Obligation Banco Espirito Santo 3.125% ( XS0997539274 ) en EUR

Banco Espirito Santo

100 % ▲

Portugal

XS0997539274 ( en EUR )

3.125% par an ( paiement annuel ) - Obligation en défaut, paiements suspendus

02/12/2018 - Obligation échue

Prospectus brochure de l'obligation Banco Espirito Santo XS0997539274 en EUR 3.125%, échue

100 000 EUR

200 000 000 EUR

L'Obligation émise par Banco Espirito Santo ( Portugal ) , en EUR, avec le code ISIN XS0997539274, paye un coupon de 3.125% par an.
Le paiement des coupons est annuel et la maturité de l'Obligation est le 02/12/2018

LISTING PARTICULARS

28 MAY 2014

Espírito Santo Financial Group S.A.
(incorporated with limited liability in the Grand Duchy of Luxembourg société anonyme registered
with the Register of Commerce and Companies under number B-22.232)

200,000,000 3.125 per cent. Exchangeable Bonds due 2018
exchangeable into ordinary shares in the capital of

Banco Espírito Santo, S.A.
(incorporated with limited liability in Portugal)

Issue price: 100 per cent.

The 200,000,000 3.125 per cent. Exchangeable Bonds due 2018 (the "Bonds") were issued by
Espírito Santo Financial Group S.A. (the "Issuer") on 2 December 2013 (the "Issue Date") at an issue
price of 100 per cent. of their principal amount (the "Issue Price"). The Bonds constitute direct,
unconditional, unsubordinated and (subject to Condition 3) unsecured obligations of the Issuer. Interest
will be payable semi-annually in arrear on 2 June and 2 December of each year (each an "Interest
Payment Date") with the first payment of interest being made on 2 June 2014. Interest will accrue at a
rate of 3.125 per cent. per annum. A Trust Deed has been entered into between the Issuer and BNY
Mellon Corporate Trustee Services Limited as trustee (the "Trustee").
These Listing Particulars have been prepared for the purposes of admission of the Bonds to the official
list of the Luxembourg Stock Exchange and to trading on the Luxembourg Stock Exchange's Euro
MTF Market (the "Euro MTF Market") and may be used solely for the purposes for which they have
been published. References in these Listing Particulars to Bonds being "listed" (and all related
references) shall mean that the Bonds have been admitted to trading on the Euro MTF Market and are
listed on the official list of the Luxembourg Stock Exchange. The Euro MTF Market is not a regulated
market for the purposes of the Markets in Financial Instruments Directive (Directive 2004/39/EC).
These Listing Particulars constitute a prospectus for the purposes of the Luxembourg Act dated 10 July
2005 relating to prospectuses for securities, as amended.
Unless previously exchanged, redeemed or purchased and cancelled, the Bonds will be redeemed at
their principal amount on 2 December 2018 (the "Final Maturity Date"). The Issuer has certain
optional redemption rights with respect to the Bonds as described in Condition 11(b) ("Redemption at
the Option of the Issuer"). Bondholders have certain optional redemption rights with respect to the
Bonds as described in Condition 11(c) ("Redemption at the Option of the Issuer").
Subject to the rights of the Issuer to make a Cash Election (as defined in the section entitled "Terms
and Conditions of the Bonds" (the "Conditions")) and as more fully described in the Conditions, the
Bonds will be exchangeable for a pro rata share of the Exchange Property (as defined in the
Conditions) at any time during the period from (and including) 13 January 2014 up to (and including)
the close of business (at the place where the Bond is deposited for exchange) on the date which falls 40
Luxembourg and Lisbon business days prior to the Final Maturity Date, or if such Bond is to be
redeemed pursuant to Condition 11(b) prior to the Final Maturity Date, then up to (and including) the
close of business (at the place aforesaid) on the date which falls 10 Luxembourg and Lisbon business
days prior to the date fixed for redemption thereof, unless there shall be default in making payment in
respect of such Bond on such date fixed for redemption. The Exchange Property initially comprises
152,334,526 ordinary shares (the "Shares" or "BES Shares") in Banco Espírito Santo, S.A.

