Key stakeholder in Banco Espirito Santo files for creditor protection

LISBON, July 18 Fri Jul 18, 2014 4:09pm EDT

LISBON, July 18 (Reuters) - Espirito Santo International (ESI), a holding company of Portugal's troubled banking clan, filed for creditor protection in Luxembourg on Friday, three days after ESI's subholding Rioforte failed to repay over $1 billion euros in debt.

"ESI is currently not able to meet its debt obligations, a material portion of which has matured," the Luxembourg-registered company said in a statement, adding that if its request for controlled management is accepted, all enforcement actions by creditors would be suspended.

"ESI believes that the controlled management regime will be in the best interest of its creditors, in a transparent and orderly disposal process under the control of the courts and the court appointed officers will enable the value of these assets to be enhanced as opposed to a massive and fast sale."

ESI is a holding company close to the top of a cascading ownership structure of the troubled Espirito Santo family empire. Sources told Reuters earlier this week that Rioforte had been preparing to file for creditor protection and it was not yet clear if a separate filing would be required. ESI owns 100 percent of Rioforte capital. (Reporting by Andrei Khalip; Editing by Robin Pomeroy)

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UPDATE 1-Spain gets more time to keep motorway debt off books-sources

Fri Jul 18, 2014 2:13pm EDT

(Adds details, background)

MADRID, July 18 (Reuters) - Creditors of a bankrupt Spanish motorway business delayed a meeting to decide whether to liquidate it on Friday, two sources close to the talks said, giving the government more time to find a way to prevent billions in debt going on to its books.

After more than a year of negotiations between ministries, banks and construction companies, the government has yet to find a way of saving nine bankrupt motorways, without debt of more than 4 billion euros ($5.4 billion) hitting its deficit.

If the creditors of the AP-36, a motorway owned by builders Ferrovial and Sacyr, had decided to put the business into liquidation, the government would have had to pay its debts of around 500 million euros under Spanish law.

The other eight could then follow suit.

"The judge has put off the meeting until the 19th of September," one of the sources said. The request was made by the counsel for the state, a legal body which represents the interests of the state, the sources said.

Spain has pledged to reduce its public deficit to about 3 percent of gross domestic product (GDP) by 2016, implying some 35 billion euros will have to be found in the three years from end-2013 to end-2016 to meet the target. A hit of 3 billion euros would make this challenging task even harder.

Under Spanish legislation drawn up more than 40 years ago, when a private motorway goes bust, the state has to repay owners for the cost of the land and the construction.

Spain wants to minimise the effect of any rescue on Europe-agreed deficit targets. The government has sought a way of funding its obligations through public debt, rather than through the government's budget deficit.

Ferrovial and Sacyr declined to comment. A spokeswoman for the Ministry of Public Works said the government was still working on a solution. She would not say if the government expected to reach a solution before Sept. 19.

Traffic on the nine toll roads, most of which connect the capital Madrid to outlying towns, has failed to reach targeted levels during a recession.

Banks holding debt linked to failed motorway companies of around 3.9 billion euros, with a further 470 million of debt with builders. The maximum hit for the deficit would be 3 billion euros, a government source said. ($1 = 0.7396 Euros) (Reporting by Sonya Dowsett; Editing by David Holmes)

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UPDATE 4-BES shareholder seeks creditor protection, woes spill to Angolan unit

Fri Jul 18, 2014 6:01pm EDT

* Espirito Santo family holding can't pay debts, wants controlled assets sale

* Angola central bank says BES's Angola unit needs capital increase

* Says unit needs capital to address 'bad' credit operations

* Portugal central bank says private investors could help BES (Recasts with filing for creditor protection)

By Shrikesh Laxmidas and Andrei Khalip

LISBON, July 18 (Reuters) - One of the holding companies of Portugal's Espirito Santo banking clan filed for creditor protection in Luxembourg on Friday and the business empire's problems also spilled over to Angola where the central bank said the local unit of Banco Espirito Santo would need more capital to deal with bad loans.

Banco Espirito Santo (BES), Portugal's largest-listed lender, is under scrutiny from investors and regulators after disclosures of financial irregularities at Espirito Santo International, or ESI, the entity that sought creditor protection.

Its problems have raised the possibility of destabilising losses at the bank. ESI, which is registered in Luxembourg, indirectly holds the largest stake in BES, at 20.1 percent.

