Espirito Slumps as Rioforte Said to Seek Creditor Protection

Rioforte Investments SA, a holding company for Portugal’s Banco Espirito Santo SA, plans to file for protection from creditors, according to a person familiar with the matter.

Rioforte, which was due to repay 847 million euros ($1.2 billion) owed to Portugal Telecom SGPS SA today, will seek shelter in the Luxembourg courts, said the person, who asked not to be identified because the plan is private. The bank’s shares earlier slumped as much as 20 percent while its 7.125 percent notes were down 11.4 percent.

Investors are concerned that financial problems within the Espirito Santo group will spill into the bank and bondholders may be made to take losses in a rescue. Rioforte holds a 49 percent stake in Luxembourg-based Espirito Santo Financial Group SA, which in turn owns 20 percent of Banco Espirito Santo.

“People are panicking, they’re concerned that potential losses are more significant than we’ve seen so far,” said Ariel Bezalel, who manages the $3.8 billion Jupiter Strategic Bond Fund. “You can quite easily see a situation where the subordinated bonds get impaired but that’s the risk you’re getting paid to take.”

Bezalel said he has “a very small position” in the lender’s subordinated notes and likes its short-dated senior debt.

Shares Slump

Shares in Portugal’s second-biggest bank by market value closed 14.6 percent lower at 38 euro cents in Lisbon. Its 7.125 percent notes due November 2023 dropped 9.38 cents to 70.4 cents, pushing the yield up to 12.46 percent.

Portugal Telecom shares have dropped on concern the Rioforte debt could impede its merger with Brazil's Oi SA. The Lisbon-based carrier slid 2.1 percent to 1.83 euros today. Oi fell 1.9 percent to 1.53 reais in Sao Paulo.

Global financial markets were roiled last week after another holding company in the group, Espirito Santo International SA, missed payments on commercial paper.

Officials at Rioforte and Portugal Telecom didn’t respond to telephone calls seeking comment on the commercial paper maturity. A spokesman for Banco Espirito Santo wasn’t immediately available to comment on the risk of bondholder losses at the bank.

The lender was the only one of the three biggest Portuguese banks not to seek help after the nation accepted a bailout by the European Union and the International Monetary Fund in 2011, with Banco BPI SA and Banco Comercial Portugues SA both requesting state aid. The financial crisis took its toll on Banco Espirito Santo, which hasn’t paid shareholder dividends for three years and posted a 517.6 million-euro loss last year.

‘Solid Capital’

“There is no reason that indicates there is a need for state intervention in a bank that has solid capital levels, that has a comfortable margin to face up to any contingencies,” Portuguese Prime Minister Pedro Passos Coelho said on July 11.

Banco Espirito Santo said last week it had exposure of 1.18 billion euros to companies of Grupo Espirito Santo through loans, securities and other items as of June 30. The lender said it’s waiting for the release of that group’s restructuring plan to assess any potential losses.

The cost of insuring against losses on Banco Espirito Santo debt surged to the highest since October today, with credit-default swaps jumping as much as 51 basis points to 504 basis points. The contracts closed at 475 basis points.

Espirito Santo Financial Group said yesterday it sold 4.99 percent of the bank to meet repayment obligations under a loan taken out during the lender’s 1.04 billion-euro rights offering in June. It can’t reduce its 20 percent stake any further because the shares back a 200 million-euro note exchangeable into the lender’s stock, the company said.

Bond Slump

Espirito Santo Financial’s 351 million euros of 6.875 percent subordinated bonds slumped to a record 6 cents from 10 cents yesterday. The notes were quoted at 100.2 cents on June 18, according to data compiled by Bloomberg.

Rioforte and Espirito Santo International are preparing requests for protection from creditors, Diario Economico reported today, without saying how it obtained the information. The group is also readying a restructuring plan that will be voted on at a Espirito Santo International shareholder meeting on July 29, the paper said.

“The direction the wind is blowing in is clear,” said Daniel Bjork, a fund manager at Swisscanto Asset Management in Zurich, which has more than $56 billion of assets. “If the current capital level is not enough, the question is how they would be able to recapitalize in the future.”