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