Portuguese investors holding structured products issued by Banco Espirito Santo (BES) are growing concerned about the future of their investments following the suspension of Banco Espirito Santo shares last Friday by the Lisbon Stock Exchange after tumbling more than 17%.
According to SRP data, Banco Espirito Santo has 110 outstanding products in the Portuguese market with an estimated volume of €1.21bn. Nine of them are fully capital-guaranteed deposits, also protected by the government’s deposit guarantee scheme, and two are insurance products.
A market source who spoke on condition of anonymity told SRP that at the moment the problem seems to be with one of the holding companies and not within BES as a bank, and that the impact in the domestic structured products market would be negligible.
“Products issued by BES could be worthless irrespective of the payout features as they’re still exposed to the credit risk of the issuer. [However] in 2011 during the sovereign debt crisis the Portuguese structured product market expanded by 15%,” said the source. “If BES goes insolvent those products issued as bonds will fall into the list of creditors and be treated along with all other creditors.”
The source added that the downside protection features embedded in structured products would also minimise the impact of a fall in value of the BES share, especially if they are structured deposits or have a downside protection barrier.
“The nature of having a capital-guaranteed product with credit risk covered by the deposit guarantee scheme provides a layer of security for investors seeking alternative exposure to traditional term deposits,” said the source. “Those issued as deposits have €100,000 guaranteed by the scheme; where the deposit amount is greater than €100,000 they will join the list of creditors for the amount above €100,000.”
In other European markets, such as Switzerland, the turmoil triggered last week has resulted in increased trading as investors seek protection from a possible bankruptcy.
Underlyings/payoffs
SRP data shows that there are ten outstanding products with a sales volume of €100m including seven issued in Portugal – five are structured notes and two 100% capital guaranteed deposits and three structures marketed in the Swiss market.
In addition, three out of the seven products launched in Portugal featuring the BES share in the underlying are credit default of BES, including the Notes db Rendimento BES series one and two, (€78m) issued in May and June 2011 by Deutsche Bank and the EUR CLN ESF Portugal 3Y issued by Banco Best – the online bank of Banco Espirito Santo – in May 2013.
There are also nine outstanding structured funds sold by the Spanish branch of Banco Espirito Santo, with an estimated volume of €126m.
Espirito Santo Financial Group (ESFG), the main shareholder in Portugal’s Banco Espirito Santo, requested the suspension of its shares and listed bonds last week after saying that it had to sell a 4.99% stake in the bank to repay a margin loan for one of its subsidiaries.