July 9, 2014 / 12:20 PM / 6 years ago

UPDATE 4-Portugal's Espirito Santo family eyes debt relief measures

* Founding family’s holding company to propose debt-restructuring

* Banco Espirito Santo shares finish down 4.7 pct

* Portuguese bond yields climb on concern over financial sector

* Moody’s slashes ESFG rating, cites exposure to holdings (Adds delayed debt payments to clients of Swiss bank)

By Andrei Khalip and Sergio Goncalves

LISBON, July 9 (Reuters) - Shares in Banco Espirito Santo (BES) fell on Wednesday and Portuguese bond yields jumped after reports of a proposed debt restructuring at a holding company of the bank’s founding family fuelled concerns over the country’s banking sector.

Espirito Santo International (ESI) has been under scrutiny since an audit found “material irregularities” at the Espirito Santo family holding company, prompting a slump in the shares of BES, Portugal’s largest listed bank by assets, on worries that the lender’s capital base could be affected.

Adding to the concerns, Banque Privee Espirito Santo (BPES), a small Swiss-based bank owned by another of the family’s holding companies, said that some of its clients who invested in ESI debt had not been reimbursed at maturity.

Two sources familiar with the situation at the Espirito Santo holding companies said on Wednesday that the family is considering debt-for-equity swaps and may ask for more time to repay debts as it grapples with the financial problems, adding that the restructuring plan is not yet ready.

One of the sources told Reuters that any operations to swap debt for equity or to extend maturities depended on acceptance by the Espirito Santo group’s bond holders and the legal safety of the restructuring process has to be assured first, including with authorities in Luxembourg and Portugal.

The source said that potential asset sales were also being considered in the medium term, but such measures required even more thorough preparation because creditors and shareholders could later challenge any sale of distressed assets.

BOND YIELDS LEAP

Analysts cited the potential risk for the wider Portuguese financial sector for the jump in bond yields, despite repeated government assertions that BES is isolated from the holding company’s problems and there is no risk to public finances.

Ten-year Portuguese bond yields were 14 basis points higher at 3.82 percent. They had earlier shot nearly 30 basis points higher. BES shares fell 8.2 percent but later recovered part of the losses to close 4.65 percent down at 0.615 euros. The shares of BES have lost almost half of their value in the past month.

Shares in Espirito Santo Financial Group (ESFG), a family holding company that owns a 25 percent stake in BES, finished down nearly 11 percent after Moody’s Investor Service cut its credit rating three notches to Caa2, citing its high exposure to ESI and Rioforte, another family company.

The downgrade to that high-risk level “reflects the entity’s deteriorating credit risk profile following the increase in its exposure to ESI and Rioforte to 2.35 billion euros at end-June 2014, from 1.37 billion at year-end 2013,” Moody’s said, warning of more possible downgrades if that exposure increases further.

Moody’s, which last month put BES’s credit rating on review for a possible downgrade, said that its concerns were magnified by the opacity surrounding ESI and intra-group links.

Weekly newspaper Expresso reported earlier on Wednesday that clients holding the debts of Espirito Santo family companies had received proposals to swap the debt for equity. The paper said 85 percent of commercial paper would be converted into equity and 15 percent would become long-term debt.

Separately, business daily Diario Economico reported that the holding company was likely to present a plan to authorities in Luxembourg before proposing it to creditors. ESI has 7 billion euros ($9.6 billion) in debt, the paper said.

Luxembourg authorities said last month that they had launched an investigation into ESI over alleged breaches of company law.

The Espirito Santo family has given no explanation for growing debts at its holding companies. Nobody at the family companies was immediately available to comment on Wednesday.

‘POTENTIAL REPERCUSSIONS’

“BES suffers from the same problem - it also has money invested in various holdings of the group and investors are concerned about the group’s solvency and potential repercussions,” said Paulo Rosa, a trader at Gobulling brokers.

Shares in Portugal Telecom also hit a record low and were down 5.5 percent on lingering concerns over its 897 million euro ($1.22 billion) investment in another Espirito Santo holding company, traders said.

Portuguese utility EDP, the shares of which fell 5.9 percent, denied it had any exposure to Espirito Santo group’s debt.

ESI’s debt has been the source of growing concerns around Banco Espirito Santo because the bank, like BPES, sold the commercial paper to its own clients. BES has said there is a provision of 700 million euros to pay back retail clients, while BPES says its own solvency is not affected. ($1 = 0.7331 Euros) (Writing by Axel Bugge; Editing by David Goodman)

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