders’ case remains to be seen. The subpoena requests that a Santander representative testify in New York on May 18. It is, however, likely to be a few months before the case is heard before a judge.

The bondholders clearly seem determined to go after any pot of money that they can; they may be hoping to claim damages from Santander if the discovery action produces any documentation or evidence that supports their position.

Euromoney has sought comment from Banco Santander as to whether or not it had prepared a bid for Banco Popular that was subsequently reduced following SRB chair Elke König’s comments on May 23 and whether or not it was privy to communications between the Bank of Spain and Popular over ELA.

The bank has declined to comment on these issues.

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