Obligation Banco Espirito Santo 3% ( XS0505141290 ) en USD

Banco Espirito Santo

99.5 % ▲

Portugal

XS0505141290 ( en USD )

3% par an ( paiement semestriel )

19/05/2015 - Obligation échue

Prospectus brochure de l'obligation Banco Espirito Santo XS0505141290 en USD 3%, échue

100 000 USD

500 000 000 USD

L'Obligation émise par Banco Espirito Santo ( Portugal ) , en USD, avec le code ISIN XS0505141290, paye un coupon de 3% par an.
Le paiement des coupons est semestriel et la maturité de l'Obligation est le 19/05/2015

Offering Circular dated 14 May 2010
BES Finance Ltd.
(incorporated with limited liability in the Cayman Islands)
500,000,000
3.00 per cent. Guaranteed Exchangeable Bonds due 2015
exchangeable into the common shares of EDP - Energias de Portugal, S.A.
(incorporated under the laws of Portugal),
unconditionally and irrevocably guaranteed by
Banco Espírito Santo, S.A.
(incorporated with limited liability in Portugal) (acting through its London branch)
Issue Price: 100.00 per cent.
The 500,000,000 3.00 per cent. Guaranteed Exchangeable Bonds due 2015 (the Bonds) will be issued by BES Finance
Ltd. (the Issuer) on 19 May 2010(the Closing Date) at an issue price of 100.00 per cent. of their principal amount (the Issue
Price). The payments of all amounts owing in respect of the Bonds will be unconditionally and irrevocably guaranteed by Banco
Espírito Santo, S.A., acting through its London Branch (the Guarantor) pursuant to the Trust Deed (as defined herein).
Unless previously exchanged, redeemed or purchased and cancelled, the Bonds will be redeemed by the Issuer on 19
May 2015 (the Maturity Date) at 100.00 per cent. of their principal amount. The Bonds are subject to redemption at the option
of the Issuer, in whole but not in part only, at their principal amount, together with interest accrued to the date of redemption,
at any time if 85 per cent. or more in aggregate principal amount of the Bonds issued have been exchanged, redeemed or
purchased and cancelled. In addition, the Issuer may, at its option, redeem all, but not some only, of the Bonds at any time at
their principal amount, together with any interest accrued to the date of redemption, in the event of certain tax changes. See
"Terms and Conditions of the Bonds Redemption and Purchase".
The Bonds will bear interest from (and including) 19 May 2010 at the rate of 3.00 per cent. per annum payable semi-
annually in arrear on 19 May and 19 November in each year, commencing on 19 November 2010. Payments on the Bonds
shall be made in Euro without deduction or withholding for or on account of any Portuguese or Cayman Islands taxes unless
required by law. In the event that any such deduction or withholding is required by law, the Issuer or the Guarantor, as the case
may be, will pay additional amounts in respect thereof, subject to certain exceptions as described herein. See "Terms and
Conditions of the Bonds Taxation".
Subject to the Bondholders' right to make, and the Issuer's right to accept in the circumstances described herein, a
Physical Settlement Election (as defined herein), Exchange Rights in the Bonds will be satisfied by the Issuer by payment of
the Cash Amount (as defined herein) in exchange for the Bonds at any time on or after 29 June 2010 and up to the close of
business on the seventh Trading Day prior to the Maturity Date (expected to be 7 May 2015) or, if such Bond shall have been
called for redemption prior to the Maturity Date, then prior to the close of business on the seventh Trading Day prior to the
date fixed for redemption thereof. Exchange Rights in respect of which a Physical Settlement Election is effective will be
satisfied by the transfer and delivery to the relevant Bondholder of a pro rata share of the Exchange Property (as defined
herein and which shall initially comprise common shares in EDP - Energias de Portugal, S.A. (the EDP Shares)), which
shall be subject to adjustment pursuant to these Terms and Conditions of the Bonds. See "Terms and Conditions of the Bonds
 Exchange Rights". The EDP Shares are listed on the official list of Euronext Lisbon and are admitted to trading on Euronext
Lisbon. On 13 May 2010, the closing price of the EDP Shares on Euronext Lisbon was EUR 2.69 per EDP Share.
Application has been made to admit the Bonds to the official list of the Luxembourg Stock Exchange and application has
been made to admit the Bonds to trading on the Luxembourg Stock Exchange's Euro MTF Market (the Euro MTF Market).
This Offering Circular constitutes a prospectus for the purposes of the Luxembourg Act dated 10 July 2005 relating to
prospectuses for Securities.
An investment in the Bonds involves certain risks. See "Risk Factors" commencing on page 7 for a discussion of
certain factors that should be carefully considered by investors.
None of the Bonds, the Guarantee or the EDP Shares to be delivered upon exchange of the Bonds have been or will be
registered under the United States Securities Act of 1933, as amended (the Securities Act) or with any securities regulatory
authority of any other jurisdiction. The Bonds are being offered and sold in offshore transactions outside the United States in
reliance on Regulation S (Regulation S) under the Securities Act and, except in a transaction exempt from the registration
requirements of the Securities Act, may not be offered, sold or delivered within the United States.
The Bonds will initially be in the form of a registered global bond (the Global Bond), without interest coupons, which will
be deposited with and registered in the name of, a nominee for Euroclear Bank S.A./N.V. (Euroclear) and Clearstream
Banking, socíeté anonyme (Clearstream, Luxembourg) on or about the Closing Date. The Global Bond will be
exchangeable for definitive registered Bonds, without interest coupons, in the denomination of 50,000, only in the limited
circumstances set out therein.
Lead Managers
BofA MERRILL LYNCH
CITI
CREDIT SUISSE
ESPÍRITO SANTO
INVESTMENT