ESI said it is "currently not able to meet its debt obligations, a material portion of which have matured".

The announcement comes three days after conglomerate Rioforte, an ESI subholding, failed to repay over $1 billion euros in debt to Portugal Telecom, forcing it to take a cut in its stake in a merger with its Brazilian rival, Grupo Oi .

ESI said in a statement that if its request for controlled management is accepted, all enforcement actions by creditors would be suspended.

That should allow it to sell assets in an orderly fashion under the control of the courts, "to enable the value of these assets to be enhanced as opposed to a massive and fast sale."

ESI sits at the top of a complex cascading ownership structure of the family empire.

Sources told Reuters earlier this week that Rioforte - which owns assets around the world from hotels to farms to energy and hospitals - had been preparing to file for creditor protection and it was not yet clear if a separate filing would be required. ESI owns 100 percent of Rioforte capital.

BAD LOANS IN ANGOLA

Meanwhile, investors are watching potential liabilities at BES's 12-year-old Angolan unit as a fault line in an escalating affair that has already roiled global markets.

Banco Nacional de Angola Governor Jose de Lima Massano broke his government's silence on the matter, saying the BESA Angolan subsidiary had problems with its credit portfolio.

"We have operations in an irregular state, so 'bad' credit operations," Massano said in Thursday statements to the Angolan parliament, which were emailed to Reuters on Friday. He did not give further details on the type or extent of the bad credit.

Massano said the problems at BESA - which is majority owned by BES and is one of the most active lenders in Africa's second-largest oil producer - would not pose a threat to Angola's overall financial system.

"What is not at stake is either the guarantee of the deposits made with BESA, nor the responsibilities which this bank has with third parties, and much less the stability of our financial system," Massano said.

The government of Angola, a former Portuguese colony, in December guaranteed 4.2 billion euros, or 70 percent of the loan portfolio of BESA, which has links to the ruling elite and family of President Jose Eduardo dos Santos.

However, the guarantee lasts only until mid 2015, and some investors have expressed concern that it could be diluted by Angola's poor credit rating. Portugal's central bank says it is sure BESA would honour its commitments, but Luanda has not commented on the state guarantee.

Analysts say the Angolan state and state-linked companies are most likely to take a larger stake in BES Angola as BES has no capacity to subscribe to any capital increase.

Angola's disclosure comes as Portugal's establishment is trying to assure investors that problems with the Espirito Santo family empire - where at least two holding companies are suffering financial difficulties, imminent bankruptcy proceedings and restructurings - will not have a bearing on the southern European country's financial stability.

Earlier on Friday, the Bank of Portugal reiterated that BES, which raised capital in May, has sufficient capital reserves to make up for any losses and added that the lender would be able to tap private investors should it need a further boost.

"Preliminary contact between BES and international investment banks, as well as interest shown by various entities, investment funds and European banks show that it is very probable that there could be a private solution to reinforcing capital," central bank governor Carlos Costa told a parliamentary committee.

And Portugal's stock market regulator said the exposure of all foreign and local investors registered in Portugal to BES, its units, and the Espirito Santo family companies was minimal - 257 million euros - compared with the 13 billion euros managed by funds registered in the country.

Investors seemed to agree that BES could be a buying opportunity. One banker who has worked with BES said there was a lot of interest in the Portuguese bank.

Another banker said investors still believed in the broader recovery story of Portugal, which last spring emerged from the international bailout it took during the euro zone debt crisis.

TRICKLE DOWN TROUBLES

Still, the Espirito Santo clan's troubles have had a major trickle-down effect since they broke into the open. In May, BES told investors that independent auditors had found "irregularities" at ESI.

It said the problems had left ESI in a "serious financial situation" and that this would trigger "reputational risk" for BES. ESI owns a nearly 50 percent stake in another company, Espirito Santo Financial Group, or ESFG, which in turn owns the 20.1 percent stake in BES.

The potential losses at BES, which put its direct exposure to family holdings at 1.15 billion euros, prompted investor panic in equity markets across the world earlier this month.

The bank has said it has 2.1 billion euros in capital above minimum regulatory requirements to deal with any losses. But it has not been able to quantify the potential losses, because it is awaiting a restructuring of the Espirito Santo holding companies to do so. BES shares reversed losses of more than 3 percent to end up 0.24 percent at 0.42 euro after Costa's remarks, but have lost about 60 percent in a month.

