Espírito Santo split into ‘good’ and ‘bad’ banks in €4.9bn rescue

Central bank leaves shareholders and junior bondholders holding only toxic assets

Portugal's Banco Espírito Santo has been split into "good" and "bad" banks as part of a €4.9 billion rescue of the distressed lender by the country's central bank that protects taxpayers and senior creditors but leaves shareholders and junior bondholders holding only toxic assets.

Junior bonds in the bank – once the country’s largest lender by market capitalisation – fell sharply yesterday after regulators announced the terms of the bailout.

The bank’s €750 million of 7.123 per cent subordinated bonds dropped 18.9 cent on the euro to 16.9 cent to yield 44.7 per cent in morning trading.

But with senior creditors protected, BES’s senior, unsecured 4 per cent notes surged 9.6 cent to 98.6 cent on the euro to yield 4.36 per cent.


Portugal’s government bonds also advanced on news of the rescue, with benchmark 10-year yields, which move inversely with prices, falling eight basis points to 3.63 per cent early yesterday. It was the first drop in 10-year yields for three days.

‘Well-oiled machine’

Holger Schmieding

, an analyst with Berenberg, said the rescue of BES, which has been split into good and bad banks, “shows once again that the systematic euro crisis is over. While the euro zone crisis still has issues, it now has a well-oiled machine to deal with them.”

Shares in BES, which have tumbled 89 per cent since a €1.04 billion capital increase in June, will remain suspended for an indefinite period. The bad bank, which retains the BES name, has been placed under central bank administration.

The Bank of Portugal's Resolution Fund will move Banco Espírito 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 sale.

Banco Espírito 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 Espírito 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.

Founding family

Banco Espírito Santo is 20 per cent owned by Espírito Santo Financial Group, part of a chain of companies linked to the bank’s founding family. The lender’s largest outside shareholders include France’s Crédit Agricole, owner of a 14.6 per cent stake, as well as Brazil’s Banco Bradesco, which has a 3.9 per cent holding.

The good bank created from BES’s healthy assets is not expected to trade on the stock market until it is sold in the coming months and rebranded.

The rescue, which will destroy much of the value of investments made by equity and subordinated debt holders, is seen as a test case for a tougher stance by EU regulators, who have promised to protect taxpayers from the cost of bailing out mismanaged banks.

– (Copyright the Financial Times Limited 2014/ Reuters)