Fleeced Mexican investors against big banks, hedge funds.

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

After nine months of fraught negotiations with its senior creditors, Spain’s teetering green-energy giant Abengoa is tantalizingly close to a financial fresh start. In August, the firm announced that it expects to win the approval of at least 75% of its creditors for a restructuring plan by September 30. The banks and hedge funds that own most of its debt are already on board.

But not everyone’s convinced. The company’s B-shares have barely budged from the €0.20 level since the announcement. As WOLF STREET reported a couple of weeks ago, the US rating agency Moody’s played down the restructuring plan’s chances of success, citing three main causes for concern:

1. The firm’s precarious liquidity situation;
2. Its unseemly high leverage ratio (even after the restructuring is completed)
3. The towering list of conditions and obligations to which it will be bound once the agreement is finalized.

The biggest issue was how two of Abengoa’s largest, most valuable markets — Brazil and Mexico — would react to the company’s announcement that it was seeking preliminary protection from creditors.

A Major Headache

Brazil and Mexico were the two countries that bore the brunt of the fallout from Abengoa’s financial collapse. In Brazil, 2,300 Abengoa workers – 42.5% of the workforce – were laid off in the first few weeks. The response of the Brazilian government was to threaten to embargo Abengoa’s Brazilian assets, including the seven electricity transmission lines it operates and another nine that are under construction. In Mexico, Abengoa’s subsidiary defaulted on tens of millions of dollars worth of debt, resulting in a flurry of investor lawsuits.

Both developments were a major headache for Abengoa’s biggest creditors — Spanish and international banks, global hedge funds and the Spanish government. They’re determined to see the firm rise from the ashes, thereby saving themselves the inconvenience of having to completely write off part of much of their investments in the firm. Even if a final agreement were reached to restructure the company, Abengoa could end up losing hundreds of millions of euros worth of assets in Brazil as well as having to shell out millions of euros in compensation in Mexico, both of which would decimate the company’s already shrinking value.

But the headache is apparently beginning to subside — at least in Brazil. According to the Spanish daily El Confidencial, the dispute there is within a whisker’s breath of resolution after U.S. private equity fund EIG Global Energy Partners agreed to take over Abengoa’s assets, not only in Brazil but also in Mexico.

The problem is that Abengoa’s Mexican creditors are not on board. In fact, they weren’t even consulted. As far as they’re concerned, Abengoa Mexico has failed to service its bonds that it issued in Mexico, and now they would like their money, or at least part of it, back. Hence the three lawsuits lodged against Abengoa’s Mexican subsidiary. There are also growing calls for Mexico’s government to embargo the firm’s assets — the same assets that EIG Global Energy Partners are rumored to have just bought.

“Where’s the Money Gone?”

The main reason for the confusion is that Abengoa Spain effectively operated a “centralized treasury,” says Jaime Guerra González, a lawyer for Monterrey-based investment bank Banco Base, one of the claimants against Abengoa. As such, the 3 billion pesos (€150 million) that was raised through the issuance of bonds in Mexico ended up in the head office accounts in Spain. “That helps to explain why the Mexican subsidiary had no money,” says Guerra.

The same conclusion was drawn by U.S. rating agency Moody’s following Abengoa Mexico’s default on its bonds, on December 3, 3015:

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.

Abengoa’s Mexican investors were not the only ones wondering where their money had gone. The same concern — that Abengoa was transferring cash and loan proceeds from its international subsidiaries to its bankrupt mother ship in Spain — was raised by creditors of Abengoa Bioenergy US Holding, which filed for Chapter 11 bankruptcy in February.

Most damning of all, in November 2015, just days before it filed for bankruptcy in Spain, Abengoa’s Mexican subsidiary raised $30 million in short-term debt in Mexico’s markets — money that no doubt went straight into the bottomless pit on the Spanish firm’s balance sheets [big hat-tip to WOLF STREET reader Nick Kelly for suggesting back in December last year that this was the case].

All of which would be, of course, morally dubious, not to mention illegal.

Double Standards

You can hardly blame Abengoa’s Mexican creditors for wanting their money back — or at least a small fraction of it. “In Spain they are trying to sell a whole bunch of Mexican assets without taking into consideration the precautionary measures already passed by a judge here in Mexico,” Guerra says.

In all corporate bankruptcies and restructurings there is a clear pecking order of creditors. But in this case, the pecking order appears to be based not solely on the seniority of creditors, but also their geographic origin. As Guerra asserts, “the only people who are going to be paid are Spanish creditors while Mexican creditors are hung out to dry.”

Yet no matter how much Abengoa’s Mexican creditors scream, shout and stamp their feet, it’s unlikely to make any difference to the ultimate outcome. For the fact of the matter is that Abengoa’s biggest creditors, including some of the world’s biggest banks (Santander, Citi, HSBC, Credit Agricole, Bank of America…) and hedge funds (AbramsCapital, Canyon Partners, D.E. Shaw, Ellliot Management, Oaktree…) have already signed along the dotted line. And it is their word that ultimately matters. By Don Quijones, Raging Bull-Shit.

Out-of-money, felled by debt and shady accounting, Abengoa faces reality. Read…  Did Moody’s Just Sever Energy Giant’s Last Life Line?

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