* Portugal Telecom suffers from potential credit risk
* Shares fall as much as 13 pct, then recover
* Short-selling ban imposed on Thursday night
(Adds Portugal Telecom, analysts' quotes)
By Andrei Khalip and Laura Noonan
LISBON/LONDON, July 1 Banco Espirito Santo (BES)
shares bounced from one-year lows on Tuesday, after
authorities banned short-selling in the stock and the Portuguese
bank attempted to allay concerns over problems at its parent
company and possible losses in Angola.
The ban on short-selling in BES, Portugal's biggest listed
bank by assets, was imposed by market regulators in London and
Lisbon to limit what has been a 40 percent drop in BES stock
over the past three weeks.
BES has been under a regulatory spotlight for months after
saying it had sold to retail investors debt that was issued by
Espirito Santo International (ESI), a holding company of the
family which independent auditors in Luxembourg classified as
having serious financial problems.
Yet the fallout from issues relating to the Espirito Santo
family holding companies stretch beyond BES. Shares in Portugal
Telecom (PT) fell sharply as some analysts warned of
potential credit risk from 897 million euros ($1.2 billion) in
debt PT has bought from another family firm, Rioforte.
"Rioforte may not be able to refinance the commercial paper
and may have to recapitalise debt or issue convertible bonds,"
Javier Borrachero, an analyst at brokerage Kepler Cheuvreux
wrote in a note, adding that the investment "raises big
questions about the treasury policies" at PT.
PT has said it chose to invest because the rate was
attractive and based on its long-standing good relationship with
BES and Espirito Santo Group.
Shares in PT, which has cross-shareholdings with BES, fell
4.7 percent by market close. Ripples were felt as far away as
Brazil, where shares in Oi, with which PT combined
some assets earlier this year, fell 4 percent.
Short selling, which bets on a stock losing value, can cause
shares to fall faster, because short sellers borrow shares, sell
them into the market, then repurchase them later.
Trading in BES's largest shareholder, Espirito Santo
Financial Group (ESFG), another family holding company,
was briefly suspended. It fell 1.4 percent on Tuesday.
After initially rising on Tuesday morning, BES shares fell
more than 13 percent to their lowest since July last year,
before rallying to be up 13.8 percent. Some analysts said
volatility was likely to continue at least until July 31, when
BES shareholders vote on new leadership at the bank.
LACK OF CONFIDENCE
"There's basically no investor confidence right now, as long
as the sentiment does not stabilise high volatility in BES will
continue," said Andre Rodrigues, an analyst at Caixa BI.
"The problem is that holding companies like ESI and Rioforte
are not listed, so some key information is not available," said
Rodrigues. "Their problems could lead them to sell their shares
in the bank and that has pressured the shares," he said, adding
though he saw little risk for BES itself in terms of its debt.
The Espirito Santo family lost control of the bank after its
1.05 billion euros share sale on June 11, but remain its largest
investor with a 25 percent stake.
Though the family's representatives have left the bank's
board and the family patriarch has stepped down as the bank's
CEO, some issues relating to BES's relationship with its
founding clan and its many holdings are yet to be clarified.
ESFG has said it expects investors who bought the debt
issued by ESI will get their money back after a restructuring.
On a call with investors on Monday, BES's new management
said retail investors were owed 650 million euros by Espirito
Santo companies, down from 2.1 billion at the end of 2013.
Monday's call was aimed at assuaging investor concerns about
the bank's stock. Yet the conference call lasted only eight
minutes before being aborted by what the bank said in a
statement before Tuesday's market open were technical problems,
due to the fact that 800 people had joined as participants.
Immediately after the call, shares accelerated their earlier
losses to close down 16 percent.
In its Tuesday statement, BES said the European Central Bank
had agreed to accept an Angolan state guarantee covering 70
percent of BES's troubled Angolan loan book.
The Angolan bank, of which BES owns just over half, has been
a concern for investors since it emerged that part of the loan
portfolio did not have an appropriate level of guarantees or
The Angolan state subsequently agreed to provide a guarantee
for 70 percent of the loan book. Angola is BES's second-largest
market, with loans totalling 6 billion euros.
In a note to clients, Banco BPI analyst Andre Bandeira said
another key concern was management's statements on the Monday
call that BES's exposure to other holding companies were higher
than previously stated.
The bank said it had about 1 billion euros worth of exposure
to companies within the wider group, including 780 million euros
to ESFG and 200 million to Rioforte. It had not previously
disclosed the Rioforte liability.
($1 = 0.7331 Euros)
(Editing by Alessandra Galloni and David Holmes)