None of the Bonds or the 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 of America in reliance on 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 of America or to or for the benefit
of U.S. persons.
The Bonds are initially represented by a global Bond (the "Global Bond") registered in the name of,
and held by a nominee or on behalf of, a common depository for Euroclear Bank SA/NV
("Euroclear") and/or Clearstream Banking, société anonyme ("Clearstream, Luxembourg").
The Issuer accepts responsibility for the information contained in these Listing Particulars with respect
to the Issuer and the Issuer and its consolidated subsidiaries taken as a whole ("ESFG"). To the best of
the knowledge of the Issuer (having taken all reasonable care to ensure that such is the case) the
information contained in these Listing Particulars is in accordance with the facts and does not omit
anything likely to affect the import of such information.
These Listing Particulars were not prepared in connection with the offering of the Bonds and none of
the Joint Bookrunners (as defined below) was involved in the preparation of, or has reviewed or made
any investigation or enquiry with respect to, these Listing Particulars. No representation or warranty,
express or implied, is made by any of the Joint Bookrunners as to the accuracy, completeness or
sufficiency of the information set out or incorporated in these Listing Particulars.
These Listing Particulars are to be read in conjunction with all documents that are deemed to be
incorporated herein by reference (see "Documents Incorporated by Reference"). These Listing
Particulars should be read and construed on the basis that such documents are incorporated and form
part of the Listing Particulars. These Listing Particulars may only be used for the purposes for which
they have been published.
Information incorporated by reference in these Listing Particulars relating to Banco Espírito Santo,
S.A. and its consolidated subsidiaries taken as a whole ("BES") and the BES Shares and the
information contained under paragraph 9 of the section "General Information" (such information, the
"BES 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 the Issuer has not made
any investigation or enquiry with respect to such documents or the BES Information. The Issuer does
not accept responsibility for the BES Information. The incorporation by reference of the BES
Information shall not create any implication that there has been no change relating to Banco Espírito
Santo, S.A., BES or the BES Shares since the date thereof or that the information contained therein is
current as at any time subsequent to its date. The Issuer has not had access to Banco Espírito Santo,
S.A.'s books, records or other non-public information. Therefore, information concerning Banco
Espírito Santo, S.A., BES or the BES Shares that has not been made public is not available to the
Issuer. The Issuer had not been involved in the preparation of the BES Information and, for the
foregoing reasons, the Issuer is not in a position to verify any such information or pass judgement on its
completeness. The Issuer makes no representations or warranties as to the accuracy, completeness or
sufficiency of the BES Information.
Banco Espírito Santo, S.A. has not participated in the preparation of these Listing Particulars 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 BES Information) that would affect the trading price of
the BES 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 Banco Espírito Santo, S.A., BES and the BES Shares could affect the trading price
of the BES Shares and, consequently, affect the value of the Cash Alternative 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 these
Listing Particulars and any information or representation not so contained must not be relied upon as
having been authorised by or on behalf of the Issuer. Neither the delivery of these Listing Particulars
nor any offer, sale or delivery made in connection with issue of the Bonds shall, under any
circumstance, constitute a representation that there has been no change or development likely to

Page 2

involve a change in the condition (financial or otherwise) of the Issuer, Banco Espírito Santo, S.A. or
BES 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.
The Issuer is not providing any advice or recommendation in these Listing Particulars on the merits of
the purchase, subscription for or investment in the Bonds or the BES Shares or the exercise of any
rights conferred by the Bonds or the BES Shares.
These Listing Particulars (including the information incorporated by reference herein) are not intended
to provide the basis of any credit or other evaluation and should not be considered as a
recommendation by the Issuer or the Trustee that any recipient of these Listing Particulars 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 these Listing Particulars and its purchase of Bonds
should be based upon such investigations as it deems necessary.
All references in this document to "EUR", "euro" and "" refer to the currency introduced at the start
of the third stage of European economic and monetary union, and as defined in Article 2 of Council
Regulation (EC) No. 974/98 of 3 May 1998 on the introduction of the euro, as amended.
An investment in the Bonds involves certain risks. Prospective investors should have regard to
the factors described under the heading "Risk Factors" beginning on page 5 of these Listing
Particulars.

