As Banco Espirito Santo SA (ELI:BES) tumbles today, a victim of the larger concerns regarding Portugal’s sovereign debt stability, the bank is announcing that Seth Klarman’s Baupost has recently acquired a 2.27 percent stake in the firm.
Espírito Santo International misses debt payments
On Tuesday Espírito Santo International, parent of BES, said that it had missed some debt payments, and on Thursday trading its stock was suspended as the stock market Lisbon, PSI Index, plummeted almost 4 percent. Banco Espirito Santo is Portugal’s second-largest lender, according to a report in the New York Times.
As its stock was tumbling, BES announced that pursuant to the Portuguese Securities Code (CVM), Baupost had acquired 48,100,000 on July 3, bringing the hedge fund’s total allocation to 127,398,763 shares, corresponding to a 2.27% stake.
It is unknown if Banco Espirito Santo SA (ELI:BES) announced the Baupost holdings in an effort to shore up confidence in the stock, as a press release announcing the holding is not required under Portuguese law.
On July 3 the stock was trading near 0.70 and today it is at 0.50, trading down nearly 17 percent on the day.
Bauposts investment in Banco Espirito Santo saves it from solvency
A spokesman at the Bank of Portugal was quoted in the Wall Street Journal as saying “the solvency situation of [Banco Espírito Santo] is solid and has been significantly reinforced with the recent capital increase.” The bank recently raised €1 billion ($1.4 billion) in a rights issue, the article noted.
The Wall Street Journal is reporting that on Thursday the turmoil spread elsewhere in Southern Europe, “illustrating how investors remain nervous about the fragility of the continent’s financial system.” Klarman’s Baupost is said to have made investments in EU debt and thus a play with the bank wouldn’t be considered style drift.
The issue in Portugal is renewing fears of a periphery debt crisis, as their government debt may have gone the way of Argentina in that it is unwieldy regardless and that a default is likely at some point.
Analysts at SocGen give a 70% likelihood to the bear scenario, which they describe as : BES writing “down €1.2b worth of loans and intra group exposures leading to a fully loaded CET1 dropping from 10.5% now to 8.75%.” Which the analysts believe would still be “Manageable.” However, SocGen notes that the ultimate Worse Case, which they give a 5% chance of happening would lead to the Bank needing government help, and certain sub debt bail in.