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BREAKINGVIEWS-Underwriters share blame in Portuguese bank fiasco
August 1, 2014 / 8:57 AM / 3 years ago

BREAKINGVIEWS-Underwriters share blame in Portuguese bank fiasco

(The authors are Reuters Breakingviews columnists. The opinions expressed are their own.)

By George Hay and Dominic Elliott

LONDON, Aug 1 (Reuters Breakingviews) - Underwriters share in the blame for the Banco Espirito Santo debacle. Following the revelation of a shock 3.6 billion euro first-half loss this week, the Portuguese bank’s shares now trade at less than a third of a 0.65 euro rights issue price. Morgan Stanley and UBS, which led the 1 billion euro equity raise in May, should expect customers to be angry.

Financial prospectuses are meant to offer comprehensive insight into the hazards of investing. The issuer’s questionable exposures, including their nature and scope, as well as any degree of concentration risk, all should be laid bare. Underwriters have a practical as well as a moral incentive to ensure advice from lawyers and auditors is watertight. After all, the banks are on the hook to buy the shares if other investors take fright.

Morgan Stanley, UBS and the other 14 syndicate banks involved can argue in court - if matters go that far - that they did just that with BES. The offering documents published two months ago outline concerns about Angola and just how BES parent company ESFG had guaranteed commercial paper issued by the uppermost holding company, ESI. Most of all, it makes clear that an independent auditor had identified irregularities in ESI accounts, and concluded that it was in a “serious financial condition.”

Given that investors backed the share issuance, underwriters can call it a simple case of caveat emptor. An investigation by Portuguese authorities into potentially illegal behavior at BES was only recently confirmed. What’s more, Portugal’s central bank, BES’s direct regulator, and the country’s stock exchange rubber-stamped the prospectus. Accountability spreads far and wide in this fiasco.

The banks, however, have a more obvious reputational risk at stake. Their role as intermediaries gives them responsibility to the issuer and investors alike. If buyers should have been more careful, Morgan Stanley and UBS arguably should have been even more so. The complex links between ESI and the rest of the empire were referenced in the prospectus. Ultimately, the financial institutions could have heeded their own warnings and chosen not to underwrite instead of putting their valued imprimatur on BES stock.


- Banco Espirito Santo on July 30 reported a loss of 3.6 billion euros and said it would need to raise fresh capital. The Bank of Portugal said senior BES officials had been suspended over suspected “harmful management” that may have contributed to the bank’s losses.

- An offering circular for BES’s earlier rights issue, published on May 20, cited “reputational risks for the BES Group associated with a potential deterioration or perceived deterioration of the financial position of Espírito Santo International, S.A. or its subsidiaries.”

- The circular also states that the financial condition of Espírito Santo International could have an adverse impact on the BES Group’s reputation and the market price of BES shares.

- Another risk factor cited was that a personal guarantee provided by the Angolan state in favour of BES’s Angolan operations, regarding transactions with Angolan companies, might not be renewed.

- Fees payable to underwriters were a maximum of 31 million euros, or 3 percent of the total deal.

- UBS, Morgan Stanley and BES’s own investment bank acted as joint global coordinators and bookrunners, and 14 other banks were also involved.

- UBS and Morgan Stanley declined to comment.

- BES offering circular

- Full prospectus (Portuguese)

- Reuters: BES edges closer to state aid as investors baulk at losses


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- For previous columns by the authors, Reuters customers can click on and

(Editing by Jeffrey Goldfarb and Sarah Bailey)

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