Espirito Santo Financial Requests Protection From Creditors

Espirito Santo Financial Group SA, the owner of a 20 percent stake in Portuguese lender Banco Espirito Santo SA, is seeking protection from creditors under Luxembourg law as it’s unable to pay all its debts.

Espirito Santo Financial Group, or ESFG, made the request after concluding it’s “unable to meet its obligations under its commercial paper program and obligations associated with the company’s standalone debt obligations,” the Luxembourg-based company said in a regulatory filing.

Today’s request for protection from creditors is the third in a week from companies linked to the Espirito Santo family. Portuguese central bank Governor Carlos Costa has tried to reassure depositors and investors that Banco Espirito Santo can withstand any losses that may result from Grupo Espirito Santo’s difficulties after some of its units missed commercial paper payments.

Banco Espirito Santo, Portugal’s second-biggest bank by market value, will probably raise private funds to boost capital, Costa said on July 18, as talks with investment banks and investors indicate interest in the lender. The Bank of Portugal governor said last week he wants to avoid the need to tap the recapitalization fund for Portuguese lenders, which he calls “a last resort.”

U.S. stocks briefly pared gains just after 1 p.m. when ESFG said it was seeking protection from creditors. The S&P 500 slipped from about 1,989 at 1:03 p.m. to 1,987 six minutes later, a dip that was erased by 1:30 p.m. September futures on the Euro Stoxx 50 Index also slipped and recovered within 30 minutes.

ESFG ‘Isolated’

“This was an excuse to sell and it will be short-lived, it’s been determined that ESFG is isolated,” said Michael Block, chief equity strategist at New York-based Rhino Trading Partners LLC. “Although it will affect stakeholders, it’s been a slow motion train wreck and it’s hard to see why it should affect other things.”

Banco Espirito Santo shares rose 1.9 percent in Lisbon trading to close at 48.7 euro cents before ESFG’s announcement. The bank’s stock has dropped 48 percent this year, the worst performance in the Stoxx Europe 600 Index. ESFG’s shares and listed bonds on the Luxembourg and Euronext exchanges were suspended from trading on July 10.

ESFG yesterday said earlier requests by parent companies Espirito Santo International SA and Rioforte Investments SA to seek protection from creditors “will have a potentially negative impact.” ESFG on July 3 said that its exposure to Grupo Espirito Santo, including Espirito Santo International and Rioforte, was 2.35 billion euros ($3.16 billion) at the end of June.

Capital Buffer

Espirito Santo International fully owns Rioforte, which owns 100 percent of Espirito Santo Irmaos SGPS SA. That company owns 49 percent of ESFG, which owns the stake in lender Banco Espirito Santo. Grupo Espirito Santo includes businesses linked to the Espirito Santo family, descendants of the bank’s founder.

Banco Espirito Santo on July 10 said it had exposure of 1.18 billion euros to companies of Grupo Espirito Santo through loans, securities and other items, and was waiting for the release of that group’s restructuring plan to assess any potential losses. The lender also said it had a capital buffer of 2.1 billion euros above the regulatory minimum following a June capital increase.

The bank on July 18 said it has ensured the reimbursement at maturity of the capital invested by its non-institutional clients through commercial branch networks on all the commercial paper issued by Espirito Santo International and by Rioforte. Both Espirito Santo International and Rioforte missed some payments on commercial paper earlier this month.

Retail Clients

ESFG has issued a 700 million-euro guarantee to cover debt instruments issued by Grupo Espirito Santo companies, including Espirito Santo International and Rioforte, and distributed to Banco Espirito Santo retail clients, the bank said on July 10.

Banco Espirito Santo also said in the July 10 statement that its retail clients held 255 million euros of commercial paper issued by Espirito Santo International, 342 million euros of commercial paper issued by Rioforte, 44 million euros of commercial paper issued by Rioforte subsidiaries and 212 million euros of commercial paper and bonds issued by ESFG and its subsidiaries.

Banco Espirito Santo on July 22 said it picked Deutsche Bank AG to provide advice about how to strengthen its balance sheet. The Portuguese lender last month raised 1.04 billion euros in a rights offering, its second capital increase in two years.

(Adds stock market reaction in fifth paragraph, strategist’s comment in sixth.)
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