Portuguese bank Banco Espírito Santo has been split into a good bank and a bad bank under measures announced by the country’s central bank yesterday (Sunday), with the issuer’s covered bonds set to be transferred to the good bank and this morning said to have tightened some 30bp.

Banco de Portugal yesterday announced that “the general activity and assets of Banco Espírito Santo, S.A. are transferred, immediately and definitively, to Novo Banco, which is duly capitalised and clean of problem assets”.

Shareholders and subordinated creditors of BES, meanwhile, will bear the losses for the problem assets. According to the central bank the losses “in essence correspond to liabilities of other entities of the Grupo Espírito Santo and to shareholdings of Banco Espírito Santo Angola”.

The separation of the problem assets and the remaining assets and liabilities will, according to Banco de Portugal, ensure full continuation of Novo Banco’s activity, “with no impact on its customers, collaborators or suppliers”.

The split of BES comes after the bank on Wednesday reported a Eu3.6bn loss, taking Common Equity Tier (CET) 1 levels to 5%, below the minimum regulatory level.

The central bank said that equity capital of Eu4.9bn for Novo Banco will be fully underwritten by the Resolution Fund, with the state bearing no costs for the operation. Because the fund is a relatively new institution – having been set up in 2012 – and does not yet have sufficient financial resources to finance the resolution measures applied to BES, it has taken out a loan from the Portuguese state, but this will be temporary and replaceable by loans from credit institutions, according to the central bank. The Resolution Fund is funded by contributions paid by member institutions and proceeds from a levy paid by banks.

Banco Espírito Santo has one obrigações hipotecarias (OH) benchmark outstanding, which will mature in February 2015. BES covered bonds were cut to Ba1 by Moody’s on 15 July.

A market participant this (Monday) morning said that the bond was bid at 228bp over, on an asset swap basis, having tightened by 30bp following the announcement from the central bank.

A syndicate banker said that the market’s response to the central bank’s measures indicated a strong level of faith in the support offered to BES. He said that he expects the spread to tighten significantly over the coming months.

“No one expects this BES covered bond to default or have any issues going forward,” he said. “It indicates that the authorities have definitely made the right move here.

“The market has taken a relaxed approach to the BES situation,” he added. “There appears to be no negative spillover.”