Portuguese prosecutors said on Friday they were investigating the family's web of businesses, and a group of investors are preparing to file a lawsuit over the unpaid debt of one of its companies.

Portugal Telecom has also been caught up in the Espirito Santo woes due to its exposure to Rioforte and its shares have plummeted to all time lows. Its shares lost 1.76 percent on Friday, and are down about 40 percent since mid June.

Portuguese Telecom executives are now under fire for making the loan in the first place. People familiar with the talks that led to the loan said PT executives knew the Espirito Santo family had financial problems when the telecom firm lent them the money in April.

PT also faces a lawsuit by several minority investors, expected to be filed on Friday, over its alleged failure to properly gauge the risks of the debt.

"The executive board had to observe the correct distribution of risks, a precaution that they failed to take, which resulted in a suicidal exposure," Octavio Viana, the head of investor association ATM and a representative of the shareholders, said. (Reporting by Andrei Khalip, Shrikesh Laxmidas, Sergio Goncalves and Freya Berry; Writing by Alessandra Galloni; Editing by Will Waterman and Alden Bentley)

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UPDATE 1-Spain gets more time to keep motorway debt off books-sources

Fri Jul 18, 2014 2:13pm EDT

(Adds details, background)

MADRID, July 18 (Reuters) - Creditors of a bankrupt Spanish motorway business delayed a meeting to decide whether to liquidate it on Friday, two sources close to the talks said, giving the government more time to find a way to prevent billions in debt going on to its books.

After more than a year of negotiations between ministries, banks and construction companies, the government has yet to find a way of saving nine bankrupt motorways, without debt of more than 4 billion euros ($5.4 billion) hitting its deficit.

If the creditors of the AP-36, a motorway owned by builders Ferrovial and Sacyr, had decided to put the business into liquidation, the government would have had to pay its debts of around 500 million euros under Spanish law.

The other eight could then follow suit.

"The judge has put off the meeting until the 19th of September," one of the sources said. The request was made by the counsel for the state, a legal body which represents the interests of the state, the sources said.

Spain has pledged to reduce its public deficit to about 3 percent of gross domestic product (GDP) by 2016, implying some 35 billion euros will have to be found in the three years from end-2013 to end-2016 to meet the target. A hit of 3 billion euros would make this challenging task even harder.

Under Spanish legislation drawn up more than 40 years ago, when a private motorway goes bust, the state has to repay owners for the cost of the land and the construction.

Spain wants to minimise the effect of any rescue on Europe-agreed deficit targets. The government has sought a way of funding its obligations through public debt, rather than through the government's budget deficit.

Ferrovial and Sacyr declined to comment. A spokeswoman for the Ministry of Public Works said the government was still working on a solution. She would not say if the government expected to reach a solution before Sept. 19.

Traffic on the nine toll roads, most of which connect the capital Madrid to outlying towns, has failed to reach targeted levels during a recession.

Banks holding debt linked to failed motorway companies of around 3.9 billion euros, with a further 470 million of debt with builders. The maximum hit for the deficit would be 3 billion euros, a government source said. ($1 = 0.7396 Euros) (Reporting by Sonya Dowsett; Editing by David Holmes)

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Key stakeholder in Banco Espirito Santo files for creditor protection

LISBON, July 18 Fri Jul 18, 2014 4:09pm EDT

LISBON, July 18 (Reuters) - Espirito Santo International (ESI), a holding company of Portugal's troubled banking clan, filed for creditor protection in Luxembourg on Friday, three days after ESI's subholding Rioforte failed to repay over $1 billion euros in debt.

"ESI is currently not able to meet its debt obligations, a material portion of which has matured," the Luxembourg-registered company said in a statement, adding that if its request for controlled management is accepted, all enforcement actions by creditors would be suspended.

"ESI believes that the controlled management regime will be in the best interest of its creditors, in a transparent and orderly disposal process under the control of the courts and the court appointed officers will enable the value of these assets to be enhanced as opposed to a massive and fast sale."

