The company which owns a quarter of Banco Espírito Santo (BES) slid a further 6% to an historic low after Moody's threatened to cut an already poor rating.
Pressure on the Espírito Santo Financial Group share price has intensified since April, when problems in the banking group started to become evident.
The Espírito Santo Financial Group holding company, largely owned by descendents of the founders, has seen over half of its value evaporate since January 2014.
The company whose principal asset is a 25.1% stake in Banco Espírito Santo started the year with a value close to €1 billion. At the close of business today the capitalisation of the group was just €439.6 million.
The scale of decline has been disastrous. Last Friday the shares lost 6.04%. On Monday they were down 5.85% and Tuesday, down 7.77%. Wednesday saw a small rise of 0.22% but today’s drop of 6.06% is a reflection of the behaviour of the BES boss Ricardo Salgado who oversaw the concealment of huge losses in cunningly worded accounts, a situation that had been going on since 2008.
In the past five trading days the shares have lost 23% and since the beginning of the year the loss amounts to 56.3%.
Moody's placed the rating of the group to "under review" for a possible cut. Today the rating already is at the fifth level of speculative investment, or 'junk' status.
Operating company BES was also warned of a possible worsening of its own credit rating.
The Espírito Santo Group has undergone a full audit, leading to the Bank of Portugal asking Ricardo Salgado to leave. His move from BES to chair the holding company was not seen in a positive light by the market - the hidden debts were referred to politely as ‘irregularities’ but the facts are that his duplicitous behaviour can not be smoothed over.
Following revelations of hidden debts the Bank of Portugal ordered the bank to make a provision for €700 million to offset undeclared losses.
However, Ricardo Salgado has said that there is to be an offer made to the minority shareholders in the Espírito Santo Group - rather cynically taking advantage of the low share price for which he is largely to blame. This may take the holding company private and not so much troubled by the Bank of Portugal’s oversight.
It gets worse...
In April Portugal Telecom decided to exchange corporate bonds held in Espírito Santo International for a similar amount in bonds issued by Rio Forte. Both companies are owned by Espírito Santo Group.
Portugal Telecom invested around €900 million in Espírito Santo International commercial paper, but in April decided to swap these securities for identical ones in Rio Forte. Portugal Telecom admission that it is funding its Espírito Santo Group, its largest shareholder, with €900 million and claims that this move was motivated by ‘liability management’ efforts in its merger with Brazilian company Oi.
All well and good, but the bonds acquired by PT expire in July/August 2014 when Rio Forte will have to repay the bonds plus interest.
PT's investment was made in these Espírito Santo Group companies as the Espírito Santo Group is PT’s largest shareholder, and what are friends for…? This investment by PT, and worries that it may not get its €900 million back, saw its share price drop by over 5% on Friday 25th June.
Meanwhile Espírito Santo International is technically bankrupt with debts exceeding €7 billion.
According to statements by the former BES accountant turned whistle-blower Cruz Machado, the accounts of Espírito Santo International have been falsified since 2008.
The Bank of Portugal enquiry found €1.3 billion in debt missing from the company accounts which for some reason is based in Luxembourg.
In the meantime Rio Forte has its own problems with high debt levels that need urgent refinancing and BES rapidly is running out of time and friends.
The BES image will never be the same. Former CEO Ricardo Salgado 'leaves with our blessings'…..the others will just have to clean up after him.
