UPDATE 3-Espirito Santo to file for creditor protection for Rioforte -sources

Tue Jul 15, 2014 2:11pm EDT

* Espirito Santo group must pay back 847 mln euros on Tuesday

* Debt owed to Portugal Telecom, which is merging with Brazil's Grupo Oi

* PT-Oi merger terms to be revisited if debt not made

* Banco Espirito Santo shares tumble, bond yields keep climbing (Adds Fitch, new BES chief's statement, closing prices)

By Sergio Goncalves and Axel Bugge

LISBON, July 15 (Reuters) - Portugal's Espirito Santo clan is preparing to file for creditor protection for one of its key holding companies, sources said on Tuesday, moving to ringfence prized assets as a deadline for a $1 billion plus debt repayment to Portugal Telecom looms.

The filing will be made by the company, Rioforte, in Luxembourg, where it is registered, one source close to the process said, adding that the move was aimed at preventing insolvency that would trigger a fire sale of assets.

Rioforte indirectly holds a stake in Portugal's largest listed bank Banco Espirito Santo, shares of which plummeted 14.6 percent to an all-time closing low on Tuesday. This extended their losses in the past month to 62 percent due to investors' worries about the bank's exposure to family debt.

The jitters jolted financial markets last week in Europe and beyond, raising new concerns about Portugal generally only two months after it exited an international bailout deal.

By 2200 GMT on Tuesday Rioforte is supposed to repay 847 million euros ($1.16 billion) in maturing debt to Portugal Telecom, the country's largest telecom services provider. PT in the throes of a tie-up with Brazil's Grupo Oi, which is likely to amend the terms of the deal in the event of a default.

The sources would not comment on how a creditor protection filing could affect the payment deadline. They said negotiations between Rioforte and PT were still going on.

Rioforte would not comment.

Concerns surrounding the Espirito Santo banking clan, who founded BES more than a century ago, have erupted since an audit of a family holding company that owns Rioforte found a "serious financial situation" there.

Further evidence of the family's financial difficulties emerged late on Monday, when a group company sold a 5 percent stake in BES at a deeply discounted price because it had to meet a margin call.

The sale helped to push BES shares 20 percent lower at one point on Tuesday to record lows just above the 0.34 euro price at which the Espirito Santo Financial Group (ESFG) sold the 5 percent stake.

"The sale by ESFG at a brutal discount shows they are jumping ship," said Jose Novo, a trader at Orey iTrade brokers.

Andre Rodrigues, an analyst at Caixa BI, also cited likely creditor protection as being behind the fall in BES shares. "The stake sale was a great pressure factor as they put a sort of a target price into people's heads, but it would have been difficult to sell a big block of shares otherwise in the market," said Rodrigues.

Yields on BES debt kept climbing on fears that bondholders would bear the cost if the bank ran into difficulty, reaching 11.7 percent on 10-year bonds, up from 10.6 percent on Monday and more than double where they stood a month ago.

MERGER AMENDMENTS?

Last week, news emerged that a family holding company had failed to meet debt payments in full and on time.

Fitch Ratings said on Tuesday that most rated Portuguese companies "are unlikely to face significantly higher risk from the troubles at the Espirito Santo group" due to their limited direct exposure to the group and diversified funding bases, but warned that PT's credit standing could suffer.

"A failure to receive repayment on the commercial paper would be viewed negatively for PT's rating profile and, while we do not believe the merger has been put at risk, there is the potential for the terms of the deal to change. We will review the credit impact if this appears likely," it said.

PT's Brazilian merger partner is watching the debt payment carefully.

A source close to the deal told Reuters on Tuesday that some large shareholders in Grupo Oi could sue Portugal Telecom if the debt investment ends up in default.

Neither Portugal Telecom nor anybody at the Espirito Santo family has commented on the payment, or indicated when they may announce the results of their talks.

The concerns have driven shares in Portugal Telecom down by about a third in the past few weeks and they closed 2.14 percent lower on Tuesday. Oi shares were down 3.6 percent in Sao Paulo.

Efforts to distance BES from the family accelerated on Monday after the Bank of Portugal ordered that a new, independent management team take over. The new CEO, Vitor Bento, said on Tuesday the bank is well-capitalised and he will seek to restore investor confidence. ($1 = 0.7331 Euros) (Additional reporting by Filipa Cunha Lima and Andrei Khalip; Editing by Will Waterman and David Stamp)

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