ESI is a holding company close to the top of a cascading ownership structure of the troubled Espirito Santo family empire. Sources told Reuters earlier this week that Rioforte had been preparing to file for creditor protection and it was not yet clear if a separate filing would be required. ESI owns 100 percent of Rioforte capital. (Reporting by Andrei Khalip; Editing by Robin Pomeroy)

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UPDATE 4-BES shareholder seeks creditor protection, woes spill to Angolan unit

Fri Jul 18, 2014 6:01pm EDT

* Espirito Santo family holding can't pay debts, wants controlled assets sale

* Angola central bank says BES's Angola unit needs capital increase

* Says unit needs capital to address 'bad' credit operations

* Portugal central bank says private investors could help BES (Recasts with filing for creditor protection)

By Shrikesh Laxmidas and Andrei Khalip

LISBON, July 18 (Reuters) - One of the holding companies of Portugal's Espirito Santo banking clan filed for creditor protection in Luxembourg on Friday and the business empire's problems also spilled over to Angola where the central bank said the local unit of Banco Espirito Santo would need more capital to deal with bad loans.

Banco Espirito Santo (BES), Portugal's largest-listed lender, is under scrutiny from investors and regulators after disclosures of financial irregularities at Espirito Santo International, or ESI, the entity that sought creditor protection.

Its problems have raised the possibility of destabilising losses at the bank. ESI, which is registered in Luxembourg, indirectly holds the largest stake in BES, at 20.1 percent.

ESI said it is "currently not able to meet its debt obligations, a material portion of which have matured".

The announcement comes three days after conglomerate Rioforte, an ESI subholding, failed to repay over $1 billion euros in debt to Portugal Telecom, forcing it to take a cut in its stake in a merger with its Brazilian rival, Grupo Oi .

ESI said in a statement that if its request for controlled management is accepted, all enforcement actions by creditors would be suspended.

That should allow it to sell assets in an orderly fashion under the control of the courts, "to enable the value of these assets to be enhanced as opposed to a massive and fast sale."

ESI sits at the top of a complex cascading ownership structure of the family empire.

Sources told Reuters earlier this week that Rioforte - which owns assets around the world from hotels to farms to energy and hospitals - had been preparing to file for creditor protection and it was not yet clear if a separate filing would be required. ESI owns 100 percent of Rioforte capital.

BAD LOANS IN ANGOLA

Meanwhile, investors are watching potential liabilities at BES's 12-year-old Angolan unit as a fault line in an escalating affair that has already roiled global markets.

Banco Nacional de Angola Governor Jose de Lima Massano broke his government's silence on the matter, saying the BESA Angolan subsidiary had problems with its credit portfolio.

"We have operations in an irregular state, so 'bad' credit operations," Massano said in Thursday statements to the Angolan parliament, which were emailed to Reuters on Friday. He did not give further details on the type or extent of the bad credit.

Massano said the problems at BESA - which is majority owned by BES and is one of the most active lenders in Africa's second-largest oil producer - would not pose a threat to Angola's overall financial system.

"What is not at stake is either the guarantee of the deposits made with BESA, nor the responsibilities which this bank has with third parties, and much less the stability of our financial system," Massano said.

The government of Angola, a former Portuguese colony, in December guaranteed 4.2 billion euros, or 70 percent of the loan portfolio of BESA, which has links to the ruling elite and family of President Jose Eduardo dos Santos.

However, the guarantee lasts only until mid 2015, and some investors have expressed concern that it could be diluted by Angola's poor credit rating. Portugal's central bank says it is sure BESA would honour its commitments, but Luanda has not commented on the state guarantee.

Analysts say the Angolan state and state-linked companies are most likely to take a larger stake in BES Angola as BES has no capacity to subscribe to any capital increase.

Angola's disclosure comes as Portugal's establishment is trying to assure investors that problems with the Espirito Santo family empire - where at least two holding companies are suffering financial difficulties, imminent bankruptcy proceedings and restructurings - will not have a bearing on the southern European country's financial stability.

Earlier on Friday, the Bank of Portugal reiterated that BES, which raised capital in May, has sufficient capital reserves to make up for any losses and added that the lender would be able to tap private investors should it need a further boost.

"Preliminary contact between BES and international investment banks, as well as interest shown by various entities, investment funds and European banks show that it is very probable that there could be a private solution to reinforcing capital," central bank governor Carlos Costa told a parliamentary committee.

And Portugal's stock market regulator said the exposure of all foreign and local investors registered in Portugal to BES, its units, and the Espirito Santo family companies was minimal - 257 million euros - compared with the 13 billion euros managed by funds registered in the country.

Investors seemed to agree that BES could be a buying opportunity. One banker who has worked with BES said there was a lot of interest in the Portuguese bank.

