Espirito Santo Rocks Bonds From Sao Paulo to Rio: Brazil Credit

A missed debt payment by Portugal’s Espirito Santo International SA is wreaking havoc in Brazil.

Bonds from the Brazilian unit of Banco Espirito Santo SA fell a record 8.6 percent in the past two days on speculation its funding costs will soar. Oi SA (OIBR4) notes are down 3.4 percent since June 30, when merger partner Portugal Telecom SGPS SA first said it held $1.2 billion of commercial paper from a unit of Espirito Santo International.

Trading in Banco Espirito Santo was suspended yesterday as speculation mounted it will be unable to contain the fallout stemming from the missed debt payment by Espirito Santo International. The crisis so far is being felt in Brazil, which has cultural and economic ties to its former colonial ruler Portugal, more than in other Latin American countries. The 3.8 cent tumble in the 2015 bonds issued by Sao Paulo-based BES Investimento SA, the Brazilian unit of the Portuguese bank, was the biggest in emerging markets yesterday.

“What is being incorporated into the bond price movement is the degradation, if not withdrawal, of assumed parent company support,” Michael Roche, an emerging-market strategist at Seaport Group LLC, said in a telephone interview. “The fall in the associated Brazilian company bonds is more or less permanent.”

BES Bonds

Espirito Santo International missed payments on commercial paper to “a few clients,” according to a July 8 statement.

The $395 million of notes due 2015 from BES Investimento lost 8.59 cents over the last two days to 90.99 cents on the dollar. The drop pushed their yield up to 20.12 percent.

BES Investimento said in an e-mailed response to questions yesterday that it will seek to buy back its bonds after the drop. It declined to comment further.

Oi’s $1.5 billion of notes due in 2022 have lost 0.8 percent since S&P issued its statement, citing the risk of losses resulting from the Portugal Telecom investment. A day earlier, Oi, Brazil’s most-indebted phone company, said that it wasn’t aware that Portugal Telecom had purchased 897 million euros ($1.2 billion) of commercial notes issued by Rioforte. The companies unveiled plans to merge in October.

Portugal Telecom’s press office didn’t reply to a request for comment. An Oi spokeswoman declined to comment in e-mailed reply to questions.

Standard & Poor’s said July 4 it was considering a downgrade of Oi’s BBB- credit rating because of the potential losses for Portugal Telecom.

‘More Pressure’

“The market is considering the risk that the commercial notes will not get paid, and we understand there is a risk for Oi on that,” Luisa Vilhena, an analyst at S&P in Sao Paulo, said by phone. “A potential loss could result in taking longer for Oi to deleverage.”

Fitch Ratings has the same grade for Oi, and put the rating on negative watch in February.

“This is obviously not very reassuring for Oi and for bondholders,” Andreas Fischer, a Zurich-based money manager at Credit Suisse Group AG, said by phone. “There could be a downgrade to non-investment grade on the back of it, which could put even more pressure on the bonds in the short term.”

Robert Jaeger, a credit analyst at Societe Generale, said the sell-off in Oi has been exaggerated and prices should rise once volatility subsides.

“As things settle down, we continue to see scope for spread tightening to levels more commensurate with the ultimate credit impact,” he said in a e-mailed response to questions.

$1.6 Billion

Banco Espirito Santo said late yesterday it has exposure of $1.6 billion to companies of Grupo Espirito Santo and is waiting for the release of that group’s restructuring plan to assess any potential losses.

Bonds from BES Investimento and Oi will remain under pressure until the situation becomes clearer, according to Seaport Group.

“There’s never just one cockroach coming out of the closet,” Eric Conrads, a money manager who helps oversee $500 million in Latin American stocks at ING Groep NV, said by phone from New York. “It looks like there will be new ones.”

To contact the reporters on this story: Julia Leite in New York at; Filipe Pacheco in Sao Paulo at

To contact the editors responsible for this story: Brendan Walsh at; David Papadopoulos at Lester Pimentel

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