* Tier 2 bonds sink six points as bail-in fears surface
* Senior debt at risk if losses are greater than expected
By Aimee Donnellan
LONDON, July 29 (IFR) - European bondholders are lying in
wait for Banco Espirito Santo's (BES) results Wednesday where an
unknown loss could leave subordinated, and potentially senior
debtholders, exposed to haircuts on their investments.
BES's outstanding 750m 7.125% Tier 2 bond came under heavy
pressure today and sank six points to just below 80 as reports
of a potential 3bn loss ramped up investors' fears. Meanwhile,
the bank's senior cash curve was 20-25bp wider and the cost of
insuring its five-year debt was 20bp wider at 400bp.
Portugal's central bank said late on Monday that if BES
posted a loss larger than its existing capital cushion of
2.1bn, a capital increase would be needed to guarantee adequate
"The big question is how big is the hole and how are they
going to fill it," said Robert Montague, a senior investment
analyst at ECM Asset Management.
"Our base case scenario is BES may impose losses on the Tier
2 bonds. We now are in a world where state aid comes alongside
the bail-in of junior debt."
By midday on Tuesday, BES's Tier 2 bond had recovered some
of the losses and were back up to 81.6 but the price gyrations
reflect the uncertainty surrounding any potential
recapitalisation of the institution, after the Espirito Santo
family effectively lost control of the bank they founded.
"It's really hard to know just how bad the losses will be,"
said John Raymond, an analyst at CreditSights.
"The 3bn figure that is rumoured seems to be plausible but
it could equally be one, two or four billion. The Bank of
Portugal is once again reiterating the possibility of a private
sector solution and they believe there is demand for BES
While market participants believe losses will likely be
imposed on the bank's subordinated debt, questions remain over
its senior debt.
BES's unsecured bonds are still quoted at a low 90s cash
price indicating that investors are relatively confident their
investment is safe from a potential bail-in.
"Bail-in of senior debt might be a step too far at this
juncture," said Montague.
"But given that other Portuguese bank spreads are holding up
so well as markets take the view that BES is a one-off,
regulators might feel it is safe to haircut even senior debt."
Raymond agrees and says the unsecured bonds may be exposed.
"There's some chance they could find a way of partially
bailing-in the senior unsecured debt. The Portuguese government
has said that state support is available as a last resort but
it's hard to know if that means all non-subordinated bondholders
are fully protected in the process."
(Reporting by Aimee Donnellan; Editing by Helene Durand and