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Portuguese Bank Reveals Exposure After Missed Payment Shakes Markets

By Joao Lima, Henrique Almeida and Abigail Moses
July 11, 2014 2:12 PM EDT 27 Comments
A pedestrian passes an automated teller machine (ATM) outside a Banco Espirito Santo SA branch in Lisbon, Portugal.
Photographer: Mario Proenca/Bloomberg
A pedestrian passes an automated teller machine (ATM) outside a Banco Espirito Santo SA branch in Lisbon, Portugal.

Banco Espirito Santo SA sought to reassure investors by revealing its exposure to related companies after a missed payment on short-term debt by a member of the Portuguese group roiled global markets.

The nation’s second-biggest bank by market value said it had 1.18 billion euros ($1.6 billion) of loans, securities and other items linked to Grupo Espirito Santo as of June 30, according to a filing. The lender also said that it has a buffer of 2.1 billion euros above the regulatory minimum following a capital increase in June.

The bank provided the update after a parent company, Espirito Santo International missed payments on commercial paper. While the nation’s central bank sought to reassure markets that the lender’s solvency is “solid,” the lack of transparency in the corporate structure jolted investors. European stocks and Portuguese bonds rebounded today after a selloff yesterday.

“Banco Espirito Santo’s executive committee believes that the potential losses resulting from the exposure to Grupo Espirito Santo do not compromise the compliance with the regulatory capital requirements,” the Lisbon-based bank said. “Banco Espirito Santo is committed not to increase its total exposure to Espirito Santo Group.”

The bank’s bonds pared losses today, with its 7.125 percent subordinated notes climbing 1.63 cents on the euro to 87.52 cents, to yield 8.85 percent. The securities dropped to a record low of 85.89 cents yesterday from 96.06 cents last week.

Stock Suspended

The stock fell 1.96 percent to 49.9 euro cents at 2:30 p.m. in Lisbon. The shares resumed trading at 11:30 a.m. after being suspended yesterday following a 17 percent decline. Portugal’s regulator banned short selling of Banco Espirito Santo shares until the end of today, while the bank’s long-term credit rating was lowered to B+ from BB- by Standard & Poor’s.

“It’s good that we have a little bit more clarity in terms of BES exposure to the group,” said Steve Hussey, a London-based financial institutions analyst at AllianceBernstein Ltd., which manages about $445 billion, including bonds of Banco Espirito Santo. “The main thing is to get greater clarity of the financial position at the group level and plans for restructuring and potential recovery values.”

Portugal’s Espirito Santo family has controlled the bank for most of the lender’s 94-year history. It began loosening its grip on management last month when it raised 1.04 billion euros in a rights offering to shore up capital.

Management Change

Chief Executive Officer Ricardo Salgado, the 70-year-old great-grandson of the bank’s founder, is being replaced. Vitor Bento, chairman of payment-processing company SIBS SA, is being proposed for the role, after Chief Financial Officer Amilcar Morais Pires’s name was withdrawn. Shareholders will vote on the management change on July 31.

Choosing a CEO from outside the family is a milestone for the bank. The Espirito Santo family lost control of their bank only when it was seized by a revolutionary government in 1975, regaining it 16 years later.

The financial crisis took its toll on Banco Espirito Santo, which hasn’t paid shareholder dividends for three years and posted a 517.6 million-euro loss last year.

The bank was the only one of the three biggest Portuguese lenders not to seek help after the nation accepted a bailout by the European Union and the International Monetary Fund in 2011. Banco BPI SA and Banco Comercial Portugues SA both requested state aid.

Corporate Structure

Portugal has injected a total of 5.6 billion euros in banks that aren’t state-owned through the 12 billion-euro recapitalization facility that is available as part of the 78 billion-euro aid program.

Market turmoil was fueled by the complex structure of the Espirito Santo group. The bank is 25 percent owned by Espirito Santo Financial Group SA. That in turn is 49 percent owned by Espirito Santo Irmaos SGPS SA, which is fully owned by Rioforte Investments SA.

Rioforte is fully owned by Espirito Santo International SA, the company that missed payments on commercial paper.

Banco Espirito Santo said in the statement released late yesterday that its retail clients hold 255 million euros of commercial paper issued by Espirito Santo International, 342 million euros of commercial paper issued by Rioforte, 44 million euros of commercial paper issued by Rioforte subsidiaries and 212 million euros of commercial paper and bonds issued by Espirito Santo Financial and its subsidiaries.

‘Material Difficulties’

Espirito Santo Financial Group said yesterday it was suspending its shares and listed bonds because of “ongoing material difficulties” at Espirito Santo International. It said it’s assessing the financial impact of its exposure to the parent company.

Espirito Santo Financial has issued a 700 million-euro guarantee to cover debt instruments issued by Espirito Santo Group companies and distributed to Banco Espirito Santo retail clients, according to the statement.

Separately, the bank said that institutional clients held 511 million euros of debt securities issued by Espirito Santo International and 1.5 billion euros of debt securities issued by Rioforte and its subsidiaries.

Accounting irregularities at Espirito Santo International emerged when Banco Espirito Santo carried out a rights offering last month. There was a “serious financial situation” at ESI that could be damaging, the bank said May 20.

‘Horizontal Audit’

The Bank of Portugal said today that the financial situation at Grupo Espirito Santo’s non-financial unit was detected in a “horizontal audit” carried out at the end of 2013.

Banco Espirito Santo has “solid” capital levels and a “comfortable margin to face up to any contingencies,” Portuguese Prime Minister Pedro Passos Coelho said today. Banco de Portugal urged depositors to remain calm and said the safety of their funds isn’t “undermined,” according to a statement today.

“We still do not know about the nature of the borrowers and any connection with the funding crisis at the group,” Gildas Surry, an analyst at BNP Paribas SA in London, wrote in a note to investors. “We remain concerned.”

To contact the reporters on this story: Joao Lima in Lisbon at jlima1@bloomberg.net; Henrique Almeida in Lisbon at halmeida5@bloomberg.net; Abigail Moses in London at amoses5@bloomberg.net

To contact the editors responsible for this story: Shelley Smith at ssmith118@bloomberg.net Michael Shanahan

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