Each of the Issuer and the Guarantor accepts responsibility for the information contained in this Offering Circular with respect to
the Issuer, the Guarantor, the BES Group (as defined below) and the Bonds, and to the best of the knowledge of Issuer and the
Guarantor (each having taken all reasonable care to ensure that such is the case), such information is in accordance with the facts
and does not omit anything likely to affect the import of such information.
This Offering Circular may only be used for the purposes for which it has been published.
This Offering Circular should be read and construed with any documents incorporated herein by reference, see "Documents
Incorporated by Reference" below. This Offering Circular does not constitute an offer to sell, or a solicitation of an offer to buy, or
an invitation by or on behalf of the Issuer, the Guarantor, or any of the Lead Managers (as defined below), to subscribe for or
purchase any of the Bonds or the EDP Shares. The distribution of this Offering Circular and the offering of the Bonds and the
EDP Shares in certain jurisdictions may be restricted by law. Persons into whose possession this Offering Circular comes are
required by the Issuer, the Guarantor and the Lead Managers to inform themselves about and to observe any such restrictions. For
a description of certain further restrictions on offers and sales of the Bonds and the EDP Shares and distribution of this Offering
Circular, see "Subscription and Sale" below. Information incorporated by reference in this Offering Circular relating to EDP -
Energias de Portugal, S.A. (EDP) and its subsidiaries and subsidiary undertakings taken as a whole (the EDP Group) and the
EDP Shares and the information contained under paragraph 11 of the section "General Information" (such information, the EDP
Information) comprises and is extracted from documents which are all publicly available. Such documents were not prepared in
connection with the offering of the Bonds and none of the Issuer, the Guarantor or the Lead Managers has made any investigation
or enquiry with respect to such documents or the EDP Information. None of the Issuer, the Guarantor or the Lead Managers
accepts responsibility for the EDP Information. The incorporation by reference of the EDP Information shall not create any
implication that there has been no change relating to EDP, the EDP Group or the EDP Shares since the date thereof or that the
information contained therein is current as at any time subsequent to its date. None of the Issuer, the Guarantor or the Lead
Managers have had access to EDP's books, records or other non-public information. Therefore, information concerning EDP, the
EDP Group or the EDP Shares that has not been made public is not available to the Issuer, the Guarantor or the Lead Managers.
None of the Issuer, the Guarantor or the Lead Managers have been involved in the preparation of the EDP Information and, for
the foregoing reasons, none of the Issuer, the Guarantor or the Lead Managers is in a position to verify any such information or
pass judgement on its completeness. None of the Issuer, the Guarantor or the Lead Managers makes any representations or
warranties as to the accuracy, completeness or sufficiency of the EDP Information.
EDP has not participated in the preparation of this Offering Circular or in establishing the terms of the Bonds. Consequently, there
can be no assurance that all events occurring prior to the date hereof (including events that would affect the accuracy or
completeness of the publicly available documents referred to above or the EDP Information) that would affect the trading price of
the EDP Shares (and, therefore, the trading price of the Bonds) have been publicly disclosed. Subsequent disclosure of any such
events or the disclosure of, or failure to disclose, material future events concerning EDP, the EDP Group and the EDP Shares
could affect the trading price of the EDP Shares and, consequently, affect the value of the Cash Amount payable upon exchange of
the Bonds or the value of the Exchange Property deliverable upon exchange of the Bonds, as the case may be, and, therefore, the
trading price of the Bonds.
No person is authorised to give any information or to make any representation not contained in this Offering Circular and any
information or representation not so contained must not be relied upon as having been authorised by or on behalf of the Issuer, the
Guarantor or the Lead Managers. Neither the delivery of this Offering Circular nor any offer, sale or delivery made in connection
with the issue of the Bonds shall, under any circumstance, constitute a representation that there has been no change or
development likely to involve a change in the condition (financial or otherwise) of the Issuer, the Guarantor or the BES Group
since the date hereof or create any implication that the information contained herein is correct as of any date subsequent to the date
hereof or the date as of which that information is stated herein to be given.
Neither the Issuer, the Guarantor nor any of the Lead Managers is providing any advice or recommendation in this Offering
Circular on the merits of the purchase, subscription for, or investment in, the Bonds or the EDP Shares or the exercise of any rights
conferred by the Bonds or the EDP Shares.
No representation or warranty, express or implied, is made by the Lead Managers as to the accuracy, completeness or verification
of the information set out or incorporated in this Offering Circular, and nothing set out or incorporated in this Offering Circular is,
or shall be relied upon as, a promise, representation or warranty by the Lead Managers. The Lead Managers assume no
responsibility for the accuracy, completeness or verification of this Offering Circular and accordingly disclaim, to the fullest extent
permitted by applicable law, any and all liability whether arising in tort, contract or otherwise which they might otherwise be
found to have in respect of this Offering Circular or any such statement. This Offering Circular (including the information
incorporated by reference herein) is not intended to provide the basis of any credit or other evaluation and should not be
considered as a recommendation by the Issuer, the Guarantor, the Trustee or the Lead Managers that any recipient of this Offering
Circular should purchase the Bonds. Each potential purchaser of Bonds should determine for itself the relevance of the information
set out or incorporated by reference in this Offering Circular and its purchase of Bonds should be based upon such investigations
as it deems necessary.
IN CONNECTION WITH THIS ISSUE OF THE BONDS, CITIGROUP GLOBAL MARKETS LIMITED (THE STABILISING
MANAGER), OR ANY PERSON ACTING ON BEHALF OF THE STABILISING MANAGER, MAY OVER-ALLOT AND
EFFECT TRANSACTIONS WITH A VIEW TO SUPPORTING THE MARKET PRICE OF THE BONDS AT A LEVEL
HIGHER THAN THAT WHICH MIGHT OTHERWISE PREVAIL. HOWEVER, THERE IS NO ASSURANCE THAT THE
STABILISING MANAGER (OR PERSONS ACTING ON BEHALF OF THE STABILISING MANAGER) WILL
UNDERTAKE STABILISATION ACTION. ANY STABILISATION ACTION SHALL BEGIN ON OR AFTER THE DATE
ON WHICH ADEQUATE PUBLIC DISCLOSURE OF THE FINAL TERMS OF THE OFFER OF THE BONDS IS MADE
AND, IF BEGUN, MAY BE ENDED AT ANY TIME, BUT IT MUST END NO LATER THAN THE EARLIER OF 30 DAYS
2