Another banker said investors still believed in the broader recovery story of Portugal, which last spring emerged from the international bailout it took during the euro zone debt crisis.

TRICKLE DOWN TROUBLES

Still, the Espirito Santo clan's troubles have had a major trickle-down effect since they broke into the open. In May, BES told investors that independent auditors had found "irregularities" at ESI.

It said the problems had left ESI in a "serious financial situation" and that this would trigger "reputational risk" for BES. ESI owns a nearly 50 percent stake in another company, Espirito Santo Financial Group, or ESFG, which in turn owns the 20.1 percent stake in BES.

The potential losses at BES, which put its direct exposure to family holdings at 1.15 billion euros, prompted investor panic in equity markets across the world earlier this month.

The bank has said it has 2.1 billion euros in capital above minimum regulatory requirements to deal with any losses. But it has not been able to quantify the potential losses, because it is awaiting a restructuring of the Espirito Santo holding companies to do so. BES shares reversed losses of more than 3 percent to end up 0.24 percent at 0.42 euro after Costa's remarks, but have lost about 60 percent in a month.

Portuguese prosecutors said on Friday they were investigating the family's web of businesses, and a group of investors are preparing to file a lawsuit over the unpaid debt of one of its companies.

Portugal Telecom has also been caught up in the Espirito Santo woes due to its exposure to Rioforte and its shares have plummeted to all time lows. Its shares lost 1.76 percent on Friday, and are down about 40 percent since mid June.

Portuguese Telecom executives are now under fire for making the loan in the first place. People familiar with the talks that led to the loan said PT executives knew the Espirito Santo family had financial problems when the telecom firm lent them the money in April.

PT also faces a lawsuit by several minority investors, expected to be filed on Friday, over its alleged failure to properly gauge the risks of the debt.

"The executive board had to observe the correct distribution of risks, a precaution that they failed to take, which resulted in a suicidal exposure," Octavio Viana, the head of investor association ATM and a representative of the shareholders, said. (Reporting by Andrei Khalip, Shrikesh Laxmidas, Sergio Goncalves and Freya Berry; Writing by Alessandra Galloni; Editing by Will Waterman and Alden Bentley)

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UPDATE 1-Spain gets more time to keep motorway debt off books-sources

Fri Jul 18, 2014 2:13pm EDT

(Adds details, background)

MADRID, July 18 (Reuters) - Creditors of a bankrupt Spanish motorway business delayed a meeting to decide whether to liquidate it on Friday, two sources close to the talks said, giving the government more time to find a way to prevent billions in debt going on to its books.

After more than a year of negotiations between ministries, banks and construction companies, the government has yet to find a way of saving nine bankrupt motorways, without debt of more than 4 billion euros ($5.4 billion) hitting its deficit.

If the creditors of the AP-36, a motorway owned by builders Ferrovial and Sacyr, had decided to put the business into liquidation, the government would have had to pay its debts of around 500 million euros under Spanish law.

The other eight could then follow suit.

"The judge has put off the meeting until the 19th of September," one of the sources said. The request was made by the counsel for the state, a legal body which represents the interests of the state, the sources said.

Spain has pledged to reduce its public deficit to about 3 percent of gross domestic product (GDP) by 2016, implying some 35 billion euros will have to be found in the three years from end-2013 to end-2016 to meet the target. A hit of 3 billion euros would make this challenging task even harder.

Under Spanish legislation drawn up more than 40 years ago, when a private motorway goes bust, the state has to repay owners for the cost of the land and the construction.

Spain wants to minimise the effect of any rescue on Europe-agreed deficit targets. The government has sought a way of funding its obligations through public debt, rather than through the government's budget deficit.

Ferrovial and Sacyr declined to comment. A spokeswoman for the Ministry of Public Works said the government was still working on a solution. She would not say if the government expected to reach a solution before Sept. 19.

Traffic on the nine toll roads, most of which connect the capital Madrid to outlying towns, has failed to reach targeted levels during a recession.

