Espirito Santo bank shares rally despite debt crisis

Shares in stricken Portuguese bank Banco Espirito Santo (BES) rallied sharply on Wednesday after the central bank reassured over prospects for a recapitalisation despite unpaid debt.

A key shareholder in BES, holding company Rioforte, failed to repay debt of 847 million euros ($1.15 billion) due on Tuesday, putting the banking group at risk of legal action, the unpaid creditor Portugal Telecom said.

Rioforte, a main shareholder in BES, is expected to file for bankruptcy protection in the next few days.

Two developments on Wednesday were the reassurance from the governor of the central bank Carlos Costa, and a statement by Portugal Telecom that it had reached a new agreement over a tie-up with Brazilian telecom company Oi which had been highly critical of the loan to Rioforte.

Under this new agreement, that loan which Oi was to have taken on will now be carried by PT. But PT’s interest in the new combined entity fall from 38.0 percent to 25.6 percent.

In remarks late on Tuesday reassuring on the outlook for BES, Costa said: “If a capital increase turns out to be necessary, owing to risks which we do not see at the moment, there will surely be shareholders who are interested.”

– Government bond issue successful –

The crisis surrounding the bank has been brewing for weeks since a hole appeared in the accounts of one of its cascade of holding companies amid allegations that financial problems had been covered up.

This led to a change of the management team at BES on Monday, a fall in the shares of rival banks and concern that the crisis could undermine the Portuguese financial system just two months after Portugal emerged from a debt bailout.

However, on Wednesday Portugal successfully placed sovereign debt to raise 1.25 billion euros. Bonds for six months were issued with a lower rate than at the last such issue, and 12-month bonds found buyers at a higher rate.

“Portugal has again raised short-term finance at good rates,” said Filipe Silva, bond strategist at Banco Carregosa. Other analysts say that the risks of the BES crisis spreading are limited so far.

However, in a statement early on Wednesday, PT warned that it would use every possible means against Rioforte and all related bodies to obtain repayment.

But a source close to the matter said Rioforte was set to seek protection from insolvency.

BES is the leading private bank in Portugal.

Rioforte is preparing to seek court protection from its creditors “within the next few days”, a source close to the matter told AFP late on Tuesday.

The crisis at BES has its origins in the discovery of a hole in the accounts of the overall holding company in the bank, called Espirito Santo International (ESI).

This led to the removal of the long-standing chief executive at the bank, Ricardo Salgado, who was replaced on Monday by an economist Vitor Bento.

Rioforte, which is based in Luxembourg, is expected to put forward a plan to restructure its balance sheet to the commercial court in Luxembourg with the aim of selling assets and raising funds, while being sheltered from creditors.

Rioforte owns 49 percent of Espirito Santo Financial Group (ESFG) which in turn is the main shareholder in BES with 20.1 percent alongside French bank Credit Agricole which has 14.6 percent.

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