AFTER THE CLOSING DATE AND 60 DAYS AFTER THE DATE OF THE ALLOTMENT OF THE BONDS. ANY
STABILISATION ACTION OR OVER-ALLOTMENT MUST BE CONDUCTED BY THE STABILISING MANAGER (OR
PERSON(S) ACTING ON BEHALF OF IT) IN ACCORDANCE WITH ALL APPLICABLE LAWS AND RULES.
The Lead Managers are acting exclusively for the Issuer and the Guarantor and no one else in connection with the offering of the
Bonds and will not be responsible to anyone other than the Issuer and the Guarantor for providing the protections afforded to its
clients or for giving advice in relation to the offering of the Bonds or any transaction or arrangement referred to herein.
None of the Issuer, the Guarantor or the Lead Managers, or any of their respective representatives, is making any representation to
any offeree or purchaser of the Bonds regarding the legality of an investment in the offering of the Bonds by such offeree or
purchaser under the laws applicable to such offeree or purchaser. Each investor should consult with his or her own advisors as to
the legal, tax, business, financial and related aspects of a purchase of the Bonds.
The investors acknowledge that they have not relied on the Lead Managers or any person affiliated with the Lead Managers in
connection with any investigation of the accuracy of any information contained in this Offering Circular or their investment
decision.
Unless otherwise specified or the context requires, references to (i) EUR, Euro, euro and refer to the currency introduced at the
start of the third stage of European economic and monetary union pursuant to the Treaty establishing the European Community, as
amended and (ii) BES Group means the Guarantor and its consolidated subsidiaries.
3