Banks holding debt linked to failed motorway companies of around 3.9 billion euros, with a further 470 million of debt with builders. The maximum hit for the deficit would be 3 billion euros, a government source said. ($1 = 0.7396 Euros) (Reporting by Sonya Dowsett; Editing by David Holmes)

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Key stakeholder in Banco Espirito Santo files for creditor protection

LISBON, July 18 Fri Jul 18, 2014 4:09pm EDT

LISBON, July 18 (Reuters) - Espirito Santo International (ESI), a holding company of Portugal's troubled banking clan, filed for creditor protection in Luxembourg on Friday, three days after ESI's subholding Rioforte failed to repay over $1 billion euros in debt.

"ESI is currently not able to meet its debt obligations, a material portion of which has matured," the Luxembourg-registered company said in a statement, adding that if its request for controlled management is accepted, all enforcement actions by creditors would be suspended.

"ESI believes that the controlled management regime will be in the best interest of its creditors, in a transparent and orderly disposal process under the control of the courts and the court appointed officers will enable the value of these assets to be enhanced as opposed to a massive and fast sale."

ESI is a holding company close to the top of a cascading ownership structure of the troubled Espirito Santo family empire. Sources told Reuters earlier this week that Rioforte had been preparing to file for creditor protection and it was not yet clear if a separate filing would be required. ESI owns 100 percent of Rioforte capital. (Reporting by Andrei Khalip; Editing by Robin Pomeroy)

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UPDATE 4-BES shareholder seeks creditor protection, woes spill to Angolan unit

Fri Jul 18, 2014 6:01pm EDT

* Espirito Santo family holding can't pay debts, wants controlled assets sale

* Angola central bank says BES's Angola unit needs capital increase

* Says unit needs capital to address 'bad' credit operations

* Portugal central bank says private investors could help BES (Recasts with filing for creditor protection)

By Shrikesh Laxmidas and Andrei Khalip

LISBON, July 18 (Reuters) - One of the holding companies of Portugal's Espirito Santo banking clan filed for creditor protection in Luxembourg on Friday and the business empire's problems also spilled over to Angola where the central bank said the local unit of Banco Espirito Santo would need more capital to deal with bad loans.

Banco Espirito Santo (BES), Portugal's largest-listed lender, is under scrutiny from investors and regulators after disclosures of financial irregularities at Espirito Santo International, or ESI, the entity that sought creditor protection.

Its problems have raised the possibility of destabilising losses at the bank. ESI, which is registered in Luxembourg, indirectly holds the largest stake in BES, at 20.1 percent.

ESI said it is "currently not able to meet its debt obligations, a material portion of which have matured".

The announcement comes three days after conglomerate Rioforte, an ESI subholding, failed to repay over $1 billion euros in debt to Portugal Telecom, forcing it to take a cut in its stake in a merger with its Brazilian rival, Grupo Oi .

ESI said in a statement that if its request for controlled management is accepted, all enforcement actions by creditors would be suspended.

That should allow it to sell assets in an orderly fashion under the control of the courts, "to enable the value of these assets to be enhanced as opposed to a massive and fast sale."

ESI sits at the top of a complex cascading ownership structure of the family empire.

Sources told Reuters earlier this week that Rioforte - which owns assets around the world from hotels to farms to energy and hospitals - had been preparing to file for creditor protection and it was not yet clear if a separate filing would be required. ESI owns 100 percent of Rioforte capital.

BAD LOANS IN ANGOLA

Meanwhile, investors are watching potential liabilities at BES's 12-year-old Angolan unit as a fault line in an escalating affair that has already roiled global markets.

Banco Nacional de Angola Governor Jose de Lima Massano broke his government's silence on the matter, saying the BESA Angolan subsidiary had problems with its credit portfolio.

"We have operations in an irregular state, so 'bad' credit operations," Massano said in Thursday statements to the Angolan parliament, which were emailed to Reuters on Friday. He did not give further details on the type or extent of the bad credit.

Massano said the problems at BESA - which is majority owned by BES and is one of the most active lenders in Africa's second-largest oil producer - would not pose a threat to Angola's overall financial system.

"What is not at stake is either the guarantee of the deposits made with BESA, nor the responsibilities which this bank has with third parties, and much less the stability of our financial system," Massano said.

The government of Angola, a former Portuguese colony, in December guaranteed 4.2 billion euros, or 70 percent of the loan portfolio of BESA, which has links to the ruling elite and family of President Jose Eduardo dos Santos.

However, the guarantee lasts only until mid 2015, and some investors have expressed concern that it could be diluted by Angola's poor credit rating. Portugal's central bank says it is sure BESA would honour its commitments, but Luanda has not commented on the state guarantee.

