Espirito Santo Creditors concerned After Missed Payments

Central bank assurances that Portugal’s Banco Espirito Santo SA is protected after its parent company missed debt payments are failing to ease creditor concern they may also suffer losses.

The cost of insuring the lender’s senior debt has surged to the highest in eight months, with credit-default swaps jumping 30 percent this week. The Lisbon-based bank’s 7.125 percent subordinated notes due November 2023 slid 3.7 cents on the euro to 89.6 cents, to yield 8.6 percent yesterday, according to data compiled by Bloomberg.

While the Bank of Portugal said the lender can avoid “contagion risks,” investors facing losses in commercial paper sold by Espirito Santo International may try to make a claim against the bank, according to a Bank of America Corp. report. An estimated 2.55 billion euros ($3.47 billion) of the short-term paper is outstanding, Merrion Stockbrokers Ltd. in Dublin said in a report.

“We see risk that unhappy holders may try to make a claim against the bank and/or other parts of the Espirito Santo group in spite of protestations that the bank is ‘ringfenced’ from the problems of the group,” Bank of America analysts led by Richard Thomas said in a report yesterday.

The Bank of Portugal reaffirmed yesterday a July 3 statement that the bank’s solvency has been significantly reinforced and can avoid risks from the rest of the group. Banco Espirito Santo has been “adequately isolated” by the Bank of Portugal from the financial problems in some entities of Grupo Espirito Santo, Parliamentary Affairs Minister Luis Marques Guedes said on July 3.

Payment Delays

Banque Privee Espirito Santo SA said July 8 the delay in payments of some debt securities issued by parent company Espirito Santo International affects “only a few clients.” Some investors have been asked to swap the commercial paper for stock and new long-term securities, according to Portuguese newspaper Expresso.

“We expect further volatility in its debt and equity pricing until final clarity emerges on the extent of the group restructuring,” Ciaran Callaghan, a senior credit analyst at Merrion Stockbrokers Ltd. in Dublin, said in a note to clients yesterday.

Moody’s cut the ratings of Espirito Santo Financial Group SA, the bank’s immediate holding company which controls 25 percent of the lender. The company was downgraded three levels to Caa2, the third-lowest ranking, with Moody’s citing lack of transparency about its financial position and links to other companies within the group.

Lending Interconnections

Espirito Santo Financial said on July 3 its borrowing from Banco Espirito Santo was 823 million euros as of June 30.

Espirito Santo Financial is owed 2.35 billion euros by Espirito Santo International SA and Rio Forte Investments SA, which are holding companies higher up in the corporate structure. The debt was increased from 1.37 billion euros in December “to support the reimbursement” of commercial paper issued by those companies and held by retail clients of the bank units, Espirito Santo Financial said.

Espirito Santo Financial Group is 49 percent owned by Espirito Santo Irmaos SGPS SA, which in turn is fully owned by Rioforte Investments, which is fully owned by Espirito Santo International.

Credit-default swaps on the senior debt of Banco Espirito Santo were the worst performing among 120 financial companies around the world yesterday, according to data compiled by Bloomberg. The lender’s debt is the most expensive to insure among 325 financial companies tracked by Bloomberg.

The cost of insuring the bank’s debt jumped 90 basis points this week to 386 basis points, the highest level since October. The contracts, which peaked above 1,200 basis points during Europe’s sovereign debt crisis in 2011, are up from a more than four-year low of 156 basis points last month.

The net amount of the bank’s debt protected by credit-default swaps almost doubled to a two-year high of $940 million on July 4 since April, according to the Depository Trust & Clearing Corp. The contracts were the 23rd most traded last week among 1,000 entities tracked by DTCC, with 352 trades covering a gross $846 million.

(Source: Bloomberg)