TABLE OF CONTENTS
DOCUMENTS INCORPORATED BY REFERENCE ................................................................. 5
RISK FACTORS ............................................................................................................................ 7
TERMS AND CONDITIONS OF THE BONDS ........................................................................ 16
SUMMARY OF PROVISIONS RELATING TO THE BONDS IN GLOBAL FORM.............. 46
USE OF PROCEEDS ................................................................................................................... 48
TAXATION.................................................................................................................................. 49
SUBSCRIPTION AND SALE ..................................................................................................... 55
GENERAL INFORMATION....................................................................................................... 58
4

DOCUMENTS INCORPORATED BY REFERENCE
Each document incorporated herein by reference is current only as at the date of such document, and the
incorporation by reference of such documents shall not create any implication that there has been no change in the
affairs of the Issuer, the Guarantor, the BES Group or EDP, as the case may be, since the date thereof or that
the information contained therein is current as at any time subsequent to its date. Any statement contained therein
shall be deemed to be modified or superseded for the purposes of this Offering Circular to the extent that a
subsequent statement contained herein modifies or supersedes that statement. Any such statement so modified or
superseded shall not be deemed, except as so modified or superseded, to constitute a part of this Offering Circular.
Furthermore, in relation to the EDP Programme Prospectus, the EDP Annual Report and the EDP Interim
Results (each as defined below), the Issuer, the Guarantor and the Lead Managers were not involved in the
preparation of such information and are not in a position to verify any such information. The Issuer, the Guarantor
and the Lead Managers do not make any representations or warranties as to the accuracy, completeness or
sufficiency of such information and nothing contained herein is, or shall be relied upon as, a representation or
warranty on such information.
The documents set out below are incorporated herein by reference:
(a) the following sections of the 20,000,000,000 Euro Medium Term Note Programme Prospectus of
the Issuer and the Guarantor dated 18 December 2009 (the Programme Offering Circular):
(i)
BES Finance Ltd. (pages 167 to 173);
(ii) Banco Espírito Santo, S.A. and BES Group (pages 174 to 219);
(b) the auditors' report and audited annual financial statements of the Issuer for the financial year ended
31 December 2009, as set out on pages 1 to 56 of the Issuer's 2009 Annual Report, including:
(i)
statements of income (pages 2 to 3);
(ii) balance sheet (page 4);
(iii) cashflow statements (page 6);
(iv) accounting policies and explanatory notes (pages 7 to 54); and
(v) auditors' report (pages 55 to 56);
(c) the auditors' report and audited annual financial statements of the Issuer for the financial year ended
31 December 2008, as set out on pages 1 to 40 of the Issuer's 2008 Annual Report, including:
(i)
income statement (page 3);
(ii) balance sheet (page 2);
(iii) cashflow statements (page 5);
(iv) accounting policies and explanatory notes (pages 6 to 40); and
(v) auditors' report (page 1);
(d) the unaudited consolidated financial information of the Guarantor for the three months ended 31
March 2010 as set out in the press release dated 3 May 2010, including:
(i)
balance sheet (page 39); and
(ii) statement of income (page 40);
(e) the auditors' report and audited consolidated annual financial statements of the Guarantor for the
financial year ended 31 December 2009, as set out on pages 1 to 155 of Part II of the 2009 Annual
Report, including:
(i)
statements of income (pages 3 to 4);
(ii) balance sheet (page 5);
(iii) statement of changes in consolidated equity (page 6);
(iv) cashflow statements (page 7);
(v) accounting policies and explanatory notes (pages 8 to 153); and
(vi) auditors' reports (pages 154 to 155);
5

