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Blinded by the light

27 November 2015 By Fiona Maharg-Bravo, Neil Unmack

Spain’s Abengoa has its creditors over a barrel. The engineering and renewable energy group is seeking court protection from its creditors after a new investor backed out of providing fresh equity. The group might survive if creditors accept a haircut of two-thirds and new cash can be found. In liquidation, losses would be much worse.

The starting point is how much debt Abengoa, which builds, operates and then sells infrastructure like solar plants, can handle. The debt for which it is directly responsible totals 7.9 billion euros, equivalent to nearly eight times its EBITDA for the past year. Assume Abengoa can make 750 million euros of EBITDA a year, and a reasonable amount of leverage is 2.5 times that, and borrowings would need to be slashed to 1.9 billion euros, implying a recovery of just 35 percent for current creditors.

Yet Abengoa’s bonds are trading lower, some around 15 percent of face value. That’s partly because the outcome could be much worse if Abengoa is declared insolvent. That is a real risk, because its business model requires lots of capital. Cash is likely to drain away if banks refuse to roll over working capital loans or customers withhold payments. And if Abengoa can’t keep building, some 2 billion euros of performance bonds – issued to customers as a guarantee that projects will be built on agreed terms – could become due.

That puts creditors in a race against the clock, because if those performance bonds are triggered, there will be more lenders chasing the same assets. Including payments to suppliers, Abengoa’s obligations in an insolvency could be 12 billion euros, CreditSights reckons.

Abengoa could sell its 47 percent stake in listed affiliate Abengoa Yield, or its existing concessions, or its projects under construction – together worth possibly 3 billion euros. But buyers may demand a steep discount for unfinished assets with high cash needs and debt attached.

The company has four months to reach an agreement with creditors before formal insolvency. Spanish courts work slowly. Given the uncertainty, they are likely to be willing to accept steep haircuts and debt-for-equity swaps. Rebooting Abengoa’s business model may be a tall order given its size and complexity, but it would still be far less painful than letting Abengoa sink.


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