ECB Caught in Cross-Fire in Santander Tussle With Billionaire

(Bloomberg) -- Bonds held by the European Central Bank could become unlikely collateral damage in a battle between Spain’s largest bank and a Russian billionaire over an almost-insolvent retailer.

The ECB is among bondholders that may be forced to take losses as a condition for Banco Santander SA to let Mikhail Fridman’s LetterOne investment fund recapitalize Distribudora Internacional de Alimentacion SA. The Bank of Spain bought DIA’s notes in 2016 as part of the ECB’s corporate bond purchase program.

Santander opposes LetterOne’s plan because it prioritizes bondholders over bank lenders, people familiar with the matter said this week. It’s the only bank that hasn’t agreed to the proposal, which will push back loan repayments by four years, while handing over more than 300 million euros to bondholders when the notes come due in July. The Spanish grocer may need to file for creditor protection if an agreement isn’t reached with all of its lenders by Monday.

DIA’s July bonds are trading at 78 cents on the euro, according to data compiled by Bloomberg.

An ECB official declined to comment on individual holdings in its 178 billion-euro portfolio of almost 1,200 corporate bonds. The central bank owned DIA’s 2019 bonds as of May 10, according to filings.

An official at DIA declined to comment, while a representative for Santander didn’t immediately return calls and emails seeking comment.

It’s not the first time the ECB has faced losses on its corporate bond holdings since starting the program in June 2016. Last year, it took a loss on its investment in Steinhoff International Holdings NV, the retailer engulfed in an accounting scandal. It’s a reminder that skeletons may emerge in Mario Draghi’s closet as Europe approaches the end of the debt cycle.

The ECB’s mandate is to buy only investment-grade corporate bonds, but it doesn’t have to sell securities if they are downgraded to junk, and it now only reinvests capital when bonds mature. DIA fell into junk territory in October after losing market share to aggressive discount retailers, combined with problems stemming from economic recession in Argentina and Brazil.

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