(f)
the auditors' report and audited consolidated and non-consolidated annual financial statements of the
Guarantor for the financial year ended 31 December 2008, as set out on pages 67 to 248 of the 2008
Annual Report, including:
(i)
statements of income (page 69, 71, 165 and 167);
(ii) balance sheets (page 70, 72, 166 and 168);
(iii) statement of changes in consolidated equity (pages 73 and 169)
(iv) cashflow statements (page 74 and 170);
(v) accounting policies and explanatory notes (pages 75 to 763 and 171 to 241); and
(vi) auditors' reports (pages 245 to 248);
(g)
the prospectus dated 7 October 2009 (the EDP Programme Prospectus) in connection with the
12,500,000,000 Programme for the Issuance of Debt Instruments issued by EDP and EDP Finance
B.V.;
(h)
the Annual Report 2009 of EDP (the EDP Annual Report); and
(i)
the unaudited consolidated financial information of EDP for the three months ended 31 March 2010
as set out in the press release dated 6 May 2010 (the EDP Interim Results).
All information included in the 2009 and 2008 Annual Reports of the Issuer and the Guarantor, but
not expressly identified above, is provided for information purposes only. The Issuer does not currently publish
interim financial statements. The Guarantor does not currently publish non-consolidated interim financial
statements but does currently publish an unaudited consolidated balance sheet and a statement of income on a
quarterly basis.
Documents incorporated by reference into this Offering Circular under paragraph (a) to (i) inclusive above
will, for so long as any Bonds are outstanding, be available free of charge at the specified offices of the Paying,
Transfer and Exchange Agents (as defined herein) and at the registered offices of the Issuer and the Guarantor.
Documents incorporated by reference under (g) above should be available on the website of the
Regulatory News Service operated by the London Stock Exchange plc at http://www.rns-
pdf.londonstockexchange.com/rns/4189A_1-2009-10-7.pdf. Documents incorporated by reference under (h) and
(i) should be available on the website of EDP at www.edp.pt.
In addition, such documents will be published on the Luxembourg Stock Exchange's web site
(www.bourse.lu).
Prospective investors are advised to obtain and read the documents incorporated by reference herein
before making their investment decision in relation to the Bonds.
6

RISK FACTORS
The Issuer and the Guarantor believe that the following factors may affect their ability to fulfil their
respective obligations under the Bonds. Most of these factors are contingencies which may or may not occur and
neither the Issuer nor the Guarantor is in a position to express a view on the likelihood of any such contingency
occurring.
Factors which the Issuer and the Guarantor believe may be material for the purpose of assessing the
market risks associated with Bonds are also described below.
The Issuer and the Guarantor believe that the factors described below represent the principal risks
inherent in investing in the Bonds, but neither the Issuer nor the Guarantor represents that the statements below
regarding the risks of holding any Bonds are exhaustive. Prospective investors should also read the detailed
information set out elsewhere in this Offering Circular (including any documents deemed to be incorporated by
reference herein) and reach their own views prior to making any investment decision.
Terms used below but not defined shall have the meaning set out under "Terms and Conditions of the
Bonds".
Risk Factors Relating to the Issuer
1.
Factors that may affect the Issuer's ability to fulfil its obligations under the Bonds
The Issuer is a funding vehicle of the BES Group. As such it raises funds to the Guarantor by way of intra-
group loans. In the event that the Guarantor fails to make a payment under an intra-group loan, the Issuer may
not be able to meet its payment obligations under the Bonds.
Risks Relating to the Guarantor
2.
Factors that may affect Guarantor's ability to fulfil its obligations under the Bonds
2.1 Financial system
The performance of the BES Group is generally influenced by conditions in the global financial markets
and the macroeconomic context of the countries in which it operates. In particular, the global financial
system has operated under difficult conditions since August 2007 and the financial markets have had
particularly negative performances after the declarations of insolvency of several international financial
institutions since September 2008. This situation has caused disruptions in the financial markets worldwide,
without precedent, in relation to liquidity and funding in the international banking system. Furthermore, this
situation in turn has put significant pressure on the core business of many investment banks, commercial
banks, and insurance companies worldwide. In response to the instability and lack of liquidity in the
market, some countries, including some members of the European Union and the United States, have
intervened by injecting liquidity and capital into the system with the goal of stabilising these financial
markets and, in some cases, with the aim of preventing the insolvency of financial institutions. Despite
these measures, the volatility in the capital markets has continued at an extraordinary level compared to the
past. The major industrialized countries of the world (the so-called G20) have agreed on the need to study
and proceed with an economic and financial policy co-ordinated on a worldwide level to support the global
economy and, in a parallel fashion, ensure greater regulation of activities on the financial markets as well.
These developments have created an unfavourable environment for banking activity generally. The specific
ways that the current economic environment create challenges for the BES Group, and may adversely affect
its business, financial condition and results of operations, include the following:

The circumstances mentioned above have caused a general slowdown in the business of the BES
Group and increase in the cost of funding (both wholesale and retail) and a reduction in share prices
and in asset values, with a corresponding reduction in profitability. If a worsening of these
circumstances occurs, the BES Group could suffer further negative consequences. Any worsening of
the current economic environment could jeopardise the BES Group's strategy of selective expansion
and impact its ability to meet client needs, which could adversely affect its profitability.

The BES Group is exposed to a risk of losses if financial institutions or other counterparties to the BES
Group become insolvent or, in any event, are not able to meet their obligations to the BES Group.
Moreover, the performance of the BES Group may be influenced by an inability to recover the value
of its own assets at percentage levels consistent with its own historical recovery estimates, which could
prove to be no longer accurate within the present market context characterised by unprecedented
turbulence.

Numerous banks worldwide have been and are being supported in part by various "rescue plans" and
7

other types of support by their home country governments. The BES Group is uncertain for how much
longer governmental support will be needed to keep these banks solvent and whether governments will
have the means or the political will to continue this support. Any failure of government support to
continue could result in more bank failures and heightened lack of confidence in the global banking
system, thus increasing the challenges faced by the BES Group and other financial institutions.

The adverse market environment described above has been exacerbated by several extremely large and
high-profile cases of fraud on investors. The largest such scandals to emerge in recent months are
those involving Bernard Madoff and Allen Stanford. Several prominent global banks have been among
the financial institutions who suffered loss or reputational damage as a result of these scandals.
In general, developments relating to the current economic conditions and unfavourable financial
environment, including those potential developments outlined above, could have a material adverse effect
on the BES Group's business, financial condition and results of operations.
2.2 Banking Markets
Structural changes in the Portuguese economy over the past several years have significantly increased
competition in the Portuguese banking sector. These changes principally relate to the privatisation of
several sectors of the economy, including banking and insurance, as well as to the integration of the
Portuguese economy into the European Union and the introduction of the Euro.
The BES Group faces intense competition in all of its areas of operation (including, among others,
banking, investment banking, specialised credit and asset management). The BES Group's competitors in
the Portuguese markets are Portuguese commercial banks, savings and investment banks and foreign
banks, many of which have recently entered the Portuguese market. Over the last years, mergers and
acquisitions involving the largest Portuguese banks have resulted in a significant concentration of market
shares, a process which the Guarantor expects may continue. Competition has increased further
with the emergence of non-traditional distribution channels, such as internet and telephone banking.
Competition in the Portuguese market can have an adverse effect on the activities of BES Group. The
structural changes in the Portuguese economy in recent years have considerably increased competition in
the Portuguese banking market. Such changes were mainly related to the privatisation of large sectors of the
economy, such as banking and insurance, as well as with the integration of Portuguese economy in the
European Union and the establishment of the Euro.
The competition is affected by consumer demand, technological changes, impact of consolidation, regulatory
actions and other factors. The Guarantor expects competition to intensify as continued merger activity in the
financial industry produces larger, better-capitalised companies that are capable of offering a wider array of
products and services, and at competitive prices. If the BES Group is unable to provide attractive product and
service offerings that are profitable, it may lose market share or incur losses on some or all activities.
Although the Guarantor believes that it is in a strong position to continue to compete in the Portuguese
market, there is no assurance that it will be able to compete effectively in the markets in which it operates,
or that it will be able to maintain or increase the level of its results of operations.
2.3 Economic Environment
As a financial group whose core businesses is banking (taking deposits and using them to grant loans) in
Portugal, the state of the Portuguese economy affects the performance of the BES Group. For the year
ended 31 December 2009, approximately 66 per cent. of the BES Group's net profit was derived from
its activities in Portugal. Consequently, the BES Group is particularly exposed to macroeconomic and
other factors that affect growth in the Portuguese market as well as to the credit risk of its Portuguese
banking private and corporate customers. After constant economic growth during the years of 1995
2000 the rate of growth of the Portuguese economy started to slow down in 2000. This reduction was
intensified by the simultaneous slow down of the world economy. Notwithstanding the modest
recovery during 2004, with the GDP reaching 1.1 per cent., in 2005 the GDP did not go over 0.3 per
cent. Such decrease was largely due to the slowdown of all internal demand segments, while the net
external demand registered a minor increase in comparison with the previous year. This adverse
economic environment had a major impact on the demand for consumer credit in general. The
demand for mortgage loans, banking products and other services was also down from previous years,
as was the stagnation of investment decisions on the part of corporations, with the consequent
decrease of credit demand in that field. The prevailing economic conditions in the Portuguese market
and the decrease of demand for credit and financial products and services in general, together with
deterioration in the quality of assets had an adverse effect in the financial condition and the results of
8

