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

July 11 (Bloomberg) -- A missed debt payment by Portuguese holding company Espirito Santo International SA is creating turmoil in Brazil’s markets.

Bonds from BES Investimento do Brasil SA, the Brazilian unit of an Espirito Santo affiliate, jumped 6 percent today, rebounding from a record 8.6 percent drop in the past two days that was spurred by speculation its funding costs would soar. Oi SA notes gained 1.1 percent after falling 3.4 percent from June 30 through yesterday after merger partner Portugal Telecom SGPS SA revealed it held $1.2 billion of commercial paper issued by another company linked to Espirito Santo.

The securities are recovering on wagers any fallout from the missed debt payment will be contained and won’t imperil the creditworthiness of companies with links to Espirito Santo International. Because of Brazil’s cultural and economic ties to its former colonial ruler, it has the most exposure among Latin American countries to the crisis. Banco Espirito Santo SA, Portugal’s second-biggest bank by market value, sought to reassure investors by saying that it has a sufficient cash buffer to withstand any losses tied to the holding company.

“Initially there were many questions and concerns about how big the problems with the group in Portugal could be,” Andre Riva, an analyst at brokerage Grupo Bursatil Mexicano, said by phone from Sao Paulo. “The market considered it positive that they came public and showed the size of the exposure, which is not as big as many had imagined.”

BES Bonds

Lisbon-based Banco Espirito Santo said it had 1.18 billion euros ($1.6 billion) of loans, securities and other items linked to Grupo Espirito Santo as of June 30, according to a filing late yesterday. The lender also said that it has a buffer of 2.1 billion euros above the regulatory minimum following a capital increase in June.

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 had lost 8.59 cents over the last two days to 90.99 cents on the dollar, pushing yields up to 20.12 percent. The securities soared 5.45 cents today as of 12:42 p.m. in New York after the company said in an e-mailed response to questions yesterday that it is buying back its bonds after the drop. It declined to comment further.

S&P Statement

Oi’s $1.5 billion of notes due in 2022 tumbled last week and earlier this week after the company said that it wasn’t aware that Portugal Telecom had purchased 897 million euros ($1.2 billion) of the commercial notes issued by Rioforte. The companies unveiled plans to merge in October.

Oi’s bonds gained 1 cent today to 97.37 cents on the dollar, the highest since July 1.

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.

“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.

Complex Structure

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.

Market turmoil was fueled by the complex structure of the Espirito Santo group. The bank is 25 percent owned by Espirito Santo Financial Group SA. That in turn is 49 percent owned by Espirito Santo Irmaos SGPS SA, which is fully owned by Rioforte Investments SA. Rioforte’s owner is Espirito Santo International, the company that missed payments on commercial paper.

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

“As an investor, you end up explaining why you’re holding these companies’ debts when there’s so much uncertainty involved,” Michael Roche, an emerging-market strategist at Seaport Group LLC, said in a telephone interview. “In that kind of vacuum, capital tends to move onwards.”

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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