Page 3

CONTENTS

Page
Risk Factors ..................................................................................................................................... 5
Documents Incorporated by Reference............................................................................................ 29
Terms and conditions of the bonds.................................................................................................. 33
Summary of provisions relating to the bonds in global form ............................................................ 78
Use of Proceeds.............................................................................................................................. 81
Espírito Santo Financial Group S.A................................................................................................. 82
Banco Espírito Santo, S.A............................................................................................................... 83
Recent Developments ..................................................................................................................... 84
Taxation ......................................................................................................................................... 85
General Information ....................................................................................................................... 89

Page 4

RISK FACTORS
The Issuer believes that the following factors may affect its ability to fulfil its obligations under the Bonds
which may in turn result in investors losing the value of their investment. Most of these factors are
contingencies which may or may not occur and the Issuer is not in a position to express a view on the
likelihood of any such contingency occurring.
In addition, factors which the Issuer believes may be material for the purpose of assessing the market risks
associated with the Bonds are also described below.
The Issuer believes that the factors described below represent the principal risks inherent in investing in
the Bonds. However, the Issuer does not represent 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 these Listing Particulars (including any documents incorporated by reference herein) and
reach their own views prior to making any investment decision.
Factors that may affect the Issuer's ability to fulfil its obligations under Bonds
This section describes some of the risks that could affect ESFG's businesses.
The risks below are not the only risks that ESFG faces some risks are not yet known to ESFG and some
that ESFG does not currently believe to be material could later turn out to be material. All of these risks
could materially affect ESFG's business, its revenues, operating income, net income, net assets and
liquidity and capital resources and the price at which the Bonds trade.
Risks relating to the Portuguese economy
The performance of ESFG is generally influenced by conditions in the global financial markets and the
macroeconomic environment of the countries in which it operates. The core businesses of ESFG are
banking and insurance (both life and non-life). As its operations are concentrated mainly in Portugal, ESFG
is dependent on the state of the Portuguese economy. A downturn in the Portuguese economy, in particular,
could have a material adverse effect on ESFG's business, financial condition and results of operations.
For the year ended 31 December 2013, 64.19 per cent. of ESFG's net assets (as of 31 December 2012: 67.7
per cent. of ESFG's net assets) and 42.38 per cent. of its operating loss (as of 31 December 2012: 76.3 per
cent. of its operating income) were derived from its activities in Portugal. Consequently, ESFG is
particularly exposed to the macroeconomic conditions which affect growth, particularly in the Portuguese
market.
As a result of deteriorating economic conditions in Portugal since the crisis that began in mid-2007, the
Portuguese government requested external assistance from the International Monetary Fund (the "IMF"),
the European Commission ("EC") and the European Central Bank ("ECB", together with the IMF and EC
the "Troika") in April 2011. The Economic Adjustment Programme (the "Adjustment Programme"),
agreed with the Troika, provided for the availability of financial support to Portugal in the amount of EUR
78 billion over a three year period ending 17 May 2014 (for technical reasons an extension of six weeks
was granted to complete a final assessment and the disbursement of the last tranche of EUR 500 million),
subject to the implementation of a series of budgetary and structural measures, which is subject to quarterly
reviews for the duration of the Adjustment Programme.
As part of the Adjustment Programme, the Portuguese government committed to meet certain budgetary
and public debt targets and to implement a series of structural reforms that, subject to certain assumptions,
were intended to reduce the general government deficit to a level of approximately 5.9 per cent. of GDP in
2011, to approximately 5.0 per cent. of GDP in 2012 (target reviewed in September 2012), approximately
5.5 per cent. of GDP in 2013 and 4.0 per cent. in 2014 (targets reviewed in February 2013). In addition, the
Adjustment Programme is intended to lead to a reduction in the Portuguese public debt to GDP ratio after
2013 and contains structural measures and policy guidelines designed to boost the country's
competitiveness and improve Portugal's growth rates in the medium term.

