Espirito Santo Bailout Wiping Out BES Bond Losses: Brazil Credit

Aug 06, 2014 7:43 am ET

Aug. 6 (Bloomberg) -- Portugal’s rescue of Banco Espirito Santo SA is poised to wipe out the losses suffered by investors in the bank’s Brazilian unit.

BES Investimento do Brasil SA’s $395 million of notes due 2015 have jumped 3 percent to 97.35 cents on the dollar since Portugal’s central bank took control of Banco Espirito Santo in a 4.9 billion euro ($6.6 billion) bailout on Aug. 3. After deepening losses at the parent pushed BES’s bonds to a two-year low of 90 cents in July, CreditSights Ltd. now says the notes will rebound to 100 cents.

The Sao Paulo-based lender’s bondholders are proving to be among of the winners of Bank of Portugal’s decision to shift Banco Espirito Santo’s deposit-taking operations and most of its assets to a new company that it will own outright. While the move means senior creditors such as BESI Brasil will enjoy the implicit support of the Portuguese central bank, lower-ranking bondholders and equity investors of Banco Espirito Santo are being saddled with losses as they’re left with the bank’s most troubled assets.

“The separation of the good and the bad assets is very positive for BESI Brasil,” Revisson Bonfim, who recommends investors buy the bonds as head of global emerging-market analysis at Sterne Agee & Leach Inc., said in an e-mailed response to questions.

Ratings Cut

In an Aug. 4 statement, BES Investimento’s press office said that it’s now part of the new and healthy bank created after the intervention and that its operations in Brazil won’t be affected by the changes.

On July 14, before the rescue, Moody’s Investors Service lowered BES Investimento’s rating one level to B1, four steps below investment grade, citing the weak financial position of its parent. Standard & Poor’s followed suit two days later, reducing the bank’s rating to B-.

Banco Espirito Santo, which tapped shareholders for funds less than two months ago, was forced to take public money after regulators uncovered potential losses on loans to other companies tied to Portugal’s Espirito Santo family. Shareholders and owners of the bank’s junior debt will be left with Banco Espirito Santo’s most “problematic” assets, including loans to other parts of the Espirito Santo Group and the lender’s stake in its Angolan unit, the Bank of Portugal said.

‘Definitely Positive’

Banco Espirito Santo’s euro-denominated subordinated bonds due 2023 have plunged 66 percent since the announcement while its senior debt due 2019 has rallied 9.9 percent, according to data compiled by Bloomberg.

“The deal is definitely positive for senior bondholders, since there had been uncertainty about whether senior debt would have to face losses,” John Raymond, an analyst at CreditSights, said in an e-mailed response to questions.

Lutz Roehmeyer, who helps manage about $1.1 billion of emerging-market assets at Landesbank Berlin Investiment, said BES Investimento may still be at risk.

“How sure can we be that all problems are solved now after the split-up?” he said in an e-mailed response to questions. “The bank showed that the accounting was very un-transparent.”

BES Investimento specializes in capital market services in the telecommunications, transportation, energy, food products and infrastructure industries, according to its website.

BES Investimento said July 10 that it started buying its bonds in the secondary market when their prices plunged.

“The news of the intervention in Europe is broadly supportive,” Paul Hollingworth, the head of research at the investment-banking unit of Banco do Brasil SA in London, said in an e-mailed response to questions.

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--With assistance from Francisco Marcelino in Sao Paulo and Joao Lima and Anabela Reis in Lisbon.