News Column

Moody's reviews Banco Espirito Santo's Ba3 ratings for downgrade

June 26, 2014



Moody's Investors Service has today placed on

review for downgrade the Ba3 long-term debt and deposit ratings of Banco

Espirito Santo, S.A. (BES). This rating action has been triggered by the

bank's corporate governance shortcomings, which are evidenced by the

unexpected announcement on 20 June 2014 of an extraordinary general

meeting at BES to redefine the bank's strategy, which will be accompanied

by changes to the bank's senior management structure. Moody's says that

concerns on the group's corporate governance developed initially after

the disclosure of Espirito Santo Financial Group's (ESFG, BES's holding

company) year-end 2013 accounts, when troubles of ESFG's main shareholder

Espirito Santo International (ESI, unrated) were revealed and the holding

company had to make and extraordinary provision of EUR700 million to

offset the potential losses stemming from this company.

This risk affects the bank's standalone baseline credit assessment (BCA),

currently b1, and the review will focus on whether the BCA should be

remapped to a lower range within the current E+ standalone bank financial

strength rating (BFSR) category, and which would result in the downgrade

of BES's debt and deposits ratings. The bank's short-term debt and

deposit ratings are affirmed at Not Prime.

At the same time, Moody's has also placed on review for downgrade the B2

long-term issuer rating of ESFG and has affirmed its short-term ratings

at Not Prime.

RATINGS RATIONALE

--- LOWERING OF BES's BCA

The possible lowering of BES's BCA is prompted by Moody's concerns on the

bank's corporate governance practices. The rating agency bases its view

on (1) the unexpected announcement on 20 June 2014 of an extraordinary

general meeting on 31 July 2014 to redefine the bank's strategy and that

will be accompanied by changes to BES's senior management structure; and

(2) risk of potential liabilities arising from ESI or any other group

asset for BES or its holding company ESFG, similar to the support that

was delivered by ESFG to this company.

The publication of ESFG's year-end 2013 accounts revealed an

extraordinary provision of EUR700 million to compensate for the potential

losses stemming from ESI, ESFG's major shareholder that was facing

significant financial difficulty. This provision was made to safeguard

retail investors holding commercial paper of ESI and that was distributed

by BES's commercial network, even though ESFG and BES are not liable for

the financial liabilities of ESI. Moody's acknowledges that almost all of

ESI's commercial paper has been repaid without requiring any usage of the

funds that guaranteed it. However, risks might arise in the future as the

rating agency lacks information on ESI's credit profile and the magnitude

of its financial problems.

Furthermore, the successful completion by BES during this month of a

EUR1.045 billion rights issue that has not been jeopardised by the

potential reputational issues derived from the troubles of ESI and

support delivered by ESFG, does not eliminate the rating agency's view

regarding the group's corporate governance. On 26 May 2014, Moody's

affirmed BES's ratings following the upgrade of the Portuguese sovereign

to Ba2 on review for upgrade (please refer to "Moody's affirms debt and

deposit ratings of 7 Portuguese banks further to sovereign upgrade"), but

stated that it will closely monitor any further negative development

deriving from the financial difficulties of ESI and that could challenge

the bank's credit profile. The recent announcement of changes in BES's

management structure raises questions on the current organisational

structure and inter-linkages between the group's assets, operations and

interests. The fact that EUR700 million support has been delivered by the

bank's holding company does not ring-fence BES's credit strength, as the

weakening of ESFG's credit profile could challenge its own financial

fundamentals, being the ESFG's main asset.

Moody's will assess (1) the composition of the bank's main governing

bodies after the changes approved by the proposed general meeting on 31

July 2014; (2) potential changes to the bank's strategy that might

result; (3) enhanced information on ESI's credit profile and likelihood

of materialisation of losses beyond the EUR700 million already provided

for; and (4) visibility on the group's commitment to support its assets

and interests outside any form of guarantee.

---REVIEW FOR DOWNGRADE OF BES's DEBT AND DEPOSIT RATINGS

The review for downgrade of BES's Ba3 long-term debt and deposit ratings

has been triggered by the conditions influencing the possible lowering of

its BCA. Moody's assigns a very high probability of systemic support for

the bank -- resulting in a one-notch uplift from the b1 BCA. However, a

lowering of the BCA would likely translate into a downgrade of the bank's

long-term ratings.

---REVIEW FOR DOWNGRADE OF ESFG's RATINGS

The review for downgrade of ESFG's B2 long-term issuer rating has been

triggered by the conditions influencing the possible lowering of BES's

BCA, its main operating company. ESFG's long-term issuer rating

incorporates Moody's view on the probability of support from BES, its

main operating company. The structural subordination of ESFG's creditors

is reflected in the one-notch differential between the issuer rating of

ESFG and BES's standalone BCA.

In concluding the review of ESFG's rating Moody's will incorporate (1)

the outcome of the potential lowering of BES's standalone BCA, and; (2)

risks of potential further support from ESFG to any of the group's

interests that could challenge its credit profile and therefore result in

a lower rating than the one stemming from its structural subordination to

BES.


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Source: EMBIN (Emerging Markets Business Information News)


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