Accounting tricks come home to roost.
By Don Quijones, Spain & Mexico, editor at WOLF STREET.
Over a month ago, it seemed that Abengoa, the global renewables giant headquartered in Spain, that once thought it had mastered the dark arts of financialization only to crumble under the weight of its own debt, appeared to be on the path to recovery. Or at least rebirth.
A Spanish judge had agreed to give the firm seven more months’ breathing space through a debt standstill. More importantly, 75% of the company’s lenders, including banks and bondholders, had provisionally agreed to the company’s restructuring plan, which includes a debt-for-equity swap and 70% write-downs on its over €9 billion debt.
The plan also includes opening up between €1.5-1.8 billion of credit lines for Abengoa, as well as €800 million in guarantees. Much of this would be provided by current bondholders and lenders, though some of the slack is expected to be picked up by private equity firms like KKR, Blackstone, Cerberus, Apollo, Centerbridge, Children’s Investment fund (TCI) and Oaktree.
Abengoa desperately needs the money to keep paying wages and invoices as well as fund what’s left of its day-to-day operations. The company also faces litigation proceedings worth €650 million. If the debt renegotiation falls through, Abengoa will go down in history as Spain’s biggest ever corporate failure.
For the company’s creditors, it makes more sense to agree to a haircut, even if it’s a large one, than lose everything. The list of creditors is exhaustive and includes many of Spain’s bailed-out saving banks as well as international giants like Credit Agricole, Societe Generale, Natixis, HSBC, Bank of America, and Citi. Santander is the bank with the greatest exposure to Abengoa (€1.55 billion) and is the most interested in sealing the deal.
By the terms of the agreement, current shareholders would keep just 5% of New Abengoa. The firm’s founding family, the Benjumeas, who are roundly blamed for the company’s woeful mismanagement, would only own 2.5% of the new company, while banks and bondholders would receive 40%, in return for the 70% haircut on old Abengoa’s debts.
Everything seemed to be proceeding towards a settlement for most concerned. But then Monday morning, the financial daily El Confidencial published a bomb-shell article revealing that Abengoa’s creditors had discovered a gaping hole in the company’s accounts that could derail the ongoing negotiations:
According to a number of sources, the creditors’ due diligence has confirmed that the total value of assets offered by Abengoa as collateral in exchange for the fresh injection of liquidity… is less than the amount that the company and banks’ respective consultants, Alvarez & Marsal and KPMG, had initially calculated. The discrepancy is in the order of €1 billion, which will make it very difficult for Abengoa to pay off the principal of its new debt.
The response of investors to the news was instant. The firm’s B-shares plunged 15% to €0.17 in the first hour of trading. The company’s A-class shares shed 11%, settling at €0.46. A year ago they were worth €3.20.
One of the key factors in the €1-billion accounting discrepancy was allegedly Abengoa’s sudden withdrawal, in March, from a contract to develop a co-generation plant in the Mexican state of Oaxaca with the Italian energy giant Enel. The plant was meant to supply Mexico’s beleaguered state-owned energy behemoth Pemex with electricity and steam and was estimated to be worth somewhere in the region of €950 million.
Abengoa’s withdrawal from the deal was part of its tactical retreat from key global markets, including Brazil, Mexico, and the U.S., where it has left behind a vast trail of unpaid debt, cancelled operations, unemployed workers, and bankruptcy filings [read: Investors, Creditors Getting Demolished by this Global Renewables Giant].
Until now, the worst of the labor pains have been felt by overseas workers, but that is about to change. Last week Abengoa announced plans to carry out adjustments as part of its restructuring program which could affect up to 10% of its 5,000 workers in Spain. That’s on top of the 1,500 workers the company has shed in recent months through contract terminations, resignations, or voluntary retirement. Almost all of the jobs on the line are in Spain’s southern province of Andalusia, which boasts an unemployment rate of 31%, one of the highest in Europe.
With a fresh round of general elections scheduled for June 26, Abengoa’s job losses are almost certain to dominate the political debate. Susana Diaz, the president of Andalusia’s regional government, already set the tone in a radio interview today. “We have to save Abengoa no matter what, there’s no discussion,” she thundered. The banks have to “stick their neck out” for the firm, she said, reminding voters that in Spain “we have got ourselves into debt to keep the financial system afloat” and now it’s the banks who “must not allow Abengoa to fall.”
And that is how Abengoa, a generations-old engineering firm that has been bled dry by a parasitical clique of senior managers who used every accounting trick in the book to hide the scale of the debts they’d amassed while paying each other exorbitant compensation packages, will probably end up being saved — not by suddenly soul-searching Spanish banks or New York-based private equity funds, but by tens of millions of unconsulted taxpayers. By Don Quijones, Raging Bull-Shit
Moody’s called it a “very serious threat … to Spain’s entire mortgage market.” Read… Spanish Banks Brace for Ultimate Showdown
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How many more “smoke and mirrors” corporations are there?
That’s the only one.
