DBRS: Espírito Santo Financial Group's Ratings Downgraded to CC, Under Review - Negative

DBRS, Inc. (DBRS) has today downgraded its ratings of Espírito Santo Financial Group, S.A. (ESFG or the Group), including the Group's Senior Long-Term Debt rating to CC from B and Dated Subordinated Debt rating to CC (low) from B (low). The Group's Short-Term Instruments rating is unchanged at R-5. All ratings remain Under Review with Negative Implications, where they were placed on July 11, 2014.

In lowering ESFG's ratings to CC, DBRS highlights its significant concerns regarding the rapid deterioration in the Group's liquidity position that has led it to sell today some of its stake in Banco Espírito Santo, S.A.(BES) in order to meet a margin call. DBRS also has concerns that if entities within the Espírito Santo Group (ES Group) continue to face financial difficulties, this could impact the repayment of these entities' obligations to various lenders, including subsidiaries of ESFG. Given the short-term nature of certain lending activities by ESFG subsidiaries and the related short-term funding, DBRS is cognizant of the elevated risk of default on these liabilities with ESFG's weakened liquidity position. Furthermore, the lack of transparency into the restructuring plan of ES Group, as well as the extent of financial difficulties in ES Group entities, contributes to a high level of uncertainty, pressuring ESFG's access to the wholesale markets and making future debt issuance challenging.

ESFG recently sold 4.99% of its stake in BES, leaving its interest in the bank at 20.1%. In May 2014, the Group issued EUR 200 million exchangeable bonds which require ESFG to maintain a minimum stake of 20% in BES, otherwise be subject to full redemption of the bonds at par. These bonds are convertible into BES shares at any time. Following this sale, DBRS views ESFG as having more limited access to additional liquid resources that could be utilized or sold to meet upcoming obligations.

Additionally, ESFG acts as a guarantor of the notes issued by Espírito Santo Financiere S.A. (ESFIL) under its Euro-Commercial Paper Programme and Euro Medium Term Note Programme. ESFIL has often lent to affiliated undertakings including Espírito Santo International (ESI) and other entities within the ES Group. While ESFIL audited 2013 financial statements have not been made public yet, DBRS is aware of the shorter-duration funding utilized within ESFIL that could be difficult to roll or repay at maturity given the vulnerable financial position of ES Group. If this were the case, it could trigger the guarantee with ESFG and potentially require a sizable amount of liquidity to support ESFIL.

DBRS remains concerned about the high level of uncertainty around the extent of intercompany exposures and linkages to other ES Group entities, directly or indirectly. DBRS views ESFG as being highly vulnerable to the deteriorating financial position of ES Group entities. The market has elevated concerns regarding ES Group entities and the pace of events continues to move very quickly. DBRS views ESFG's access to the wholesale markets as highly challenged.

Notes:
All figures in Euros (EUR) unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations (June 2014). Other applicable methodologies include the DBRS Criteria - Support Assessments for Banks and Banking Organisations (January 2014) and DBRS Criteria: Rating Bank Capital Securities - Subordinated, Hybrid, Preferred & Contingent Capital Securities (December 2013). These can be found at: http://www.dbrs.com/about/methodologies

The sources of information used for this rating include company documents and SNL Financial. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

Lead Analyst: Lisa Kwasnowski
Rating Committee Chair: Elisabeth Rudman
Initial Rating Date: April 20, 2011
Most Recent Rating Update: July 11, 2014

For additional information on this rating, please refer to the linking document under Related Research.