Analysts say the Angolan state and state-linked companies are most likely to take a larger stake in BES Angola as BES has no capacity to subscribe to any capital increase.

Angola's disclosure comes as Portugal's establishment is trying to assure investors that problems with the Espirito Santo family empire - where at least two holding companies are suffering financial difficulties, imminent bankruptcy proceedings and restructurings - will not have a bearing on the southern European country's financial stability.

Earlier on Friday, the Bank of Portugal reiterated that BES, which raised capital in May, has sufficient capital reserves to make up for any losses and added that the lender would be able to tap private investors should it need a further boost.

"Preliminary contact between BES and international investment banks, as well as interest shown by various entities, investment funds and European banks show that it is very probable that there could be a private solution to reinforcing capital," central bank governor Carlos Costa told a parliamentary committee.

And Portugal's stock market regulator said the exposure of all foreign and local investors registered in Portugal to BES, its units, and the Espirito Santo family companies was minimal - 257 million euros - compared with the 13 billion euros managed by funds registered in the country.

Investors seemed to agree that BES could be a buying opportunity. One banker who has worked with BES said there was a lot of interest in the Portuguese bank.

Another banker said investors still believed in the broader recovery story of Portugal, which last spring emerged from the international bailout it took during the euro zone debt crisis.

TRICKLE DOWN TROUBLES

Still, the Espirito Santo clan's troubles have had a major trickle-down effect since they broke into the open. In May, BES told investors that independent auditors had found "irregularities" at ESI.

It said the problems had left ESI in a "serious financial situation" and that this would trigger "reputational risk" for BES. ESI owns a nearly 50 percent stake in another company, Espirito Santo Financial Group, or ESFG, which in turn owns the 20.1 percent stake in BES.

The potential losses at BES, which put its direct exposure to family holdings at 1.15 billion euros, prompted investor panic in equity markets across the world earlier this month.

The bank has said it has 2.1 billion euros in capital above minimum regulatory requirements to deal with any losses. But it has not been able to quantify the potential losses, because it is awaiting a restructuring of the Espirito Santo holding companies to do so. BES shares reversed losses of more than 3 percent to end up 0.24 percent at 0.42 euro after Costa's remarks, but have lost about 60 percent in a month.

Portuguese prosecutors said on Friday they were investigating the family's web of businesses, and a group of investors are preparing to file a lawsuit over the unpaid debt of one of its companies.

Portugal Telecom has also been caught up in the Espirito Santo woes due to its exposure to Rioforte and its shares have plummeted to all time lows. Its shares lost 1.76 percent on Friday, and are down about 40 percent since mid June.

Portuguese Telecom executives are now under fire for making the loan in the first place. People familiar with the talks that led to the loan said PT executives knew the Espirito Santo family had financial problems when the telecom firm lent them the money in April.

PT also faces a lawsuit by several minority investors, expected to be filed on Friday, over its alleged failure to properly gauge the risks of the debt.

"The executive board had to observe the correct distribution of risks, a precaution that they failed to take, which resulted in a suicidal exposure," Octavio Viana, the head of investor association ATM and a representative of the shareholders, said. (Reporting by Andrei Khalip, Shrikesh Laxmidas, Sergio Goncalves and Freya Berry; Writing by Alessandra Galloni; Editing by Will Waterman and Alden Bentley)

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UPDATE 3-Portugal Telecom may sue BES over unpaid family co's debt -sources

Thu Jul 17, 2014 5:34pm EDT

* S&P cuts BES rating to B-, warns on solvency risks

* Moody's cuts ESFG to Ca, cites default fears

* Portugal Telecom itself faces potential lawsuit

* BES-linked Rioforte holding company failed to repay $1 bln debt (Adds Portugal Telecom also likely to be sued)

By Sergio Goncalves and Andrei Khalip

LISBON, July 17 (Reuters) - Banco Espirito Santo (BES) could be sued over a loan that one of its founding family's holding companies failed to repay to Portugal Telecom, sources said on Thursday, as credit rating agencies downgraded the bank and its key shareholder.

Still, Finance Minister Maria Luis Albuquerque said the problems faced by BES, Portugal's largest listed bank, and the family's Espirito Santo Group did not pose an imminent danger to the country's financial system and reiterated the government did not plan to use public funds to help the bank.

