Portugal uses EU bailout money in €4.9bn rescue of Espirito Santo bank

Portugal's central bank took control of Banco Espirito Santo, once the country's largest lender by market value, in a €4.9 billion bailout that will leave junior bondholders with losses.

The Bank of Portugal’s Resolution Fund will move Banco Espirito Santo’s deposit-taking operations and most of its assets to a new company, Novo Banco, which it will own outright.

The fund will finance the rescue with a Treasury loan to be repaid by Novo Banco’s eventual sale.

Subordinated debt plunged today as junior bondholders and shareholders will be left with the most “problematic” assets, including loans to other parts of the Espirito Santo Group and the lender’s stake in its Angolan operation, the central bank said yesterday.

Banco Espirito Santo, which tapped shareholders for funds less than two months ago, has been forced to take public money after regulators uncovered potential losses on loans to other companies tied to Portugal’s Espirito Santo family.

Bank of Portugal governor Carlos Costa had sought to find private investors to inject cash, and said government funds would only be a last resort.

The Portuguese government has about €6.4 billion remaining from its European Union-led bailout in 2011 to fund the injection.

“I was very surprised that they went down the route of a state bailout so quickly,” said Lutz Roehmeyer, who helps manage €10 billion including senior bonds of Banco Espirito Santo at Landesbank Berlin Investment.

“That suggests that the bank’s situation was much worse than described.” Bailing in “is the route the EU will take from now on,” he said.

The bank’s €750 million of 7.125 per cent subordinated bonds fell 15.3 cents on the euro to 20.5 cents to yield 40.7 per cent at 10.07am in Lisbon.

Its senior, unsecured 4 per cent notes surged 10.8 cents to 99.8 cents on the euro, to yield 4.06 per cent.

“Shareholders, subordinated debt holders, as well as board members or former board members directly involved in the more recent events, and not the taxpayers, will be called to shoulder the losses incurred by a banking business they failed to adequately oversee,” the Finance Ministry said in a statement.

Portugal’s benchmark PSI-20 stock index rose 0.3 per cent as of 10.01 am in Lisbon, after declining in the last four trading days.

Banco Comercial Portugues, the country's biggest bank by market value, rose 3.3 per cent.

Portugal’s 10-year bond yield fell eight basis points, or 0.08 percentage point, to 3.63 per cent.

Bloomberg