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 The bonds were sold via a complex transatlantic scheme involving
companies in Panama and Europe, the people said. Much of the debt
ended up with Banco Espirito Santo and its customers, they added,
accelerating the financial woes that led to the lender’s state
bailout earlier this month.
The 11th-hour borrowing gambit uncovered by Reuters is being
examined by Portuguese financial regulators who are trying to
determine whether it was legally permissible, according to people
close to the examination.
It shines new light on the lengths to which Portugal’s biggest
corporate dynasty went to save their empire from collapse, mixing
family affairs with those of the country’s then largest listed bank,
in which until recently they were the single-largest shareholder.
The collapse of the 145-year-old Espirito Santo group has caused
turmoil in international markets and rocked Portugal’s political and
business world.
Regulators and prosecutors are examining possible fraudulent
behavior behind the fall. As part of their investigation, regulators
are looking into how the bonds issued in the first six months of the
year were packaged, marketed and sold to clients, according to the
people familiar with the examination.
Espirito Santo International (ESI), the family’s umbrella company,
is under court protection and could not be reached for comment.
Espirito Santo Financial Group (ESFG) <ESF.LS>, another family
company now under court protection, also could not be reached for
comment. Novo Banco, the new bank that has been created after Banco
Espirito Santo’s bailout, declined to comment on the bonds. The bank
pointed to previous statements in which it said all retail clients
who bought very short-term debt from Espirito Santo companies would
be repaid.
The Espirito Santo family’s woes became public in May, when it was
disclosed that ESI, which is based in Luxembourg, had serious
financial difficulties and accounting irregularities in its
accounts. ESI in turn owned a stake in ESFG, another
Luxembourg-based company that owned a large stake in Banco Espirito
Santo.
Portuguese regulators had been aware of the problems at the start of
the year and said later in public statements that they required the
family to pay back bank clients who had bought bonds in the troubled
family companies. Some 1.7 billion euros of short-term debt had been
sold to BES retail clients by the end of 2013, according to public
BES statements.
NEW BONDS
Under pressure to reimburse the bank’s clients, Espirito Santo group
companies created new debt for a total redemption value of 5 billion
euros, according to the people familiar with the transactions.
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Buyers of the bonds would have to wait for up to 40 years to get
paid back, but a lofty interest rate of 7 percent compensated them
for the delay, the people said. The bonds were also issued at a
"huge discount”, they added.
The bonds were first sold to ESFG unit ES Bank Panama (ESBP), which
then transferred the bonds to another family-linked company, these
people said. ESBP's operations in Panama City are currently closed,
and no one at the bank could be reached for comment. A spokesman for
Panama's banking regulator, the Superintendencia de Bancos de Panama
(SBP), said it was still analyzing the debt issue and could not
comment further for now.
The bonds were then repackaged into debt with redemption dates far
shorter than the original 40 years that was then sold to clients of
BES, the people said. To transform the long-term debt into
shorter-term debt, the family empire used so-called special purpose
entities. These entities are specially created firms often used to
hold and re-engineer debt for companies, allowing them to keep it
off their balance sheets.
In its first half accounts BES said it had taken heavy one-off
losses, including a 1.1 billion euro charge due to four previously
unknown special purpose entities that had issued bonds to BES
clients. At the time, the Bank of Portugal said the entities had not
been properly accounted for in the bank’s accounts, violating
Portuguese financial regulations.
The losses from the entities were a major factor in its total 3.6
billion euro half-year loss, which led Portuguese authorities on
Aug. 3 to announce a rescue package for BES, under which it has been
split into a good and bad bank.
The Espirito Santo family has applied for creditor protection for
most of their other companies, whose assets included hotels and
insurance companies.
($1 = 0.7580 euro)
(Editing by Alessandra Galloni and Will Waterman)
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