Mess for BES bondholders

IFR 2042 19 July to 25 July 2014
7 min read
Alex Chambers, Christopher Spink

Junior bondholders in Banco Espirito Santo may still be bailed in, even though Portuguese authorities are increasingly hopeful that private investors will inject fresh capital into the country’s second largest lender.

Last Tuesday, the cash price of BES’s €750m 2023 subordinated Tier 2 bonds, only issued last November, hit a fresh low of 69.50 before recovering 10 points by Friday morning. That is still way below the 110 level of early June.

The gyrations reflect the uncertainty surrounding any potential recapitalisation of the institution, after the Espirito Santo family effectively lost control of the bank they founded.

Much of their ownership came through a string of holding companies, many of which are also believed to have received loans from the bank. One such entity, Rioforte, last Tuesday failed to repay over US$1bn due to Portugal Telecom for notes it had earlier issued to the telecoms group.

Existing investors in BES may now be reluctant to stump up fresh capital. Just last month, a €1.05bn rights issue was completed and since then the share price has more than halved to €0.41.

The major holding company through which the family stake was held, Espirito Santo Financial Group, was effectively forced to sell a 4.99% stake last Monday after Nomura, a joint bookrunner, demanded repayment of a €100m margin loan that had enabled ESFG to take up its rights.

That left the investor with 20.11% of the group. On the same day, Ricardo Espirito Santo Salgado was replaced as chief executive of BES by Vitor Bento on the advice of Portugal’s central bank. The head of the country’s debt management agency Joao Moreira Rato was made chief financial officer.

Bankers in London were considering whether they could advise the family on restructuring their various stakes. Rioforte was reported to be considering filing for creditor protection in Luxembourg.

Family fights

One potential investor said that making sense of the family machinations was crucial to any outside rescue. “There are brothers and cousins fighting. Everyone is looking for clarification on whether some parts of the family holdings will file for creditor protection,” said the investor.

A family-led rescue could still not be discounted, said the investor. However, that might no longer be welcomed by the Bank of Portugal following revelations of cross-holdings and loans between the bank and the family-controlled holding vehicles.

The opaque nature of the group could also put off fresh investors. “There are still many unknowns. The capital hole could be as little as €1bn or as much as €6bn. Investors are right to be cautious before investing in this situation,” said one senior FIG banker.

The banker added that new private investors might only be prepared to invest if the subordinated bondholders shared the costs of recapitalising the institution, should the hole be sizeable.

“It’s definitely possible that the Tier 2 bonds would be wiped out,” said a DCM syndicate banker. “Investors are really struggling to believe the numbers, as it’s very hard to speculate just how much will be enough to sort out the problem.”

”There are brothers and cousins fighting. Everyone is looking for clarification on whether some parts of the family holdings will file for creditor protection”

Much will depend on how exposed BES is to the wider group. According to CreditSights, the banks has €1.2bn of direct exposure to the Espirito Santo group, guarantees written on €641m of ES group securities and potential exposure to a further €212m of securities sold by ESFG to BES clients.

BES is also exposed to €2bn of ES group debt securities held by institutional clients, which are not guaranteed but could give rise to claims by the clients, CreditSights says.

It is also exposed to a loan portfolio in Angola totalling €6.1bn, of which €4.2bn is covered by a guarantee from the country’s government. According to CreditSights, this guarantee has determined loan-loss provisioning policy, but its exact status – including the permanence of the guarantee beyond 2015 – is not clear. It also owns equity in Angolan subsidiary Banco Espirito Santo Angola of €663m.

Two weeks ago, BES said it had €2.1bn in capital above regulatory minimums. But if the above liabilities crystallise, then that could quite quickly be wiped out, requiring contributions from creditors or new shareholders.

This could place the bank’s subordinated capital in the fulcrum of any restructuring before new investors are prepared to inject new equity.

Bond trading

Bankers reported that some €150m of BES’s Tier 2 debt has been traded in the past week, which makes up 20% of the deal size.

One insider said there are more sellers than buyers, with many investors unwilling to ride the uncertainty. Hedge funds and family offices are taking the other side, believing the lender’s assurances about its capital position, which have been vigorously supported by the government and central bank.

“People can speculate but it’s hard to believe that a prime minister and or governor of a central bank can say three times that a bank is adequately capitalised and be wrong,” said an adviser.

“But it is a very complex group and the holding structures make people nervous. The prime minister wants a private solution to a private problem. If this gets solved privately, this is a huge victory for the system.”

While the Tier 2 debt looks to be at risk, bankers believe that BES’s senior unsecured bonds are safe for now – something reflected in the fact that the senior debt is still trading in the 90s.

On Friday, the governor of the Bank of Portugal Carlos Costa told a parliamentary committee that a private rescue looked feasible.

“Preliminary contact between BES and international investment banks, as well as interest shown by various entities, investment funds and European banks, show that it is very probable that there could be a private solution to reinforcing capital,” he said.

Reports have suggested that Credit Agricole, which has a 15% stake in BES, and Santander as well as other Portuguese banks, could contribute.

Banco Espirito Santo