Out-of-money Abengoa, felled by debt and shady accounting.

By Don Quijones, Spain & Mexico, editor at WOLF STREET.

Few companies epitomize the failings, follies and foibles of today’s age of hyper-financialized, super-crony capitalism quite like Spain’s teetering green-energy giant Abengoa. The firm came within inches of becoming Spain’s biggest ever bankruptcy last year after embarking on a suicidal multi-year international expansion program fueled by exceedingly generous renewable energy subsidies and massive helpings of bank and corporate debt.

But the subsidies were abruptly taken away when the Spanish government changed. When it had trouble dealing with its debt, the company began hiding it through increasingly complex financial vehicles set up, of course, in the City of London. As Abengoa’s then-CEO Manuel Sánchez Ortega crowed 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.”

Last year Abengoa’s off-balance sheet debt load became so unwieldy that it could no longer be hidden. In August the company announced that it would need a new capital expansion, which triggered a massive shareholder exodus and the collapse of its share price. By November things were so bad that even Deloitte, its trusted auditor, refused to sign off on the firm’s accounts, leaving management with little choice but to announce that it was seeking preliminary protection from creditors.

By that time Sánchez Ortega was gone, having taken a new job with the world’s biggest investment fund, BlackRock, which took a massive short position against Abengoa just weeks after his appointment. Blackrock is also now the proud owner of 563,000 shares of Abengoa’s renamed, rebranded U.S subsidiary, Atlantic Yield.

In February this year, its US unit Abengoa Bioenergy US Holding filed for chapter 11 bankruptcy in the US. In March, the parent company in Spain filed for chapter 15 bankruptcy in US to get access to protection in the US courts.

Back in Spain, Abengoa is apparently back on the mend after nine months of intense negotiations with its creditors and a massive divestment program. Last week the firm announced that it expects to win the approval of at least 75% of its creditors for a restructuring plan by Sept. 30. The banks and hedge funds that own most of its unpaid debt are already on board.

But not everyone’s convinced. They include rating agency Moody’s, whose senior analyst, Scott Phillips, warned that while the proposed restructuring, if completed, will probably provide a “more sustainable capital structure” and “significantly lighter debt interest burden,” the restructuring plan’s success is far from guaranteed.

The analyst cites three reasons for the prevailing uncertainty. The first is the firm’s liquidity situation, which could deteriorate sharply in the event of an economic downturn. If the group can’t reach the forecast cash flow through asset sales and cost cutting, its liquidity capacity will be reduced, Moody’s warns.

According to Abengoa’s own calculations, which should probably be taken with a fairly large pinch of salt, it has a liquidity shortfall of €830 million for what remains of this year and next. That will apparently be financed through money raised from the sale of assets worth around €420 million and the entrance of €510 million worth of new money, most of it from international hedge funds. In total, the company will need €1.17 billion, of which €590 million will be used to refinance past obligations.

The second reason for uncertainty cited by Moody’s is the massive list of conditions and obligations to which it will be bound if the agreement is finalized. If the firm fails to comply with “any of the agreement’s conditions,” it could delay or even prevent the execution of the restructuring plan. Those “conditions” include the firm’s tortured negotiations with its suppliers.

Abengoa has no money whatsoever to pay its debts to suppliers or even its workers’ salaries, as its lenders and bondholders refuse to give it any fresh cash despite signing the new agreement. The international hedge funds that have pledged to provide most of the new funds are reluctant to release any new cash until the requisite three-quarters of Abengoa’s creditors sign along the dotted line.

The biggest fear is that the firm’s suppliers may not abide by the terms of the new agreement. After all, it is they and Abengoa’s workers who have borne the brunt of the fallout from Abengoa’s collapse. According to one Spanish daily, Abengoa sent its suppliers a proposal in March that included a 60% haircut on the debt it owed them and payment of the remaining 40% in two installments — one for 30% that was supposed to be paid last June and the other for 10% that will be paid in June 2017.

Abengoa is reportedly dealing with its suppliers and the €3.5 billion it owes them on a one-by-one basis. In recent weeks the firm announced that it will apply a further haircut of €300 million to that debt as well as defer payment of up to €688 million to suppliers — double the amount previously agreed upon!

As conditions worsen, more and more suppliers may choose to seek repayment of their debt through judicial process, which they are perfectly entitled to do. If enough of them go down this path, it could jeopardize Abengoa’s entire restructuring plan.

Moody’s cites a third, even more important reason for the current uncertainty surrounding Abengoa’s future: leverage. Even after it had completed its restructuring, Abengoa’s consolidated leverage ratio would still be unseemly high, with gross debt of over 10 times Ebitda until at least 2020. Abengoa would have to pay an interest rate of around 15% on all of its newly refinanced debt despite being a shadow of its former self, having sold off many of its juiciest foreign assets, including in the U.S., Mexico, Israel and Brazil. Hence, Moody’s reservations.

Spain’s taxpayers will be once again be left on the hook, this time for €250 million of government guarantees. Spain’s caretaker government is also considering allowing the participation of the state-owned Official Credit Institute. If things go sour, the company’s new creditors will be cushioned from the pain by Spain’s eternally generous taxpayers. By Don Quijones, Raging Bull-Shit.

Or maybe Abengoa should coddle up more closely to the ECB, as some other companies are doing, to benefit from its program of Financial Darwinism. Read…  Revealed: ECB Secretly Hands Cash to Select Corporations

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