Just kidding. Some people will argue that there are no inherently corrupt corporations, but only corrupt people who make corporations corrupt. But that would not be true. The very nature of corporations makes them self-selecting for people with piratical tendencies.
http://thecorporation.com
Bullshit.
Humans are imperfect, and reasonable regulation is required to co-exist with capitalism (speaking as a retired CFO).
Abengoa is simply an example of what happens when corruption is obvious and no body cares. Not only should a bunch of Abengoa managers end up in prison, so should a lot of in-the-know politicians & regulators (not all of whom are in Spain…). Don’t hold your breath.
I actually watched 123 minutes of this rambling mess called the corporation. It’s all I could take. I wanted to puke every time I see Michael Moore (net worth $50 million) lecturing about the evils of “the corporation” & capitalism. Should have had a cameo appearance with Gore. Is there mostly truthful facts given in the film? Yes. But it’s all over the map.
The human race has strip mined the planet & is slowly destroying the capacity to sustain life as all systems are in a state of decline. That much anyone of reasonable intellect can deduce. To say it is all the fault of this “person” called a corporation & not corrupt people? Ok, have at it, ad infinitum. Maybe more regulations are needed ? We went down this road before but I never got the concise list of regulations from you that you always say we need. Perhaps regulations could work IF the regulators weren’t as greedy as the businesses they are supposed to regulate. Good luck with that. Regulations aren’t going to alter the actions of greed & evil just like a law against murder isn’t going to prevent someone from murdering another. Neither will elimination of this “person” called a corporation or any other fiction man has dreamt up.
You’re right, Biggie. It’s hopeless.
Why, when the situation is so clear and alarming, does it remain so stubbornly intractable to change? It’s because those who have power in the world want it to be this way. And like The Machine said, it is in your nature to destroy yourselves.
Fortunately this kind of problem has a way of solving itself, much to the relief of whatever other species manage to survive. Even the plastic crap and synthetic radionuclides should be taken care of by geologic forces eventually.
As for Abengoa, the winners are the bank cartel and Big Oil. No surprises there. When a wounded shark becomes the target of a feeding frenzy the biggest sharks naturally get the biggest shares. The banksters will be feasting on the carcass for as long as they can get their cronies in Madrid to feed it.
Come on Walter, don’t take away my hope. I had just turned away from the “edge ” & was headed back to my watering hole :-)
..
Classic:
.
.
“We have to save Abengoa no matter what, there’s no discussion,”
” After setting be priority, Diaz explained that later will be analyzed why is the company in this situation, …”
.
.
?????? Abengoa and the family Benjumeas contributed heavily to Diaz campaign – you can bet on that . ??????
“Abengoa’s creditors had discovered a gaping hole in the company’s accounts” – Wow, took a long time to find a billion$ discrepancy.
“current shareholders would keep just 5% of the New Abengoa” – so the haircut % the shareholders are taking is ???
I see these things, & a little voice inside my head screaming (never said I wasn’t troubled :-) contagion, contagion, contagion, is what I hear ——————–
And they were “helping” Pemex? Exact financial connections?
Childrens Investment Fund (TCI) – sounds like some garbage US leaders would dream up. Oh, it’s a private hedge fund regulated in the UK. All clear now. Beautiful name though.
BTW, share holders often get totally wiped out in debt restructurings. So if they get to keep 5%, they got a DEAL!
I suppose the 5% is at the “new” devalued valuation so I bet they are inching ever closer to zero. Ah, subordinate debt structures. Darn it, there goes the voices again :-)
Abengoa shareholders (including the Benjumeas family) get 5% of a company that lost 97% of market value in the last 2 years.
Yahoo Finance shows current Abengoa market cap at $1.9B (worth about $63B two years ago), 5% of which ($95M) belongs to common share holders.
Thus common shareholder value is 95/63,000 (0.15%) of what is was 2 years ago; a common share holder haircut of 99.85%.
But like Wolf said, they’re lucky to get anything this was probably only done for some benefit to the Benjumeas family (just a wild guess).
Here’s my guess. I have not checked this out in Abengoa’s case, but normally, that fraction of equity that existing shareholders get (if any) is of the restructured corporation. So that 5% would be 5% of the restructured equity, with 95% going to creditors and others. So that 5% would have some value, but a lot less value than 100% did a few years ago.
Thanks for doing the math for me Chip.
Abengoa went from being a respected and profitable company to a corrupt POS facing bankruptcy within a couple of years. How? That sort of collapse doesn’t simply happen. It might be interesting to understand the factors which have led to its present parlous state, and perhaps even financially actionable.
I’ve assigned the case study and should have some reliable facts in fairly short order. It’s easy enough to speculate about the usual bad actors and conditions turning adverse, but I will defer judgement for the present.
Walter
From your comment, I assume you are a teacher/professor (I’m a retired USA CFO).
