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Rating Action:

Moodys' downgrades Espirito Santo Financial Group ratings to Caa2 from B2, ratings remain on review for downgrade

Global Credit Research - 09 Jul 2014

Madrid, July 09, 2014 -- Moody's Investors Service has today downgraded the long-term issuer and debt ratings of Espirito Santo Financial Group S.A. (ESFG) to Caa2 from B2. The entity's ratings remain on review for downgrade and the short-term ratings have been affirmed at Not Prime.

The downgrade reflects Moody's view of a higher credit risk profile for ESFG following the increase in ESFG's exposure to its indirect shareholders (Espirito Santo International (ESI) and Rioforte, both unrated) which it disclosed on 3 July 2014. Moody's concerns regarding ESFG's creditworthiness are heightened by the lack of transparency around both the Espirito Santo Group's financial position and the extent of intra-group linkages including ESFG's direct and indirect exposure to ESI.

For additional insight about our recent rating actions on ESFG please refer to "Moody's reviews Banco Espirito Santo's Ba3 ratings for downgrade" published on 26 June 2014 (https://www.moodys.com/research/PR_302552).

For a full list of affected ratings, please refer to the end of this press release.

RATINGS RATIONALE

--- LOWERING OF THE ISSUER RATINGS

The three notch downgrade of ESFG's issuer and long-term debt ratings to Caa2, reflects the entity's deteriorating credit risk profile following the increase in its exposure to ESI and Rioforte to EUR2.35 billion at end-June 2014 from EUR1.37 billion at year-end 2013. The financial troubles of these two companies have been the catalyst for the weakening of ESFG's creditworthiness in recent months. ESFG had already raised a EUR700 million provision at end-December 2013 against possible losses stemming from its commitment to safeguard retail customers of Banco Espirito Santo, S.A. (BES, Ba3/E+/b1 review for downgrade) against any losses experienced on their holdings of ESI's commercial paper. While that indirect exposure has diminished in recent months as the commercial paper has matured, ESFG's direct lending exposure to ESI and Rioforte has increased significantly over the period.

As well as heightening EFSG's vulnerability to the default of these companies, the increase raises concerns that its exposure may increase still further over the coming months, whether through direct lending or as a result of any further obligations stemming from Espirito Santo Group debt for which ESFG might choose to assume liability. Those concerns are magnified by the lack of transparency around the financial position of ESI and the lack of information from the Espirito Santo group on the extent of intra-group linkages including ESFG's direct and indirect exposure to ESI.

The continued review for downgrade of ESFG's rating will attempt to address that opacity and to obtain the information needed to understand the full extent of ESFG's current and potential future exposure to other parts of the Espirito Santo Group, and the risks associated with that exposure. The downward bias of the review reflects the downside risks to ESFG's rating that could stem from the conclusion of the review for downgrade of its operating company BES as well as the potential for its credit profile to deteriorate still further should more support need to be provided to any other Espirito Santo Group interests. The review of ESFG's issuer rating will also focus on (1) impact of the restructuring plan of the Espirito Santo Group, and (2) the implications of the change in the scope of supervision by Bank of Portugal announced on 5 July 2014 from ESFG to its operating company BES.

The increase in the rating differential between ESFG and its operating company BES to four notches reflects the rising risks to creditors highlighted above as well as the structural subordination of ESFG's creditors to those of the bank.

DOWNGRADE OF SUBORDINATED DEBT AND HYBRID RATINGS

The downgrade of ESFG's long-term issuer rating to Caa2 and further review for downgrade, has prompted the downgrade to Caa3 and further review for downgrade of its subordinated debt ratings and to C(hyb) of its preference shares.

WHAT COULD CHANGE THE RATING DOWN/UP

The ratings remain on review for downgrade, indicating downward pressure. In addition, a lowering of BES's stand alone credit assessment would likely lead to a downgrade of ESFG's issuer rating.

Upward pressure on ESFG's ratings is unlikely given the current review for downgrade.

LIST OF AFFECTED RATINGS

Downgrades:

..Issuer: ESFG International Limited

....Pref. Stock Non-cumulative Preferred Stock, Downgraded to C(hyb) from Caa2(hyb)

..Issuer: Espirito Santo Financial Group S.A.

.... Issuer Rating, Downgraded to Caa2 from B2; Placed Under Review for further Downgrade

....Multiple Seniority Medium-Term Note Program, Downgraded to (P)Caa2 from (P)B2; Placed Under Review for further Downgrade

....Multiple Seniority Medium-Term Note Program, Downgraded to (P)Caa3 from (P)B3; Placed Under Review for further Downgrade

....Subordinate Regular Bond/Debenture, Downgraded to Caa3 from B3; Placed Under Review for further Downgrade

....Senior Unsecured Conv./Exch. Bond/Debenture, Downgraded to Caa2 from B2; Placed Under Review for further Downgrade

..Issuer: Espirito Santo Financiere S.A.

....Senior Unsecured Medium-Term Note Program, Downgraded to (P)Caa2 from (P)B2; Placed Under Review for further Downgrade

....Senior Unsecured Regular Bond/Debenture Jun, Downgraded to Caa2 from B2; Placed Under Review for further Downgrade

Affirmations:

..Issuer: Banco Espirito Santo N. A. Capital, LLC

....Senior Unsecured Commercial Paper, Affirmed NP

..Issuer: Espirito Santo Financial Group S.A.

....Multiple Seniority Medium-Term Note Program, Affirmed (P)NP

....Senior Unsecured Commercial Paper, Affirmed NP

..Issuer: Espirito Santo Financiere S.A.

....Senior Unsecured Commercial Paper, Affirmed NP

....Senior Unsecured Medium-Term Note Program, Affirmed (P)NP

..Issuer: Espirito Santo Plc

....Senior Unsecured Commercial Paper, Affirmed NP

Outlooks:

Unchanged at Rating Under Review:

..Issuer: Espirito Santo Financial Group S.A.

..Issuer: Espirito Santo Financiere S.A.

No Outlook:

..Issuer: Banco Espirito Santo N. A. Capital, LLC

..Issuer: Espirito Santo Plc

..Issuer: ESFG International Limited

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

The below contact information is provided for information purposes only. Please see the ratings tab of the issuer page at www.moodys.com, for each of the ratings covered, Moody's disclosures on the lead analyst and the Moody's legal entity that has issued the ratings.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Maria Jose Mori
VP - Senior Credit Officer
Financial Institutions Group
Moody's Investors Service Espana, S.A.
Calle Principe de Vergara, 131, 6 Planta
Madrid 28002
Spain
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Johannes Felix Wassenberg
MD - Banking
Financial Institutions Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Espana, S.A.
Calle Principe de Vergara, 131, 6 Planta
Madrid 28002
Spain
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moodys' downgrades Espirito Santo Financial Group ratings to Caa2 from B2, ratings remain on review for downgrade
No Related Data.

 

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