* Bondholders of ESF Portugal say sale "illegal"
* Tranquilidade shares were pledged to recently-rescued BES
By Laura Noonan
LONDON, Aug 27 (Reuters) - A small group of bondholders is trying to block part of a major restructuring plan for Espirito Santo group, the family business empire whose collapse rocked international markets.
The bondholders are challenging the sale of the group's Portuguese insurance company, according to a lawyer's letter seen by Reuters, highlighting the difficulties that bailed-out Banco Espirito Santo (BES) and its successor face as they try to recover some of the family's massive debts.
Once Portugal's largest listed lender, BES lost billions of euros from dealings with its Espirito Santo founding family. Regulators decided on Aug. 3 to put its healthy assets into a new entity, Novo Banco, and leave family borrowings, shareholders and junior creditors behind in BES.
Novo Banco's share of the spoils included Tranquilidade, a large Portuguese insurer owned by the family's companies, and sources told Reuters last week that the new bank was close to sealing a 200 million euro ($264 million) deal to sell Tranquilidade to U.S. fund Apollo.
However, bondholders in Espirito Santo Financial (Portugal) (ESFP) are now challenging that. Their Lisbon-based lawyer has written to Novo Banco asserting that BES's claim on Tranquilidade is invalid, because it disadvantages creditors of ESFP, which is the indirect owner of 45 percent of the insurer.
"The creditors of Espirito Santo Financial Group (Portugal) ... consider the disposal ... if carried out, will constitute an illegal act and will seriously damage their legitimate interests," the lawyer, Antonio Alfaia de Carvalho, wrote in a letter to Novo Banco dated Aug. 22.
Portugal's 4.9 billion euro rescue for BES tested the euro zone's resilience to another banking crisis just months after Lisbon had exited an international bailout.
Hamburg-based Rainer Manthey, one of the bondholders involved, told Reuters that about 10 individual investors were in the group making the challenge, almost all of them German. They hold 12 percent of a 70 million euro bond issue made in May 2013 and were due to get their money back in May 2016.
"We're working hard to stop the sale," Manthey told Reuters. ESFP is now under court protection and its affairs are being overseen by an administrator.
A Novo Banco spokesman said the bank had no immediate comment on any legal challenge, but reiterated that no deal had been yet sealed to sell Tranquilidade as talks continued. A spokesman for Apollo had no immediate comment.
The shares in Tranquilidade were pledged to BES as a guarantee that another Espirito Santo company, Espirito Santo Financial Group (ESFG), would make sure that BES retail clients who were sold about 2 billion euros of Espirito Santo debt would be repaid.
ESFG, which owns the other 55 percent of Tranquilidade, applied for creditor protection in Luxembourg on July 25. ESFG is the 100 percent owner of ESFP, so it beneficially owned all of Tranquilidade.
ESFP's bondholders nonetheless argue that they were unfairly disadvantaged by the pledge of Tranquilidade because the repayment of their debt depended on ESFP continuing to own its stake in Tranquilidade.
BES could face similar challenges as it tries to secure repayment of 1.6 billion euros of borrowings by an array of companies related to Espirito Santo.
The complex structure of the Espirito Santo empire, which spanned from Panama and Luxembourg to Dubai, means that there are dozens of borrower companies across different jurisdictions.
The Bank of Portugal ordered BES to take additional security against Espirito Santo family borrowings, but attempts to enforce this security - or seize the assets that were pledged - could be resisted by other creditors of the Espirito Santo entities involved. (1 US dollar = 0.7588 euro) (Additional reporting by Andrei Khalip in Lisbon, editing by David Stamp)