The Portuguese government has agreed to offload a 75% stake in Novo Banco to US private equity firm Lone Star in exchange for a capital infusion of €1bn.

Lone Star will initially offer €750m of capital and another €250m within three years. The deal is subject to regulatory approval, including the approval of the European Central Bank and the European Commission.

Novo Banco will also swap €500m of senior bonds for new bonds to strengthen its common equity Tier 1 capital ratio before the acquisition by Lone Star.

The sale comes nearly two and a half years after Portugal’s government rescued collapsed lender Banco Espirito Santo in a €4.9bn bailout in August 2014. The rescue plan included splitting BES into ‘bad’ and 'good' banks.

The good bank was renamed as Novo Banco and was recapitalised by a special bank resolution fund, which will now retain the remaining 25% stake in Novo Banco.

Lone Star president for Europe Olivier Brahin said: “We recognize the strength of Novo Banco's unique franchise in working with small and medium-sized companies, an important engine of growth in Portugal. This agreement marks a significant step toward providing Novo Banco with the capital, resources, and expertise necessary to ensure that the bank remains a strong, domestically focused pillar of the Portuguese banking system."