News & Analysis

BES to sell €2.6bn project finance book

Ballooning funding costs are forcing the Portuguese bank to deleverage, leading it to sell a €2.6bn portfolio comprised mostly of project finance loans. However, sources close to BES say the bank will remain active in project finance.

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Banco Espirito Santo (BES), a Portuguese bank, is putting a large portfolio of project finance loans up for sale in early February in a bid to deleverage.

The €2.6 billion portfolio is comprised mostly of project finance loans although it will also include some corporate loans, explained a source close to the bank. The source said the portfolio will include several international loans which should appeal to the market, including loans provided for the UK’s M6 toll road, London City Airport, and Peel Ports.

BES, like other Portuguese banks, has been having a hard time financing itself ever since Portugal found itself in the crosshairs of international money markets. Reuters is saying the bank is unable to obtain funds on the bond market. The bank’s funding requirements are estimated at between 350 basis points and 500 basis points with BES’ five-year credit default swaps trading at 795 basis points.

This is creating a mismatch with a portfolio of project finance loans that carry margins in the region of 100 basis points. However, the source says the portfolio up for sale is only part of the bank’s project finance book, which he estimates to be up to three times bigger. Furthermore, BES is not looking to exit project finance, although it might be scaling down its lending activity until the worst of the crisis passes, the source said.

The Portuguese bank is not alone in choosing to monetise its project finance book in a bid to deleverage. Britain’s Royal Bank of Scotland (RBS), once one of the most active lenders in project finance, agreed to sell its project finance portfolio to Japan’s Bank of Tokyo-Mitsubishi last November. RBS’ portfolio was valued at £3.8 billion (€4.5 billion, $6.1 billion), although it is unclear if the bank was able to sell it at par. RBS sold its project finance loans as part of a programme of non-core asset divestments, after it sustained heavy losses and required government intervention in the wake of the financial crisis.

The source close to BES did not wish to comment on the bank’s chances of selling its project finance book at face value but traders quoted by Reuters did not expect BES to be able to do so.