the BES Group. If the economic activities continue to grow at such a slow pace, the BES Group may
face difficulties in accomplishing its growth strategy and the financial condition and results of BES
Group may be adversely affected.
To a lesser extent, the Guarantor's performance, results of operations and financial condition are also
affected by the economic conditions and levels of economic activity in other countries where the BES
Group operates, such as Spain, Brazil and Angola. A downturn in the economy of any of these countries,
particularly Portugal, could lead to an increase in defaults by the BES Group's customers on the loans
extended to them. In addition, protracted economic declines could reduce the overall level of economic
activity in the market, thereby reducing the Guarantor's ability to collect deposits and forcing it to satisfy
its liquidity requirements by resorting to the more expensive capital markets as a result.
2.4 Soundness of other financial institutions
The Guarantor is exposed to many different counterparties in the normal course of its business; hence its
exposure to counterparties in the financial services industry is significant. This exposure can arise through
trading, lending, deposit-taking, clearance and settlement and numerous other activities and relationships.
These counterparties include institutional clients, brokers and dealers, commercial banks, investment banks
and mutuals. Many of these relationships expose the Guarantor to credit risk in the event of default of a
counterparty or client. In addition, the Guarantor's credit risk may be exacerbated when the collateral it holds
cannot be realised at, or is liquidated at prices not sufficient to recover, the full amount of the loan or
derivative exposure it is due to cover, which could in turn affect Guarantor's ability to meet its payments
under the Bonds. Many of the hedging and other risk management strategies utilized by the Guarantor also
involve transactions with financial services counterparties. The insolvency of these counterparties may
impair the effectiveness of the Guarantor's hedging and other risk management strategies, which could in
turn affect the Guarantor's ability to meet its payments under the Bonds and may have a material adverse
effect on the each of the Guarantor's financial condition and results of operations.
2.5 Interest Rate Risk
The BES Group is subject to the risks typical of banking activities, such as interest rate fluctuations. Interest
rate risk may be defined as the impact on shareholders' equity or on net interest income due to an adverse
change in market interest rates. As is the case with other banks in Portugal, the BES Group, and especially its
banking and corporate operations segment, is particularly exposed to differentials between the interest rates
payable by it on deposits and the interest rates that it is able to charge on loans to customers and other banks.
This exposure stems from the fact that, in the Portuguese market, loans typically have variable interest rates,
whereas the interest rates applicable to deposits are usually fixed for periods that may vary between three and
six months. As a result, Portuguese banks, including the BES Group, frequently experience difficulties in
adjusting the interest rates that they pay for deposits in line with market interest rate changes. This trend is
reinforced by intense competition in the sector. The current low interest rate environment puts pressure on a
bank's deposit spread.
Interest rate risk is monitored by the Assets and Liabilities Committee (ALCO), namely through the
monitoring of net interest income and using repricing tables. The BES Group's exposure to interest rate risk
is calculated based on Bank of International Settlements (BIS) methodology, classifying all Assets,
Liabilities and off balance sheet items, excluding those from trading sources, by repricing schedules.
If the BES Group is unable to adjust interest on deposits in line with the changes in market interest rates on
loans, or if the monitoring procedures are unable to adequately manage interest rate risk, its interest income
could rise less or decline more than its interest expense, in which case the BES Group's results could be
negatively affected.
2.6 Credit risk
Risks arising from changes in credit quality and the repayment of loans and amounts due from borrowers and
counterparties are inherent in a wide range of the BES Group's business. Adverse changes in the credit
quality of the Guarantor's borrowers and counterparties, a general deterioration in Portuguese or global
economic conditions, or increased systemic risks in financial systems, could affect the recovery and value of
the Guarantor's assets and require an increase in provision for bad and doubtful debts and other provisions.
The BES Group faces the risk of its borrowers and counterparties being unable to fulfill their payment
obligations towards the BES Group. While the BES Group analyses its exposure to such borrowers and
counterparties on a regular basis, as well as its exposure to certain economic sectors and regions which the
BES Group believes to be particularly critical, payment defaults may result from circumstances which are
