Espirito Santo Owner Sells Stake to Meet Margin Call on Loan

Jul 14, 2014 7:57 am ET

(Updates with stock decline in second paragraph.)

July 14 (Bloomberg) -- Banco Espirito Santo SA’s largest shareholder was forced to sell a stake in the Portuguese bank to meet a margin call on a loan, heightening market concerns about the group’s finances.

Espirito Santo Financial Group SA said today it sold 4.99 percent of the bank, reducing its holding to 20.1 percent, to meet the call on the loan taken out during the bank’s 1.04 billion-euro ($1.4 billion) rights offering in June. Banco Espirito Santo, Portugal’s second-biggest lender by market value, fell as much as 11.9 percent in Lisbon trading.

The sale came as Chief Executive Officer Ricardo Salgado, the 70-year-old great-grandson of the bank’s founder, was replaced by Vitor Bento after the Bank of Portugal urged the lender to speed up changes to its executive management. The Espirito Santo family’s hold on the bank slipped further as Moreira Rato, 42, head of the government’s debt agency, was named as chief financial officer.

Banco Espirito Santo roiled global markets on July 10 after another parent company, Espirito Santo International SA, missed some payments on commercial paper. The stock plunged 36 percent last week and its credit rating was cut by Standard & Poor’s and Moody’s Investors Service on July 11. German Chancellor Angela Merkel said at the weekend the market turmoil caused by the Portuguese bank underlined the euro region’s fragility.

Burden Sharing?

The shares were down 7.3 percent to 44.6 euro cents as of 12:35 p.m. in Lisbon today. Portuguese securities regulator CMVM has banned short-selling of the stock until the end of the day on July 15. The bank’s 7.125 percent subordinated notes fell 3.14 cents to 83.8 cents on the euro to yield 9.64 percent, according to data compiled by Bloomberg.

“Even if the bank is saved people tend to forget that it doesn’t mean bondholders will be saved too,” said John Raymond, an analyst at CreditSights Inc. In London. “This all points to some kind of burden sharing and the subordinated bonds are prime candidates.”

The lender is 20 percent owned by Espirito Santo Financial Group. That in turn is 49 percent owned by Espirito Santo Irmaos SGPS SA, which is fully owned by Rioforte Investments SA. Rioforte is fully owned by Espirito Santo International SA, the company that missed payments on commercial paper.

Espirito Santo Financial Group borrowed more than 100 million euros from Nomura to buy the shares in Banco Espirito Santo, Portuguese newspaper Expresso reported, without saying how it got the information. France’s Credit Agricole SA also owns a 14.6 percent stake.

Regulatory Buffer

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

“The example of a Portuguese bank showed us in the last few days how quickly the so-called markets are roiled, how quickly uncertainty returns and how fragile the whole euro construction still is,” Merkel said.

Problems in the Espirito Santo Group should not have a significant impact on Portugal’s credit metrics and the macroeconomic fundamentals of the country, Moody’s said last week.

Prime Minister

Portugal’s government debt agency plans to auction as much as 1.25 billion euros of treasury bills on July 16. It will also hold one or two bond auctions during the third quarter, it said on July 11.

Portuguese Prime Minister Pedro Passos Coelho has called on Grupo Espirito Santo to organize negotiations with creditors as soon as possible to ensure any failures in the group don’t have an economic impact.

New CEO Bento, 60, has served as chairman of payment- processing company SIBS SA. Moreira Rato, 42, hired as the bank’s CFO, is chief of Portugal’s government debt agency.

Choosing a CEO from outside the family is a milestone in the 94-year history of Banco Espirito Santo. The family lost control of their bank when it was seized by a revolutionary government in 1975, regaining it 16 years later.

--With assistance from John Glover in London.