Page 5

Portugal complied with the targets imposed by the Troika. The last assessment of the Adjustment
Programme in April 2014 was positive. To date, Portugal has received EUR 76.1 billion from the
Adjustment Programme.
The performance of the Portuguese economy since 2011 has been highly dependent on the implementation
of the Adjustment Programme. The need to reduce the public deficit was addressed by the adoption of very
restrictive budgetary policies, with a negative impact on economic activity in the near term. At the same
time, the private sector (corporate, financial and households) continued its deleveraging process. Under
these circumstances, GDP decreased by approximately 1.4 per cent. in 2013, after having contracted by 3.2
per cent. in 2012 and by 1.3 per cent. in 2011 according to Statistics Portugal. This contraction is mainly a
result of the significant decline in domestic demand, equalling approximately 13.7 per cent. (according to
the Portuguese Ministry of Finance) in real and accumulated terms for this three-year period. In 2013, the
favourable performance of exports and a stabilisation trend in domestic demand translated into the recovery
of economic activity from the second quarter. While GDP fell by 1.4 per cent. in 2013, there were positive
quarterly fluctuations in the second quarter (1.1 per cent., 0.3 per cent. and 0.6 per cent.) as well as overall
growth during the fourth quarter (1.7 per cent., following 11 quarters of contraction). In the first quarter of
2014, GDP fell 0.7 per cent. when compared to the fourth quarter of 2013, increasing uncertainty as to the
level of economic recovery although it represented an increase of 1.2 per cent. as compared to the first
quarter of 2013. The deleveraging and financial rebalancing of all business sectors resulted in a surplus of
external accounts of 2.0 per cent. of GDP in 2013 according to Statistics Portugal. The recovery of activity
and the fiscal consolidation measures contributed towards a reduction in the general government deficit (as
adjusted by the Troika's criteria) to about 4.5 per cent. of GDP in 2013, according to the Portuguese
Ministry of Finance, which is below the target of 5.5 per cent. of GDP, with expenditure and income
showing better than expected performance, thereby creating a favourable context for budgetary
implementation in 2014. In previous years the Portuguese government deficit was also below set targets:
4.3 per cent. in 2011 (target of 5.9 per cent.) and 4.7 per cent. (revised target of 5 per cent.) The main risk
relating to budgetary implementation is the rejection of certain measures (which BES estimates accounted
for 0.5 per cent. of GDP in total) by the Constitutional Court of Portugal. Notwithstanding these
improvements, budgetary policy will continue to be quite restrictive in 2014 and thus continue to have an
impact on economic growth.
Although the outlook for the recovery of economic activity in Portugal has improved, with both the
Portuguese government and the Troika moving their GDP forecasts upwards to 1.2 per cent. and 1.5 per
cent. for 2014 and 2015, respectively, and the unemployment rate is expected to fall to 15.7 per cent. in
2014 and 14.8 per cent. in 2015, risks remain to the Portuguese economy, including the impact of continued
weak growth in many parts of the global economy.
The positive sentiment towards the peripheral countries of the Euro Zone in general, and Portugal in
particular, has contributed to a significant decrease in the public debt yields. In relation to the end of the
Adjustment Programme on 17 May 2014, discussions about Portugal's exit from the Adjustment
Programme have intensified and the Portuguese government has announced a "clean" exit without a
precautionary programme. The need for short-term financing has been reduced, global funding needs for
2014 have already been covered and the forthcoming debt issuances should partially pre-finance 2015
funding needs. Nonetheless, market risks remain high and uncertainties continue as to the financing
conditions Portugal will face upon the completion of the Adjustment Programme. Following the exit from
the Adjustment Programme, the Portuguese sovereign yields may suffer from increased volatility, which
might in turn have a negative impact on the funding conditions for ESFG.
Given its high level of public debt, even with the successful conclusion of the Adjustment Programme,
Portugal will need to continue to pursue a fiscal consolidation strategy and implement structural reforms
that favour medium term growth, provide for the reduction of budgetary deficit (the target for 2015 is 2.5
per cent. of GDP) and reduce the public debt ratio from 2014 onwards. The implementation of such
measures requires the continued commitment of the Portuguese government. Possible changes to the
Portuguese government or to governmental policies may have an effect on budget execution and on
structural reform. In addition, significant resistance from unions and/or the Portuguese public to these
continuing reforms may put pressure on the Portuguese government's capacity to implement such measures
in the future.

Page 6

Concerns relating to Portuguese public finances and to political and social stability in Portugal have
affected, and may continue to affect, the liquidity and profitability of financial institutions in Portugal,
resulting in, amongst other things, lower market values for Portuguese government debt; limited liquidity in
the Portuguese banking system and reliance on external funding; increased competition for, and thus cost
of, customer deposits; limited credit extension to customers; and a deterioration of credit quality.
The macroeconomic conditions in Portugal adversely affect the behaviour and the financial condition of
ESFG's clients, and consequently, the supply and demand of the products and services that ESFG offers. In
particular, and despite the recent signs of stabilisation of the labour market and the reduction of corporate
insolvencies, it is expected that the high unemployment rates, the low profitability and the high level of
indebtedness of companies and an increase in company and personal insolvencies will continue to have a
negative influence on ESFG's clients' ability to pay back loans, and, consequently, could cause an increase
in overdue loans and in impairments related to loans and other financial assets. The occurrence of any one
or more of these events could have a material adverse effect on the business, financial condition, results of
operations and prospects of ESFG.
ESFG's business and performance are, and may continue to be, negatively affected by actual or
perceived risks relating to global economic conditions and to the Euro Zone sovereign debt crisis
ESFG's businesses and performance are, and may continue to be, negatively affected by local and global
economic conditions and adverse perceptions of those conditions and future economic prospects.
In particular, 2013 was characterised by moderate optimism concerning global macroeconomic indicators.
The United States and Europe registered economic recovery in the second half of 2013, although the
recovery in Europe remained weak. Although the year began with certain adverse events that affected
confidence, namely political instability in Italy and the Cyprus crisis, financial markets in the Euro Zone
stabilised during the second half of 2013 and there was a gradual improvement in business growth
forecasts. Improved confidence in the Euro Zone economies was extended to the economies of peripheral
Euro Zone countries such as Portugal.
Despite the favourable forecasts for the global economy in the near and medium term, sustainable
economic growth continues to be a challenge, especially in the peripheral countries of the Euro Zone,
including Portugal. It is therefore expected that the central banks of the main global economies will
maintain expansionary monetary policies, to boost demand in those economies. Some factors may
negatively affect forecasts for the global economy, namely the volatility felt in emerging markets, political
tensions in Ukraine and Venezuela and the evolution of interest rates in developed countries, given the
tapering of the asset purchase programme in the United States.
Deflationary pressures on the Euro Zone also represent a risk to the Portuguese economy, as the persistence
of low inflation rates can lead to the postponement of investment decisions as well as to debt increases in
real terms. In this context, it is expected that the ECB will keep or broaden its expansionist policies.
Adverse economic and market conditions pose various challenges and exert downward pressure on asset
prices and on credit availability, increase funding costs, and impact credit recovery rates and the credit
quality of ESFG's businesses, customers and counterparties, including issuers of sovereign debt. In
particular, ESFG has significant exposure to customers and counterparties in the EU (particularly in
Portugal) that would be affected by the restructuring of the terms, principal, interest or maturity of their
borrowings.
During the next few years, a combination of anticipated recovery in private sector demand and of a reduced
pace of fiscal austerity in Europe and the United States is likely to result in a return by central banks
towards more conventional monetary policies, following the recent period that has been characterised by
highly accommodative policies, which have helped to support demand at a time of very pronounced fiscal
tightening and balance sheet repair. The possibility of a withdrawal of such programmes or slowing of
monetary stimulus by one or more governments could lead to a generally weaker than expected growth, or
even contracting GDP, reduced business confidence, higher levels of unemployment, adverse changes to
levels of inflation, potentially higher interest rates and falling property prices, and consequently to an
increase in delinquency rates and default rates among customers. Any further slowing of monetary

Page 7

stimulus and the actions and commercial soundness of other financial institutions have the potential to
impact market liquidity. The adverse impact on the credit quality of ESFG's customers and counterparties,
coupled with a decline in collateral values, could lead to a reduction in recovery rates and high levels of
impairment provisions, which could have a material adverse effect on ESFG's business, financial condition
and results of operations.
Any significant deterioration in the global economy, including in the credit profiles of other EU member
states or in the solvency of Portuguese or international banks, or other economic changes in the Euro Zone
could:

negatively affect the capacity of Portugal to satisfy its financing needs;

have a direct negative impact on the value of ESFG's portfolio of Portuguese public debt
securities (as of 31 March 2014, BES held approximately EUR 5 billion in Portuguese public
debt). In relation to the sovereign debt of other EU periphery economies, BES held EUR 693
million of Spanish public debt, EUR 908 million of Italian public debt and EUR 178 million of
Greek public debt. BES is a market maker of Portuguese sovereign debt and also takes risk
positions in such sovereign debt with the amount of its holdings and the portfolio's average
maturity varying from time to time as a result of its market making and risk taking activities and
its view regarding the attractiveness of such debt;

