(Reuters) - Swiss company Eurofin was a key go-between in a complex scheme that used bonds of Portugal's Banco Espirito Santo via offshore companies to cover liabilities of the bank's founding family as its business empire crumbled, a regulator said on Tuesday.
Carlos Tavares, head of Portugal's securities market watchdog CMVM, told a parliament committee that the scheme that worked in the first half of 2014 involved heavily-discounted bonds that were later resold at about triple the initial price.
The committee is looking into the August rescue of Banco Espirito Santo (BES) by the state.
The debt scheme had increased BES's exposure to the Espirito Santo family liabilities in breach of central bank orders, causing a huge loss for BES and forcing the state to inject 4.9 billion euros in it. A working bank, Novo Banco, was carved out of BES, the country's second-largest lender, while toxic assets remained with BES that the authorities plan to wind down.
Tavares said the debt triangulation scheme had been detected by the auditing firm KPMG.
"These operations were concentrated in the first half of 2014. Eurofin was the intermediary and we suspect that it is an entity related to BES, although not formally," Tavares said.
According to media reports Espirito Santo Group companies held a 20 percent stake in Eurofin - a Lausanne-based finance and consulting services firm with an office in Porto - between 2004 and 2009. Nobody at Eurofin was available to comment.
BES issued very bonds with maturities of up to 40 years at a very low price of some nine percent of face value, Tavares said.
Later the bonds were resold via Eurofin to BES clients, either directly or using offshore special purpose vehicles that held the bonds, but issued shares and sold them to clients.
At that stage bonds were valued two to three times the issue price, with an implicit yield of 4 percent, below the initial yield of 7 percent.
"This price difference was kept by the counterparties (SPVs) that we have not fully identified," Tavares said. According to information obtained by the auditors, "the difference was used to repay debts of other Espirito Santo Group entities," he said.
In late August, Reuters exposed the Espirito Santo borrowing spree, worth around 5 billion euros in January-June, and other attempts to save the family empire that ignored central bank orders that the management stop mixing the lender's affairs with the family business