But other risks loomed for BES following Tuesday's failure by the family's Rioforte company to repay 847 million euros ($1.15 billion) in debt to Portugal Telecom, which forced the telecom firm to take a cut in its stake of a merger with Brazil's Oi.

Sources close to the process told Reuters that Portugal Telecom was considering taking BES to court due to the non-payment as the commercial paper was bought with funds deposited at BES bank accounts, and was considered risk-free by the telecom firm.

A BES spokesman pointed to the bank's July 10 statement in which it said institutional clients "are considered qualified investors, in accordance with applicable legal criteria, hence with more capacity to assess risk".

Portugal Telecom declined to comment.

The company also faces a possible lawsuit by several minority shareholders, according to Diario Economico newspaper. It cited Octavio Viana, the head of ATM investor association, as saying they sought legal action against PT's board over the Rioforte investment that cut their stake in the merged company.

A lawsuit against BES could potentially open the door to other companies and investors suing it for selling them debts issued by the family's companies that were seen as being safe.

BES's shares have been hammered by fears in the past few weeks that its capital base could be undermined by the large debts of its founding family, which controlled and managed the bank until just a few weeks ago.

Ratings agencies warned of a potential impact on BES solvency from the Espirito Santo family's financial problems.

Standard & Poor's cut two notches from its long-term rating - to high-risk "B-" - for BES, saying its action reflected "our assessment that BES' capital position has weakened as a result of the higher losses that, according to our expectations, it is likely to face given its direct exposure to the Espirito Santo Financial Group (ESFG), to its subsidiaries, and to Rioforte."

The rating could be downgraded again, S&P said.

Sources have told Reuters that Rioforte is preparing to file for creditor protection in Luxembourg, where it is registered, to avoid a disorderly cut-price sale of its assets.

Moody's rating agency - which last week cut BES by three notches to "B3" - downgraded ESFG by two notches to "Ca", citing "the heightened risk of default for the group, combined with the potential for significant losses for bondholders".

ESFG is still the largest single shareholder in BES, with a 20 percent stake.

BES shares fell 7.9 percent to close at 0.419 euros, but still above the all-time low of 0.36 euros it hit on Tuesday.

"The rating cut is another blow in what has been a very negative news flow about the group, which stokes the uncertainty in the market, not allowing BES to have two straight sessions of gains," said Jose Novo, a trader at Orey iTrade brokers.

Shares in Portugal Telecom fell 6.8 percent to new all-time lows after another rater, Fitch, downgraded its and Oi's credit ratings by one notch to junk-level "BB+" due to the nonpayment by Rioforte, adding that "the recovery value is highly uncertain". Oi was down 5.5 percent in Sao Paulo.

"SERIOUS SITUATION"

Concerns surrounding the Espirito Santo banking clan, which founded BES more than a century ago, were sparked when an audit of a family holding company that owns Rioforte found what it called a "serious financial situation".

Those jitters spread last week to Europe and beyond, raising broader concerns about Portugal itself, just two months after it exited an international bailout deal, but have subsided somewhat after the government said the bank had enough capital to face its risks and it would not use public funds to help it.

"We are not preparing any recapitalisation of BES, and there are no indications that it may become necessary," Albuquerque told a parliament committee.

"The situation in the financial system has improved significantly with the reinforcement of capital ratios. Let's not confuse the whole financial system with one bank; it is important not to spread unjustified alarm."

The problems at BES initially pushed Portugal's bond yields higher, but in the past few days the yields have fallen again - to 3.73 percent on Thursday from Wednesday's 3.76 percent.

S&P said potential new impairments associated with BES's exposure ESFG and Rioforte "could be of a magnitude at least offsetting the benefit" from BES's recent capital increase.

BES raised 1.04 billion euros in a capital increase in May-June. It first reported unspecified "material irregularities" at Rioforte's parent company Espirito Santo International in the capital hike prospectus in late May.

BES's problems have wiped out 57 percent of its value in the past month, despite a 20 percent surge on Wednesday that analysts attributed to bargain-hunting and reports the bank's new CEO may bring in new shareholders to reinforce capital.

Bank of Portugal chief Carlos Costa has also said that although he sees no need for a capital increase at BES, there were shareholders interested in taking part in a BES capital increase if any additional capital were needed. ($1 = 0.7394 Euros) (Additional reporting by Filipa Lima; Editing by Sophie Walker and Will Waterman)

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