unforeseeable or difficult to predict. In addition, the security and collateral provided to the BES Group may
be insufficient to cover its exposure, for instance, as a result of sudden depreciations in the market which
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dramatically reduce the value of collateral. As such, in case borrowers or other material counterparties fail to
comply with their payment obligations to the BES Group, this would have a material adverse effect on each
of the BES Group's financial condition and results of operations.
The BES Group is strongly dedicated to the management of credit risks and to the analysis of credit
transactions Credit portfolio management is an ongoing process that requires interaction between the various
teams responsible for the management of risk during the consecutive stages of the credit process, with the
purpose of improving risk control methodologies, risk assessment and control tools, as well as in procedures
and decision circuits. The Guarantor uses two major internal rating systems according to their specific
characteristics, which are the Internal Rating Models for Corporate Credit Portfolios and the Internal Scoring
for Retail Clients' Credit Portfolios. The first is designed for large companies or institutional clients and
credit ratings are assigned by a rating desk, which is organized into specialised teams, which use expert-
based systems that include quantitative and qualitative variables linked to the industry sector. As per the
Internal Scoring for Retail Clients' Credit Portfolios and specifically in the context of the main products
available to individual clients -- mortgage loans, consumer loans, credit cards, overdrafts and loan --
accounts the ratings are calibrated to a probability of default within one year. The models' predictive
capacity is subject to regular monitoring and the BES Group also regularly monitors other parameters
required for risk quantification and management, namely losses at default and exposure at default figures
(LGD and EAD). Nevertheless, the provisions regarding future credit losses may prove to be inaccurate for a
number of reasons. Factors such as unexpected deterioration of global economic conditions, unexpected
political events or a general lack of liquidity in economy may result in credit losses which exceed the amount
of provisions of the BES Group or the maximum expected losses planned through the risk management
procedures. To the extent that the BES Group transactions are mainly located in Portugal, the Guarantor is
particularly exposed to the risk of a general economic contraction or to another event affecting default rates
in Portugal.
An increase in the BES Group's provisions for losses resulting from defaulted loans or possible losses which
exceed the amount of such provisions may have a significantly adverse effect on each of the BES Group's
financial condition and results of operations.
2.7 Operational Risk
Operational risk represents the risk of losses or of a negative impact on the relationship with clients or other
stakeholders resulting from inadequate or negligent application of internal procedures, or from people
behaviour, information systems, or external events. Operational risk also includes the business/strategic risk,
i.e., the risk of losses through fluctuations in volume/business/earnings/prices or costs.
Legal risk is also included in the above definition. Legal risk represents the risk of losses arising from non-
compliance with the regulations in force (due to inadequate document retention, failure to change processes
as required by new legislation and/or differences in the interpretation of the law) or resulting from legal
action.
The BES Group is subject to certain operational risks, including interruption of service, errors, fraud by third
parties (including large-scale organised frauds, as a result of the BES Group's financial operations), breach
or delays in providing services and in complying with risk management requirements. The BES Group
continually monitors these risks by means of, among other things, advanced administrative and information
systems and insurance coverage in respect of certain operational risks.
To manage operational risk, the BES Group implemented a system that standardises, systematises and
regulates the frequency of actions viewing the identification, monitoring, control and mitigation of risk.
These processes are part of a management model comprising two broad areas: the first concerns the
collection and treatment of information, using tools that facilitate the identification and monitoring of risk;
and the second uses the information that has been duly processed for the efficient management of risk,
monitoring the more critical situations and implementing the risk management strategy. These two broad
areas are coordinated through reporting to senior management and the monitoring of the mitigation measures
determined.
However, the BES Group may be unable to successfully monitor, manage or prevent these risks in the future.
Any failure to successfully execute the BES Group's risk management and control policies could have a
material adverse effect on the BES Group's financial condition and results of operations.
2.8
Liquidity Risk
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