(Recasts with decision to stop selling debt; adds comment and
detail from controlling stakeholder, background )
By Axel Bugge
LISBON May 29 Portugal's Espirito Santo Group
(ESG) said on Thursday it will stop selling non-financial debt
to retail clients at Banco Espirito Santo (BES) after finding
"material irregularities" at one of its holding companies.
The unusual statement came after BES, Portugal's
largest listed bank, sold debt issued by troubled holding
company Espirito Santo International (ESI) through its branch
network to clients in the past few years.
The sale and unearthing of financial troubles at ESI
prompted BES to warn of "reputational risks" in the prospectus
it released last week ahead of a capital increase.
That has resulted in a focus on Portugal's Espirito Santo
family, which is one of the country's richest and controls BES
and many other assets through a number of complicated holding
companies. Members of the family sit on many different boards of
the various companies.
Espirito Santo Financial Group, which holds the family's
stake in BES, issued Thursday's statement and said it would
introduce changes across the group, including eliminating common
directors at ESI and other group companies.
It promised "total and final separation of the brands used
by each branch of the Espirito Santo Group and refraining from
selling to retail clients, directly or indirectly, any debt
issued by entities from the non-financial branch of GES."
The statement said a second audit of ESI's accounts has just
been concluded, which found an "extremely negative financial
It said the irregularities found affect "the completeness
and trustworthiness of its accounting records, consisting
notably in omissions in the accounting of liabilities in a
relevant amount, overvaluation of assets, non-recognition of
provisions for risks."
Among the changes to fix the situation, ESI will start
yearly consolidated accounts from 2014 onwards, it said.
ESI is a non-listed company registered in Luxembourg.
ESFG has guaranteed ESI's debt and took on a provision of
700 million euros last year to cover it. It said it was not
necessary to take on any further provisions.
"It is also important to note that the second phase of the
limited audit has not revealed any facts that would imply a
reinforcement of the above mentioned provision of 700 million
euros," ESFG said in the statement.
It said that at the end of December 2013 "the indirect
exposure of EFSG to ESI," through debt instruments, stood at
6.039 billion euros.
(Reporting by Axel Bugge; Editing by Leslie Adler)