martes, 2 de septiembre de 2014

martes, septiembre 02, 2014

Goldman Sachs Made Big Loan to Banco Espírito Santo Shortly Before Collapse

Goldman Lost Money on $835 Million Loan, Earmarked for Venezuelan Project

By Margot Patrick, David Enrich and Patricia Kowsmann

Sept. 1, 2014 8:27 a.m. ET


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Goldman Sachs made the loan available to Banco Espírito Santo when it was unable to borrow money in the capital markets. Reuters


As Portuguese lender Banco Espírito Santo SA neared collapse this summer, it found a Wall Street ally to help it raise funds: Goldman Sachs Group Inc. 

Through a Luxembourg financing vehicle created by Goldman, Banco Espírito Santo received $835 million in July, according to a prospectus reviewed by The Wall Street Journal, a time when it was nearly impossible for the troubled lender to borrow directly in the capital markets.

At least some of that money was earmarked for an unusual destination: helping finance a refinery-construction project that a troubled Chinese company was running for Venezuela's state oil company. That oil company was a major creditor of companies in the Espírito Santo group.

The previously unreported Goldman deal offered a fleeting respite for Portugal's second-largest bank, which was struggling with a cash crunch and a month later was bailed out and broken up by the Portuguese central bank.

For Goldman, what started out looking like a lucrative opportunity became a money-loser. The Wall Street bank planned to sell the Espírito Santo debt to outside investors, but Goldman struggled to find buyers, according to a person familiar with the matter. The deal also drew Goldman near the eye of a Chinese political storm.

The transaction with Goldman is the latest instance of a Wall Street firm helping finance the Espírito Santo empire via off-balance-sheet vehicles before its demise. Portuguese regulators, for example, are investigating special-purpose vehicles, administered by Credit Suisse Group AG, that bought debt from Espírito Santo companies, the Journal reported last month.


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The London office of Goldman Sachs. The firm made the loan to Banco Espírito Santo through a Luxembourg-based vehicle. David Enrich/The Wall Street Journal


The latest twist in the Espírito Santo saga started last September, when Venezuela's state oil company, PDVSA Petroleo SA, known as PDVSA, awarded an $834 million contract to a Chinese company named Wison Engineering Services Co.

The contract, awarded just days after Chinese police detained Wison's controlling shareholder in an oil-industry corruption crackdown, was to help build an oil refinery in Puerto la Cruz on Venezuela's coast. It marked the biggest such contract in Latin America for a Chinese company and a rare international foray for Wison.

Banco Espírito Santo at the time had a substantial presence in Venezuela. It had opened a Caracas branch in January 2012, part of an ambitious global growth strategy, and served as banker to the Venezuelan government and PdVSA on multiple projects. A Banco Espírito Santo marketing presentation this year touted Venezuela as "an important market," noting the large community of Portuguese expatriates there.

PDVSA, meanwhile, held significant sums of Espírito Santo debt, making it one of the family-owned conglomerate's largest creditors, according to a person familiar with the relationship.

Banco Espírito Santo's financial problems were intensifying amid revelations of accounting problems at its parent company. Earlier this year, Banco Espírito Santo wrote to PDVSA seeking to reassure it that it would make good on its debts, according to a person familiar with the so-called comfort letter.

In May, Banco Espírito Santo approached Goldman to set up a special-purpose vehicle named Oak Finance Luxembourg SA. Banco Espírito Santo wanted to use the vehicle to raise dollar-denominated funding, which was growing scarce due to the bank's financial troubles, according to the person familiar with the relationship.

On July 3, locked out of bond markets and bleeding cash, Banco Espírito Santo borrowed $835 million from Oak Finance, according to the prospectus.

The borrowed funds were for purposes including trade financing for Wison Engineering on PDVSA's Deep Conversion Project, according to the loan agreement included in the Oak Finance prospectus.

Wison, which is listed on the Hong Kong stock exchange, has struggled following the police detention last September of its founder and controlling shareholder, Hua Bangsong. The 48-year-old Mr. Hua, later formally arrested on unspecified bribery charges, is one of several Chinese oil-industry executives and senior government officials detained in a broad corruption investigation. Chinese authorities haven't detailed specific allegations against the men. Mr. Hua hasn't made a court appearance and couldn't be reached for comment.

Wison says the investigation casts doubt on its ability to stay in business, noting last week that it is in default on some of its bank obligations. Nonetheless, Wison announced on July 21 that it had started its phase of construction activity on the Venezuelan refinery project, although it said it had subcontracted out the work to Chinese state-owned companies. Wison said in a statement that such subcontracting arrangements are normal and declined to comment about financial aspects of the project.

The same day that Banco Espírito Santo tapped the Oak Finance loan, Oak Finance issued $785 million of debt with annual interest rates of up to 3.5%. Goldman, which served as arranger and dealer for the transaction, bought the debt and hoped to sell it at a profit to outside investors.

At first, the arrangement appeared lucrative for Goldman. It stood to collect fees from Oak Finance that "will be materially higher than the fees and/or commissions typically charged in vanilla bond transactions," according to the prospectus.

But Banco Espírito Santo's financial difficulties made it hard for Goldman to attract buyers. During July, customers and creditors of the Portuguese lender yanked €3.35 billion ($4.4 billion) of funds, leaving the bank with "a severe liquidity shortfall," according to Portugal's central bank. The bank's shares plunged 80% before its Aug. 3 bailout.

Goldman eventually sold a slug of the Oak Finance debt, at a loss, to hedge funds that specialize in distressed debt, according to a person familiar with the market activity. Goldman is still holding some of the debt, which has lost value, this person said.

The fate of the Oak Finance debt is unclear. The sole collateral on the bonds is Oak Finance's $835 million loan to Banco Espírito Santo. Despite the bank's collapse, that loan is supposed to be repaid. It was among the liabilities transferred to Novo Banco, the "good bank" that Portugal carved out of Banco Espírito Santo when it was bailed out in August, according to Moody's Investors Service.


—James T. Areddy contributed to this item.

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