LISBON A near-10 percent fall in the shares of Banco Espirito Santo(BES) accompanied a spike in Portuguese bond yields on Wednesday, with reports of a proposed debt-restructuring increasing concern over the country's financial sector.
The family behind Portugal's largest listed bank by assets intends to ask creditors for an extension of the maturities on debts issued by its Luxembourg-registered holding company and a possible debt-for-equity swap, Portuguese media reported on Wednesday.
Espirito Santo International (ESI) has been under scrutiny since an audit found "material irregularities" at the Espirito Santo family's holding company and BES shares have slumped sharply on worries that the bank's capital base could be affected.
Analysts cited the potential risk for the Portuguese financial sector as a whole for the jump in bond yields, despite repeated government assertions that BES is isolated from the holding company's problems and there is no risk to public finances.
Diario Economico reported that the holding company is likely to present its plan to authorities in Luxembourg before proposing it to creditors. The company has 7 billion euros ($9.6 billion) in debt, the newspaper said.
Luxembourg authorities said last month that they had launched an investigation into ESI over alleged breaches of company law.
Separately, weekly Expresso reported that clients holding the debts of Espirito Santo family companies had received proposals to swap the debt for equity. The newspaper said that 85 percent of commercial paper would be converted into equity and 15 percent would become long-term debt.
Expresso cited a source close to one of the family holding companies as saying that such a debt-for-equity swap is one of the proposals on the table for the family.
BES shares, which have lost almost half of their value in the past month, were down 9.5 percent at 1158 GMT. The less liquid Espirito Santo Financial Group was down 13 percent.
"BES suffers from the same problem - it also has money invested in various holdings of the group and investors are concerned about the group's solvency and potential repercussions," said Paulo Rosa, a trader at Gobulling brokers.
Shares in Portugal Telecom also hit record lows and were down almost 5 percent on lingering concerns that its 897 million euro ($1.22 billion) investment in another Espirito Santo holding company's debt could be rescheduled or lost, traders said.
Nobody at the family companies was immediately available to comment on the stories.
ESI's debt has been the source of growing concerns around Banco Espirito Santo because the bank sold the commercial paper to its own retail clients. BES has said there is a provision of 700 million euros to pay back retail clients.
The Espirito Santo family has given no explanation for the growing debts at its holding companies.
Last week Espirito Santo Financial Group, which holds the family's 25 percent stake in BES, said the family's companies owed it 2.35 billion euros in June, up from 1.37 billion euros at the end of last year.
($1 = 0.7331 Euros)
(Editing by Mark Potter and David Goodman)