Portugal Announces $6.6 Billion Espirito Santo Rescue

Portugal’s central bank took control of Banco Espirito Santo SA, once the country’s largest lender by market value, in a 4.9 billion-euro ($6.6 billion) bailout that will leave junior bondholders with losses.

The Bank of Portugal’s Resolution Fund will move Banco Espirito Santo’s deposit-taking operations and most of its assets to a new company, Novo Banco, which it will own outright. The fund will finance the rescue with a Treasury loan to be repaid by Novo Banco’s eventual sale. Subordinated debt plunged today as junior bondholders and shareholders will be left with the most “problematic” assets, including loans to other parts of the Espirito Santo Group and the lender’s stake in its Angolan operation, the central bank said yesterday.

Banco Espirito Santo, which tapped shareholders for funds less than two months ago, has been forced to take public money after regulators uncovered potential losses on loans to other companies tied to Portugal’s Espirito Santo family. Bank of Portugal Governor Carlos Costa had sought to find private investors to inject cash, and said government funds would only be a last resort. The Portuguese government has about 6.4 billion euros remaining from its European Union-led bailout in 2011 to fund the injection.

“I was very surprised that they went down the route of a state bailout so quickly,” said Lutz Roehmeyer, who helps manage 10 billion euros including senior bonds of Banco Espirito Santo at Landesbank Berlin Investment. “That suggests that the bank’s situation was much worse than described.”

Bailing in “is the route the EU will take from now on,” he said.

‘Full Contribution’

The bank’s 750 million euros of 7.125 percent subordinated bonds fell 15.3 cents on the euro to 20.5 cents to yield 40.7 percent at 10:07 a.m. in Lisbon, according to data compiled by Bloomberg. Its senior, unsecured 4 percent notes surged 10.8 cents to 99.8 cents on the euro, to yield 4.06 percent.

“Shareholders, subordinated debt holders, as well as board members or former board members directly involved in the more recent events, and not the taxpayers, will be called to shoulder the losses incurred by a banking business they failed to adequately oversee,” the Finance Ministry said in a statement.

Portugal’s benchmark PSI-20 stock index rose 0.3 percent as of 10:01 a.m. in Lisbon, after declining in the last four trading days. Banco Comercial Portugues SA, the country’s biggest bank by market value, rose 3.3 percent.

Portugal’s 10-year bond yield fell eight basis points, or 0.08 percentage point, to 3.63 percent. Two-year yields fell to the lowest level since 1999.

“The government has been prompt in acting and that’s certainly a positive, that there’s quick intervention without much disruption,” David Costa, dean of faculty at Robert Kennedy College in Zurich, said in an interview with Bloomberg Television’s Mark Barton. Still, “the evolution of the banking sector isn’t over yet, there may be some other surprises.”

Shares of the lender plunged 73 percent in Lisbon last week to 12 euro cents, for a market value of 675 million euros, before the stock was suspended on Aug. 1.

“The full contribution of shareholders and of subordinated debt holders to the losses of Banco Espirito Santo will be ensured in accordance with the burden-sharing rules” set out in 2013, the European Commission said in a statement yesterday as it approved the plan.

Family Companies

Subordinated bonds have been hit by European regulators seeking to share the cost of resolving distressed banks with bondholders, with losses inflicted on holders of junior debt of lenders including Britain’s Co-Operative Bank Plc and Spain’s Bankia SA.

Banco Espirito Santo has 457 million euros of Tier 1 bonds, its most junior debt securities, and 853 million euros of more-senior Tier 2 bonds, making a total of about 1.3 billion euros, according to data compiled by Bloomberg. The lender has 13.5 billion euros of senior bonds and 4.63 billion euros of secured notes outstanding. All in all, it has 20.4 billion euros of bond debt outstanding, the data show.

Portugal accepted a bailout by the European Union and International Monetary Fund in 2011 as it lost access to market funding, and the country’s financial institutions faced a similar squeeze, though Banco Espirito Santo had returned to the bond market in November 2012.

The financial crisis took a toll on the lender as well as its competitors. It posted losses in 2011 and 2013, with a 517.6 million-euro loss last year. Shareholders hadn’t received dividends in three years.

Banco Espirito Santo is 20 percent owned by Espirito Santo Financial Group, part of a chain of companies linked to the bank’s founding family. The lender’s largest outside shareholders include France’s Credit Agricole SA, owner of a 14.6 percent stake, as well as Brazil’s Banco Bradesco SA, which has a 3.9 percent holding.

Banco Espirito Santo shares slumped 67 percent in July as three parent companies linked to the Espirito Santo family requested protection from creditors and concern grew that the bank may have to inject additional capital into its Angola unit.

Novo Banco’s managers, led by Chief Executive Officer Vitor Bento, will seek to find private investors to buy “significant” stakes in the bank in “an adequate time horizon,” according to the central bank.

Bento said in a statement that yesterday’s move removes key uncertainties around the bank and the lender is now stronger and safer than before.