“Negative profits were being converted into positives.”
By Don Quijones, Spain & Mexico, editor at WOLF STREET.
Abengoa, the Spanish renewables giant that once thought it had mastered the dark arts of financialization only to crumble under the weight of its own debt, urgently needs a lifeline. In November, it filed for preliminary protection from creditors. If it doesn’t get a lifeline, it will be go down in history as Spain’s biggest bankruptcy ever.
According to the latest accounts, its creditors may have thrown it that lifeline, but barely enough to last through the very inconvenient general elections this Sunday and the holidays, when the government is off.
A Last Minute Stay
Amazing as it seems for a publicly traded company, there’s still “no official figure for the firm’s total financial liabilities,” Reuters reported, though “separate sources familiar with the matter say they total at least €25 billion.”
The banks on the hook for about 80% of that debt include Spain’s Santander, Caixabank, Bankia, Banco Sabadell and Banco Popular; France’s Credit Agricole, Société Generale and Natixis; London-based HSBC and the US behemoths Bank of America and Citi. These banks could have a big problem on their hands, especially since the Spanish government is currently powerless to intervene.
In normal circumstances, finding a few hundred million euros to help out a domestic company in need — especially one that is estimated to owe national and international banks and investors €25 billion — would be routine, particularly when Mario Draghi is conjuring up €60 billion of QE funny money each month.
But these are not normal circumstances. The general elections this Sunday are so tight they’re impossible to call. And just before the election is certainly not the time for the government, which has been preaching austerity to the regular people, to be bailing out yet another big company.
Instead, the banks have stepped in with an offer of €210 million so that Abengoa can pay salaries and maintain current operations, at least until the next round of negotiations. This temporary stay of execution keeps the company alive for a few more weeks and certainly past the elections on Sunday; it helps the government avoid the Dickensian sight just before the elections of tens of thousands of global workers, including 6,000 in Spain’s southern province of Andalusia, where the unemployment rate is 31%, going unpaid.
Shifting the Pain
In other parts of the world, the fallout is already being felt. In Brazil, 2,300 Abengoa workers – 42.5% of the workforce – have been laid off. According to some reports, Abengoa intends to keep on only 400 of its 5,400 employees in the country.
The company’s Mexican division is in default, after its announcement on December 3 of missed principal and coupon payments on some of its peso-denominated commercial paper. Moody’s:
Under the underlying indentures, the missed payments constitute an event of default if not cured in a 5-day period and trigger the anticipated amortization of all debt outstanding under the program.
Considering that the missed payments refer to a modest amount of around MXN 267 million (USD 15.8 million), Abengoa Mexico’s inability to service them reflects the lack of access of the Mexican subsidiary to its surplus in the centralized treasury controlled by its parent company, Abengoa S.A. (Caa2, negative) in Spain.
Bizarrely, Abengoa’s activities in Mexico have, if anything, increased in recent years, even amidst growing speculation about the company’s chronic debt problems. As Tomás de la Rósa writes in Economia Hoy, many domestic construction companies – including the number-one firm by revenues, ICA, which now potentially faces its own multi-billion dollar bankruptcy – have persistently complained about Mexico’s National Bank for Public Works and Services’ perceived favoritism for foreign construction and infrastructure companies, particularly those from Spain [a subject I covered last year in Spain’s Silent Reconquest of Mexico].
Whatever the reason, Mexico’s government and investors should have done a little more research on Abengoa’s financial health: In November, the very month Abengoa filed for preliminary protection from creditors, the company was still able to sell 550 million Mexican pesos (€30 million) worth of short-term debt.
The Ultimate Indictment
It wasn’t just Mexico’s government that was seemingly caught unawares by Abengoa’s implosion. Only weeks before the company hit the wall, Standard & Poor’s upgraded its long-term rating on the company, saying it expected it to “execute various actions to reduce debt over 2015.” And the company’s auditor, Deloitte, didn’t express any alarm about Abengoa’s financial situation until November 13, just two weeks before the company announced that it was seeking preliminary protection from creditors.
But there’s someone who didn’t miss Abengoa’s collapse: Pepe Baltá, a 17-year old secondary school student in Barcelona who chose Abengoa as his economics project last year! Baltá noticed serious flaws in the company’s accounting. “If it does not act soon, there is a strong risk Abengoa will go into bankruptcy,” he wrote in his 18-page paper, titled “Analytical Report on Abengoa, 2012 and 2013.”
“I have some accounting knowledge,” Baltá, now 18, told the Spanish daily El Mundo, “and Abengoa’s accounts did not seem to add up. There was a lot of debt and few active assets compared to fixed ones. The big surprise was that negative profits were being converted into positives. I didn’t understand how they could do that.” By Don Quijones, Raging Bull-Shit.
Even the central bank of Mexico frets about this explosive dollar debt. Read… It Begins: Investors Brace for Mexico’s Biggest Corporate US-Dollar Bond Default in 20 Years
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