Bloomberg News

Espirito Santo Bonds Rally on Shareholder Assurance

July 16, 2014

Central Bank Governor Carlos Costa

Central Bank Governor Carlos Costa said, “There are certainly shareholders interested in participating in a capital increase.” Photographer: Mario Proenca/Bloomberg

Portugal’s central bank said shareholders are interested in injecting more capital into Banco Espirito Santo SA after a second affiliate failed to repay short-term debt.

Bonds and shares in the Lisbon-based lender jumped following the comments from Bank of Portugal Governor Carlos Costa. Rioforte Investments SA, a holding company in the Espirito Santo group, missed a 847 million-euro ($1.2 billion) payment of commercial paper yesterday.

“The governor’s comments have helped reassure the market that a bail-in of the bonds probably won’t be necessary,” said Tom Jenkins, a credit analyst at Jefferies International in London. “It’s hearsay for the moment but it’s certainly helpful.”

Fending Off Contagion

Investor concerns that bondholders would take losses should financial problems within the Espirito Santo group spill into the bank prompted a 25 percent slump this month in the lender’s subordinated debt through yesterday. Its shares lost more than 40 percent of their value.

“There are certainly shareholders interested in participating in a capital increase,” Costa told Portuguese broadcaster TVI. The bank has a “capital cushion to deal with the risks with which it’s confronted,” he said.

Bonds Jump

Banco Espirito Santo’s 7.125 percent subordinated bonds due November 2023 rose 9.9 cents on the euro to 80.2 cents to yield 10.3 percent at 12:11 p.m. in Lisbon, according to data compiled by Bloomberg. Its shares climbed 18 percent to 44.7 euro cents. Yields on Portugal’s 10-year bonds fell 7.8 basis points to 3.74 percent.

Rioforte owes the money to Portugal Telecom SGPS SA, which said today the payment due July 15 wasn’t made. Rioforte owns 49 percent of Espirito Santo Financial Group, which in turn holds 20 percent of Banco Espirito Santo.

Luxembourg-based Rioforte plans to file for creditor protection, a person familiar with the matter said yesterday, asking not to be identified because they’re not authorized to speak about it.

Global financial markets were roiled last week after Espirito Santo International SA missed payments on commercial paper.

Banco Espirito Santo said last week it had exposure of 1.18 billion euros to companies in Grupo Espirito Santo through loans, securities and other items as of June 30. The lender said it’s waiting for the release of that group’s restructuring plan to assess any potential losses.

Reputational Damage

The lender said 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.

Banco Espirito Santo said it isn’t responsible for those payments, according to the offer document for its capital increase last month. The bank drew attention to potential reputational damage should the issuers of the commercial paper fail to meet their obligations and Espirito Santo Financial Group fails to honor a 700 million-euro guarantee.

Non-payment may also prompt litigation that may “have a substantial negative effect on its financial position and results,” according to the prospectus.

Separately, the bank’s 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, the bank said.

To contact the reporter on this story: John Glover in London at johnglover@bloomberg.net

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


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