The Nationalisation of Banco Espirito Santo – The Aftermath

SUMMARY

The Bank of Portugal announced on Sunday 3 August 2014 that it applied its powers under the Decree law No 31/2012 of 10 February 2012 (the "Resolution Law") to split Banco Espirito Santo ("BES") into a "good bank" and "bad bank" (the "Restructuring") and to transfer certain of BES "good" assets and liabilities to "Novo Bank". Following the release by BES of its half year results, it was... (see full summary)

 
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August 11, 2014
Financial Industry Alert
11 August 2014
ALERT
The Nationalisation of Banco Espirito Santo – The
Aftermath
The Bank of Portugal announced on Sunday 3 August 2014 that it applied its powers under the Decree law No
31/2012 of 10 February 2012 (the "Resolution Law") to split Banco Espirito Santo ("BES") into a "good bank" and
"bad bank" (the "Restructuring") and to transfer certain of BES "good" assets and liabilities to "Novo Bank".
Following the release by BES of its half year results, it was apparent that the financial stability of BES was more
questionable than many had suspected. A rapid decline in BES’s share and subordinated bond price followed and on
the weekend of 2 and 3 August, the Bank of Portugal must have come to the conclusion that its earlier plea for a
private sector recapitalisation was unrealistic. On 3 August, the Bank of Portugal publicly announced the split which
left certain assets with BES, which also retained the subordinated debt. The senior bonds and many of the quality
assets of BES were transferred to Novo Bank.
In view of the European Central Bank's ongoing asset quality review, the BES case was seen as a test case in
Europe. This client alert looks at some of the recent history of the Espirito Santo group and BES and considers what
will happen in the aftermath of the nationalisation of BES and following the filing by certain Espirito Santo holding
companies for controlled management (gestion contrôlée) in Luxembourg. Specifically, this client alert considers:-
i) the background and recent history relating to BES and the Espirito Santo group;
ii) the limited legislative tools available to the Bank of Portugal under the Resolution Law;
iii) what the effects of the use of the Resolution Law will have on BES stakeholders; and
iv) what the next steps are likely to be in relation to Espirito Santo International ("ESI"), Rio Forte Investments ("Rio
Forte") Espirito Santo Financière SA ("ESFIL") and Espirito Santo Financial Group ("ESFG") that have filed for a
controlled management process in Luxembourg.
Background
BES, one of Portugal’s best known banks, is associated with the Espirito Santo family which indirectly owns a 20%
stake in BES through ESI and its subsidiaries. BES gave every appearance of navigating the banking crisis with
relative success given that it did not seek to draw down on any of the funds made available in the Troika programme
for Portugal. However, its exposure to the Espirito Santo group, amongst other things, has caused significant financial
woes for BES.

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