Banco Espirito Santo: All The Latest News

New comment
 

There has been an informational overload this morning, when as we reported previously, one after another bank scrambled to issue reports, some full of typos and clearly unvetted by compliance, calming the market and desperate to see all important confidence return to the peripheral market. Most of these notes have been nothing short of outright propaganda and disinformation, or a confirmation the analysts had zero idea what they were doing (case in point Goldman which had the stock at a Buy ratinguntil this morning, even as the stock was virtually wiped out in recent weeks).

Some, surprisingly, have done the work. Below we provide some of the less then insightful reports, as conveniently summarized by Bloomberg, and we conclude with perhaps the best piece so far - one written by Bank of America's Richard Thomas who alone among the sell-side penguin circus, was as close as he could be, to predicting this week's outcome.

First, the penguins, via Bloomberg, all of which are prayingf that the powers that be will simply step in and bail out the bank in case they are, as usual, wrong:

SocGen

  • BES is “money-good” at senior and LT2 level, but confidence on T2 has to be lower than senior
  • Expect the authorities to concentrate hard on avoiding the failure of a systemic bank
  • Base case, with 70% probability, is BES writes down EU1.2b worth of loans and intra-group exposures, leading to a fully loaded CET1 dropping to 8.75% from 10.5%; manageable
  • Investors who are long BES and concurring with our base case shouldn’t sell [ZH: and hence, those who don't concur, should sell]
  • Investors seeking a buying opportunity should take a closer look; don’t expect a quick snap back

    • Henderson

    • Expect Portuguese authorities to intervene and protect senior BES bondholders if bank’s situation becomes systemic
    • Situation at Banco Espirito Santo isn’t comparable with SNS in the Netherlands, or Austria’s Hypo Alpe

      • Cairn Capital

      • Senior BES credit spreads in the 500bps-700bps area start to look interesting for long risk opportunities, based on known information
      • Senior bonds remain protected by most regulators in Europe; losses at BES unlikely to exceed the layer of the capital structure sitting below senior bonds

        • Merrion

        • Given BES’ systemic importance, believe that the bank will be kept as a going concern
        • Fate of subordinated bonds likely to be determined by the magnitude of its parent losses and whether the Portuguese govt and/or the ESM are required to rescue the institution

          • BNP

        • Estimates there’s a 70% chance of an ESFG orderly resolution and 20% for a forced liquidation; in both cases the subordinated debt would be completely written off
        • 10% chance of a “going concern” scenario with intervention of cash-rich investors

        RBS

      • Weakened family control and a clearer separation between the BES and the group is positive for BES; should help reduce contagion from the group’s problem
      • Trading desk strategists remain negative on BES

      Barclays

    • ESI and Rioforte have been funding themselves with large placements of CP, which they are looking increasingly unlikely to be able to repay
    • With Portugal under a 3-yr troika program until two months ago, investors wonder why this wasn’t detected and dealt with earlier; this event casts some doubt about other latent problems in the system
    • Portuguese banks are relatively well positioned for AQR
    • Sees limited systemic implications for the Portuguese sovereign and the rest of the periphery

    SEB

  • More negative news on European banks likely in the coming mos as the ECB presents the results of its comprehensive assessment in Oct.
  • Portugal is wake-up call for mkts as asset pricing and positioning are vulnerable to negative shocks, especially in fundamentally weak countries
  • Developments in Portugal shouldn’t cause L-T risk aversion; country may apply for a similar support program that Spain had for its banking sector

read more

 

Banco Espirito Santo: A Portuguese Disaster, Not A European Crisis

The ratings agencies Moody’s and S&P have sharply downgraded the long-term debt ratings of the troubled Portuguese bank Banco Espirito Santo (BES). Both ratings agencies cite as the principal reasons for the downgrade the financial problems of BES’s ultimate parent, the Espirito Santo Group (ESG), and the possibility that the ring fence supposedly separating BES from its parents might prove insubstantial. Here is Moody’s explanation:

The downgrade of BES’s standalone financial strength rating to E/ca from E+/b1 reflects the risks associated with the bank’s direct exposure to the Espirito Santo Group and the likelihood that it may become liable for any further obligations stemming from the group. These concerns are heightened by the lack of information on BES’s ring-fencing against these risks.

S&P cites management instability within BES itself as well as its exposure to ESG:

We see persistent uncertainty regarding Banco Espirito Santo’s (BES) management, reflected in further recent announcements about proposed, yet-to-be approved changes to BES’ management team.

At the same time, negative reports on what increasingly appears a fragile, and possibly deteriorating, financial position of several entities within the Grupo Espirito Santo (GES), of which BES is a part, have intensified.

There is good reason for concern. As my colleague Raoul Ruparel explains, ESG’s complex and opaque corporate structure has enabled some exceedingly dodgy internal financing (my emphasis):

The ownership structure is a mess. BES is 25% owned by Espirito Santo Financial Group, which is 49% owned by Espirito Santo Irmaos SGPS SA, which in turn is fully owned by Rioforte Investments, which is fully owned by Espirito SantoInternational (ESI)…

The exposure between these levels is equally opaque, with the WSJ highlighting back in December that ESI was utilising different branches of its structure, including BES, to fund itself up to the tune of €6bn. Currently, BES has admitted it has the following exposure: €980m debt from Rioforte, but it also helped place €651m of debt issued by Rioforte and ESI to retail customers and €1.9bn to institutional clients.

This debt could essentially be worthless or massively written down. It’s not clear how open BES was about its conflicts of interest and if it misled buyers. There is a serious risk of lawsuits here. Citi has put potential total losses at €4.3bn, this could wipe out BES capital buffer and force it to raise a similar amount again.

This wouldn’t be merely a leaky ring-fence. It would be a gaping hole. BES is already poorly capitalized: despite raising additional capital after a bad result in the 2011 stress tests it is expected to do badly in the next round of stress tests scheduled for completion in October 2014. Bailing out its parent would be likely to mean bailing in its own creditors. Hence the downgrades.

But possibly not all of its creditors. For senior creditors, the downgrades are not as bad as they might have been. Moody’s maintained the ratings of the bank and its senior debt at a higher level than those of its immediate parent, Espirito Santo Financial Group (ESFG), which have been slashed to one notch above default. This is unusual: usually ratings of subsidiaries would be the same as those of their parents. But as Moody’s explains, BES is a bank – and banks can be recapitalized by their sovereigns (my emphasis):

The downgrade of BES’s senior debt and deposit ratings reflects (1) the downgrade of its standalone BCA to ca; and (2) Moody’s assessment of a high probability of support from the Portuguese government for the bank in case of need. The one notch differential between BES’s deposit and debt ratings, reflects our assessment of higher risk for senior debt holders versus the bank’s depositors.

S&P, too, says that its ratings are uplifted one notch in anticipation of sovereign support. So much for senior debt and depositor haircuts. The ratings agencies think that the Portuguese government will choose to recapitalize the bank directly rather than bail in senior creditors.

But the story for junior debt is quite different. Moody’s has downgraded subordinated debt and preferred stock to C – which is default. So Moody’s is not only certain that BES will need recapitalization, either because of parental debt obligations or because of its own weak capital position and risky balance sheet; it also expects that junior creditors will be bailed in. BES’s junior debt is now worthless.

This is as it should be. Junior debt holders should take the first hit after shareholders when a bank needs to be recapitalized. But the expectation of sovereign support for senior debt raises some very uncomfortable issues.

read more

New comment
Reason: