Banks are on the hook. Shareholders get slammed.
By Don Quijones, Spain & Mexico, editor at WOLF STREET.
Spain’s benchmark stock exchange, the Ibex-35, has been through the grinder the last couple of days, with some stocks falling like flies. The primary reason, besides the deteriorating global backdrop, is the huge volume of debt floating on or just below the surface of corporate balance sheets.
Far and away the worst performer is Abengoa, a Seville-based multinational, specialized in renewable energy and “environmental services.” Just in the last two days, its share price has collapse nearly 50%.
Making Shareholders Pay
One of the biggest players in the renewable energy market, Abengoa leads huge projects all over the world. It runs the biggest bioethanol plant in Europe, is executing one of the world’s biggest water projects, in Mexico, and is the biggest developer of solar-thermal plants. But the company also has a huge amount of debt. So much so that yesterday it announced plans to sell assets worth some €500 million as well as increase capital by €650 million. In other words, its existing shareholders are left holding the bag. Hence the desperate stampede for the exits.
According to the company’s management, the drastic restructuring is needed in order to reduce its corporate debt as well as put to bed, once and for all, the endless rumors and speculation about its struggling finances. Where investors might have gotten that idea from is anyone’s guess.
Creative Accounting Abengoa-Style
According to Abengoa’s latest financial report, for the first two quarters of this year its discretionary cash flow after investments was a negative €304 million, to sustain a total (declared) debt load of €6 billion – “declared” because when it comes to not declaring certain parts of its debt, Abengoa has plenty of form.
For instance, late last year it got into trouble for not declaring its so-called “green bonds.” Its justifications was thay the bonds qualified as uncollateralized debt – a view that was not entirely shared by the credit rating agency Fitch. In fact, in its analysts’ report on Abengoa, Fitch warned that the company’s total debt was at least double the amount stated in its financial report.
The company had tried to manage its debt exposure through the creative use of what is known in the business as a “yieldco”. (Yieldcos are the state-of-the-art financing mechanism currently en vogue in the renewable energy sector, a “dividend growth-oriented public company created by a parent company that bundles renewable and/or conventional long-term contracted operating assets in order to generate predictable cash flows”).
In other words, it allows firms to quietly transfer debt from the mother ship onto a purposely built, publicly listed debt frigate. And that’s precisely what Abengoa hoped to achieve through the launch on NASDAQ, in June 2014, of Abengoa Yield: to gradually shift its more than €6 billion of debt off its own books and on to Abengoa Yield’s, which is headquartered in (drum roll)… the City of London.
As Abengoa’s then-chief executive Manuel Sánchez Ortega said at the time, when things get serious, you need to have your wits about you and “Abengoa has always been at the leading edge of financialization.”
Not that financialization has done the firm any favors; on the contrary, it seems to have merely dug it a deeper grave. Even with the assistance of Abengoa Yield, Abengoa had zero chance of concealing – let alone overcoming – its acute debt problems. As for Manuel Sánchez Ortega, he resigned three months ago, allegedly due to heart problems. On a positive note, he seems to have made a remarkable recovery, judging by his recent recruitment by the world’s largest asset manager, Blackrock, where his financialization skills will doubtlessly be put to good use.
As for Abengoa, its spectacular fall from grace seems set to continue, barring of course government intervention. And with general elections just around the corner, now is certainly not the time for another taxpayer-funded bailout. As El Confidencial reports, if the company does go the way of the dodo, the potential reverberations will be felt not only in Spain’s financial sector, where Santander, Bankia, Caixabank, Banco Popular and Banco Sabadell have all chipped in to keep Abengoa afloat, but also in France (Credit Agricole, Société Generale, Natixis), the UK (HSBC) and the U.S. (Bank of America and Citi Group).
In fact, Citi may well be the most exposed of all. As the preeminent bank of choice of Abengoa’s founding Benjumea family, its total exposure could exceed €100 million. Not only that: the bank’s analysts have spent the last year urging investors to buy up Abengoa’s shares – when analysts had tagged it with a price target of €6. Its Class A shares are now down to €1.54.
For Spain’s corporate sector, Abengoa’s recent troubles should serve as a cautionary tale on the dangers of over-indebtedness and excessive dependence on the dark arts of financialization. However, judging by the number of other heavily indebted companies that seem intent on following Abengoa’s example and sharply increasing their own capital base to the detriment of their existing shareholders, it’s probably much too late in the day for that. By Don Quijones, Raging Bull-Shit.
And the City of London, the center of a secretive financial web spanning the entire globe, well, the British Prime Minister just declared that he’d do the impossible. Read… Fat Chance: Cameron Vows to Clean Up UK Property Market