Besides the particulars of this solid example, I sincerely hope you teach your students that citizens in any non-comminust/totalitarian society (including socialist) have an absolute social obligation to hold their elected representatives accountable for preventing/prosecuting corruption – including rigorously investigating the whiff of corruption.
I am an art critic.
A few pointers, Walter:
— The company’s thirst for debt-fuelled growth and diversification, at any cost.
— The Rajoy government’s withdrawal of Spain’s very generous renewable energy subsidies a couple of years ago, which wiped out many companies, domestic and foreign.
— The company’s embrace of the dark arts of financialization. It’s worth checking out the U.S. subsidiary Abengoa Yield, which has now virtually cut all ties with the mother ship.
— Woeful mismanagement. In particular the former president Felipe Benjumea, who’s accused of malfeasance, and Manuel Sanchez Ortega, who’s accused of sharing insider information about Abengoa’s finances with his new employer, BlackRock. (Read: http://wolfstreet.com/2015/12/21/mother-of-all-shorts-how-blackrock-made-a-killing-from-spains-biggest-ever-corporate-meltdown/)
Hope that helps.
Thank you Don Quijones.
The Rajoy government’s withdrawl of subsidies was retroactive, and after the firm had made commitments based on those subsidies. Same with other governments. Brutal.
Other Rajoy actions appear to have been deliberately destructive and politically motivated, such as onerous taxes on Spanish solar installers and gratuitous withdrawl of licenses. The firm appears to have been targeted politically by every industry adversary group of renewable energy in the world. The global recession, competition from the collapse of natural gas prices, and renewable energy policy changes in several countries appear to have adversely affected demand for its products since 2009.
Llorente appears to have been trying to cash out before the fall but otherwise did not deliberately undermine the company. But several of Ortega’s actions suggest that he worked for BlackRock for some time before becoming an actual employee. BlackRock’s liability may not be a separate issue.
The firm’s financing problems became serious only after Spain joined the ECB, and it’s involvement with Citibank was certainly adverse. Do you have any further details on those?
A nice exercise. Thanks again.
Tbh, not much, Walter. Good digging. :-]
Did somebody say Enron?
Abengoa seems to be a lovely combination of Enron (on-going criminal enterprise undisturbed by regulators, prosecutors, auditors) and Solyndra (half-bilion dollar government subsidy to political contributors)
The renewable energy industry is not a method to extract electricity from renewable resources. It is a way to extract money from the pockets of taxpayers and deposit it into the bank accounts of the One Percenters who own and manage the companies.
Brilliant!
And anyone foolish enough to actually invest in a company in that business pretty much gets what they deserve.
“The renewable energy industry is not a method to extract electricity from renewable resources. It is a way to extract money from the pockets of taxpayers”
Just goes to show just how wrong you can be.
Here, have a hanky. You have egg on your face.
Rajoy’s government would do ANYTHING to keep this zombie criminal company just one step away from bankruptcy. They are already doing it.
Abengoa could destroy Western civilization as we know it and still get bailed out.
No representation. When it comes to taxpayer funds being spent on pet projects “no matter what, there’s no discussion,”
Beginning and End, of story. This isn’t about anything other than theft, despite the distracting rhetoric.
How did spain post franco get so rotten so fast. and get into the Eur.
““We have to save Abengoa no matter what, there’s no discussion,” she thundered. The banks have to “stick their neck out” for the firm, she said, reminding voters that in Spain “we have got ourselves into debt to keep the financial system afloat” and now it’s the banks who “must not allow Abengoa to fall.””
So she is willing to pour more good taxpayer money after bad in to Abengoa. To keep herself in fat salary state employment.
Then when the banks need another bail out to deal with the next set of NPLs from Abengoa she will say the banks bailed out Abengoa for us so now we must bail out the banks.
As after the proposed bailout Abengoa will still be debt ridden and probably unprofitable.
Better idea.
Let Abengoa fail and stand this Diaz along with the administrators of Abengoa against the nearest wall and shoot the lot of them.
Spanis corrupt company administrators and politicians will not change, until given a reason to.
A very few firing-squads will do that.
I have some surplus ammo. I’ll mail it pronto.
“How did spain post franco get so rotten so fast.”
Are you kidding me? There is no “post franco” era, it’s the same regime with the same faces. Literally the same faces. Now Podemos is trying to change that, but here we are, in the same situation as 1977.
Spain has had 38 + years to change it, and make it good.
Blaming it all on Franco, dosent fly any more.
And it was nowhere near this rotten under Franco.
All the old Spanish and Portuguese colony’s along with Spain have the same disease
They got the disease from the Vatican.
However they have had the time to eradicate it, they have chosen not to.
Abengoa is not a Spanish energy company, it’s a beard for looting US and EU taxpayers, same management as Fannie Mae look here http://www.bloomberg.com/research/stocks/people/relationship.asp?personId=4882678&ticker=ABG:SM&previousCapId=0&previousTitle=ClimateWorks%20Foundation
Same MO as the massive Fannie Mae fraud too, chump Taxpayers stuck with federally coerced guaranteed loans.