have a significant adverse effect on ESFG's capacity to raise and/or generate capital and comply
with minimum regulatory capital requirements;

significantly restrict ESFG's ability to obtain liquidity; and

negatively affect ESFG's capital position, its operational results and its financial condition.
ESFG's business, financial condition and results of operations may be affected by economic, political or
governmental conditions in other countries where it operates
ESFG's performance, financial condition and results of operations are affected by the economic conditions
and levels of economic activity in countries other than Portugal where ESFG operates. These countries
include, but are not limited to, Spain, Angola, Mozambique, Libya, Brazil, the United Kingdom, France,
Luxembourg, Switzerland, Poland, India, Panama, the United States, Dubai and Venezuela, among others.
A downturn in the economy of any of these countries could adversely affect ESFG's customers and,
therefore, levels of demand for its products and services and as a result, its financial condition and results
of operations. Higher unemployment, reduced corporate profitability and increased corporate and personal
insolvency rates in other countries outside Portugal, may reduce the ability of borrowers' in those countries
to repay loans and may result in an increase in defaults by ESFG's customers on the loans extended to
them, as well as a reduction in the amount of premiums written in the insurance business.
Protracted economic decline could reduce the overall level of economic activity in the market, thereby
reducing ESFG's ability to collect deposits and forcing it to satisfy its liquidity requirements by resorting to
the more expensive capital markets and wholesale markets as a result.
In addition, ESFG's international operations are exposed to the risk of possible adverse political,
governmental or economic developments in the countries in which they operate. These factors could have
a material adverse effect on ESFG's business, financial condition and results of operations.
Accordingly, ESFG can give no assurance that it will be successful in Spain, Brazil, Angola or any of the
other international markets in which it operates. ESFG's international operations are exposed to the risk of
adverse political, governmental or economic developments in the countries in which it operates and other
risks associated with doing business in emerging markets. In particular, certain countries where ESFG has
operations, especially Libya and Venezuela, have been subject to U.S. and/or international sanctions (for
example sanctions administered by the Office of Foreign Assets Control of the U.S. Treasury Department
(OFAC)) and have experienced political, social and economic instability in the past and may face such

Page 8

instability again in the future. Additionally, the results for the international activity of ESFG are subject to
the exchange rate volatility of the currencies of the countries in which it operates, which is particularly
relevant in emerging market countries. For example, in 2013, as a result of the significant devaluation that
affected the Venezuelan currency, ESFG's operations in Venezuela recognised a loss of EUR 7 million,
although, in local currency terms, its operational results were positive.
Any of these factors can have a material adverse effect on ESFG's business strategy, financial condition
and results of operations.
Financial Markets
The performance of ESFG is generally influenced by conditions in the global financial markets and the
macroeconomic conditions in the countries in which it operates. Since the beginning of the financial crisis,
the global financial system has operated under difficult conditions and the markets are still recovering from
the negative effects following the insolvency of several international banks since September 2008. As a
result, over the past five years there have been periods of unprecedented disruptions in the financial
markets worldwide in relation to liquidity and funding of the international banking system. In addition, this
situation 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 EU and the United States) intervened by injecting liquidity and
capital into the financial system with the goal of stabilising these financial markets and, in some cases,
preventing the insolvency of certain banking institutions.
Despite these measures, volatility in the capital markets has continued. The sovereign debt crisis in Europe
in the 2010 to 2012 period exacerbated investors' fears and led to uncertainty with respect to the European
financial sector, particularly with respect to the economies in the periphery of the Euro Zone. Although
financial and economic conditions in the Euro Zone stabilised during 2013, certain adverse factors
remained, including political instability in Ukraine and Italy and the financial crisis in Cyprus. Greater
stability in the financial markets resulted from a strong improvement in systemic risks related to the
sovereign debt crisis, as well as a gradual improvement in business growth forecasts. New steps toward
consolidation in the banking sector also contributed to a boost in confidence. Nevertheless, the risk of
default and the possibility that the contagion effect spreads to other EU member states remains.
The impact a sovereign default could have on the Euro Zone countries, including the potential exit of some
countries from the Euro Zone, continues to raise concerns, though to a lesser extent, about the ongoing
viability of the euro currency and the European Economic and Monetary Union.
A worsening of the economic and financial climate may create challenges for ESFG and the occurrence of
any one or more of the events described above may adversely affect its business, financial condition and
results of operations in the following ways:

