Developments at Banco Espirito Santo are Credit Negative for It, Other Portuguese
Banks and for Portugal Telecom
On Wednesday, certain subsidiaries of Espirito Santo International (ESI, unrated) announced the
restructuring of maturing debt that otherwise they would not have been able to repay. The defaults exposed
the precarious financial health of ESI and its various subsidiaries.
These subsidiaries include Banco Espirito Santo, S.A. (BES, B2 review for downgrade, E/ca stable11). BES
has balance-sheet exposure of at least €1.2 billion (17% of BES core equity Tier 1 capital) to some of the
ESI subsidiaries that defaulted on their obligations last week. Our ratings for BES had been on review for
downgrade since 26 June, and we made downgrades Friday.
The problems also affect the BES 25.1% shareholder and ESI indirect subsidiary Espirito Santo Financial
Group S.A. (ESFG, Caa2 review for downgrade). We downgraded ESFG Wednesday. Its ratings had also
been on review for downgrade since 26 June.
Although these developments are unique to BES, they challenge the nascent improvement in confidence in
Portugal’s banking sector and the ability of other Portuguese banks to fund themselves, at least while the
issue is roiling capital markets.
The problems are also credit negative for Portugal Telecom, SGPS, S.A. (Baa3 negative) which is 10%
owned by BES and which owns €897 million of commercial paper issued by Rio Forte Investments, S.A,
another subsidiary of ESI.
However, the situation is unlikely to jeopardize the Portuguese sovereign‘s (Ba2 review for upgrade)
improving fundamentals, as we commented on Friday. Moreover, other Portuguese corporate issuers
typically benefit from diversified sources of bank funding and banking services and are therefore also
unlikely to be significantly affected by developments at BES.
Banco Espirito Santo, S.A. Uncertainty about the entirety of BES’ direct or indirect exposure (be it via
credit, reputational or fiduciary risk) to ESI subsidiaries undermines confidence in BES’ financial strength.
This is despite BES’ €1.0 billion capital increase earlier this year and, as of end of March 2014, available
regulatory capital of €2.1 billion in excess of the 8% minimum regulatory common equity Tier 1 ratio
requirement.
The likelihood that the Portuguese government or bank regulator will intervene to sustain the viability of
BES has increased, and in that case, BES subordinated debtholders are clearly at risk of bail-in as a
condition for the European Commission to approve any systemic support. Because the European Bank
Recovery and Resolution Directive, which requires the bail-in of senior creditors, is not yet law in Portugal,
the bail-in of senior creditors is less likely.
Portuguese Banks. While these developments are idiosyncratic to BES, they undermine the improvement
in confidence in Portugal’s banking sector and reduce the ability of other Portuguese banks to fund
themselves, at least until investors have time to digest the implications of the situation at BES. Portuguese
banks only regained market access to capital in early 2014. This has enabled them to diminish solvency
pressures stemming from the system’s very weak profitability and asset quality. The problem at BES comes
as Portuguese banks face a potential need to raise capital ahead of the European Central Bank’s
comprehensive assessment. A bright spot is that Portuguese banks’ funding requirements have been reduced
by ongoing balance sheet deleveraging and increased deposits.
Portugal Telecom. On 30 June, Portugal Telecom announced that it owned €897 million in Rio Forte
Investments SA commercial paper: €847 million that matures 15 July and €50 million that matures 17 July.
Portugal Telecom also has €128 million of bank deposits at BES.
While credit negative, the effect of a default of Rio Forte Investments on Portugal Telecom debt holders is
diminished because obligations of Portugal Telecom’s finance subsidiary, Portugal Telecom International
Finance BV, have been fully and unconditionally guaranteed by Oi SA (Baa3 negative) as part of the
merger of Portugal Telecom’s operations into Oi SA.Oi has also acquired 100% of the stock of Portugal
Telecom principal operating subsidiaries and has merged Portugal Telecom’s treasury operations with its
own. This guarantee is not dependent upon the merger of PT SGPS, Portugal Telecom’s holding
company, with Oi SA. The only condition for the guarantee was the completion of Oi’s capital increase,
which has been successfully executed.
Rio Forte’s commercial paper owned by Portugal Telecom equals just over 20% of Oi’s total liquidity. In
addition, Portugal Telecom has available long-term committed lines of credit (€800 million) plus access to
Oi’s own liquidity to cover its debt maturities of approximately €1.3 billion and other expected cash
demands over the next 18 months. Portugal Telecom’s liquidity is further supported by additional bank
facilities, amounting to €470 million.
In terms of the ongoing merger between Oi SA and PT SGPS, we believe that if Rio Forte Investments SA
were to default on the commercial paper held by Portugal Telecom, Oi S.A. could delay the merger because
shareholders could challenge the share exchange terms of the provisionally agreed merger. However, the
guarantee extended to the bondholders would not be affected.
The Portuguese Sovereign. Portugal’s fiscal and economic situation has been improving over the past
quarters and the government has cash buffers of at least €15 billion at its disposal, including a cushion of
€6.4 billion that was set aside specifically for bank recapitalisation. Hence, any government capital support
for BES would not affect Portugal’s public debt ratio, which is nevertheless very high at close to 130% of
GDP. Although we believe that the situation at BES could potentially affect the budget deficit, it is unclear
at this stage whether such public capital support would be required. The key focus of our ongoing review
for upgrade of Portugal’s Ba2 government bond rating is the prospect of meaningful expenditure-focused
fiscal consolidation over the coming years. We will also take into account any further information regarding
the need for public capital support for BES.
ma dovrei essere ancora in tempo per raccattare qualcosa anche se a dire il vero i dubbi che mi portavo dietro l'entrata nella lt2 bes e che mi hanno impedito l'ingresso continuano a solleticarmi...forse è presto per entrare, in mezzo al fumo mi pare però che almeno 1 bilioncino nel bilancio di bes inizi ad essere messo in discussione...non è che poi bes abbia questi grossi paracaduti, non ho voglia di calcolarmi l'impatto in termini di caduta di cet1 ma mi pare che già da ora un intervento bes dovrà metterlo in preventivo...vediamo domani anzi oggi che quotazioni si vedono