a general slowdown in the business of ESFG may increase its funding costs (both wholesale and
retail) and reduce its share prices and asset values, which may have a material adverse effect on its
financial performance and condition;

an exposure of ESFG to potential losses if certain financial institutions or other counterparties to
ESFG, become insolvent or are not able to meet their obligations to ESFG. Moreover, the
performance of ESFG may be influenced by an inability to recover the value of its assets at
percentage levels consistent with its historical recovery estimates, particularly as such estimates
could prove to be inaccurate if significant volatility returned to the financial markets; and

numerous banks worldwide continue to be supported in part by various "rescue plans" and other
types of support by their home country governments and ESFG is unable to determine 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, or if necessary expand, this support. Any
failure of government support to continue, or if necessary to expand, could result in more bank
failures and a heightened lack of confidence in the global banking system, thus increasing the
challenges faced by ESFG and other financial institutions. With the goal of reducing or completely

Page 9

eliminating the link between the sovereign and the financial system, the Euro Zone has recently
adopted legislation relating to a unified regulatory framework for the banking industry (the
"Banking Union") so that in future financial crises countries no longer have to bear the support to
the financial system. This new regulation will limit the support governments can give to financial
institutions in the future.
In general, the deterioration of economic conditions and an unfavourable financial environment, including
those potential developments outlined above, could have a material adverse effect on ESFG's business,
financial condition and results of operations.
ESFG is subject to the risk that liquidity may not be available, and this risk may be exacerbated by
market conditions
Liquidity risk arises from the present or future inability to pay liabilities as they mature. Banks, principally
by virtue of their business of providing long-term loans and receiving short-term deposits, are subject to
liquidity risk.
Customer deposits are the main source of funding for ESFG. The maintenance of sufficient customer
deposits to fund ESFG's loan portfolio is subject to certain factors outside ESFG's control, such as
depositors' concerns relating to the economy in general, the financial services industry or ESFG
specifically, ratings downgrades, significant further deterioration in economic conditions in Portugal and
the existence and extent of deposit guarantee schemes. Any of these factors on their own or in combination
could lead to a reduction in ESFG's ability to access customer deposit funding on appropriate terms and
could result in deposit outflows, both of which would have an impact on ESFG's ability to fund its
operations and meet its minimum liquidity requirements, potentially increase its funding costs and may
require ESFG to increase its use of sources other than deposits, if available, to fund its loan portfolio.
ESFG's liquidity could also be impaired, namely by an inability to access the capital markets, an inability
to sell assets or redeem its investments, other outflows of cash or collateral deterioration. These situations
may arise due to circumstances that ESFG is unable to control, such as market volatility, loss in confidence
in financial markets, uncertainty and speculation regarding the solvency of market participants, credit rating
downgrades or operational problems that affect third parties. Access to financial markets has been
challenging since the disruptions in the financial markets in 2007. Despite the improvement in the markets
since mid 2013, funding in the interbank markets or via the capital markets has been very difficult,
especially since 2010 for banks in the EU periphery economies. Even a perception among market
participants that a financial institution is experiencing greater liquidity risk can cause significant damage to
the institution. Specific ways in which ESFG could find its liquidity further impaired include the following:

increased difficulty selling ESFG assets, particularly if other participants in distressed situations
are seeking to sell similar assets or because the market value of assets, including financial
instruments underlying derivative transactions, has become difficult to ascertain, which has
occurred in the recent past;

financial institutions with which ESFG interacts may exercise setoff rights or the right to require
additional collateral;

if the customers with which ESFG has outstanding but undrawn lending commitments were to
draw down on these credit lines at a rate that is higher than ESFG is anticipating;

ESFG's contingency plan for liquidity stress scenarios relies largely on its ability to enter into repo
transactions with the ECB. If the ECB were to suspend its repo programme, and if no similar
source of repo financing were to exist in the market, this could severely impede ESFG's ability to
manage a period of liquidity stress; and

increase in credit spreads, as well as any restriction to inter-bank credit and other credit.

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