On Closer Inspection, Debt of Bankrupt Spanish Construction Firm Grows Four-Fold

What happens if cases like this prove to be the rule rather than the exception?

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

Spain appears to have a brand-new Abengoa — the imploded energy giant whose fabulous accounting tricks pushed creditors into a black hole — on its hands: Isolux was until recently a fairly large privately owned infrastructure company with operations spanning the globe.

When the group declared bankruptcy last July, its cash flow in Spain was barely enough to cover a month’s operating costs. The group had a a total workforce of 3,884 and 119 infrastructure projects under development of which 39 were still operational and the remaining 90 had been halted.

The company tried to reduce its debt addiction through agreements with investment funds but they fell through. It also made two attempts to go public, in Brazil and Spain. Both failed.

The bankruptcy proceedings affected seven subsidiaries. At the time, the company stated that it owed €405 million to suppliers, that its total financial debt — including those companies not included under the Spanish Insolvency Act filing — was €1.3 billion, of which €557 million was associated with project financing, and that the total deficit on the group’s balance sheet was about €800 million.

Turns out, according to the bankruptcy receivers, the shortfall is actually €3.8 billion — four-and-a-half times the company’s original estimate — and the group’s total debt, at €5.7 billion, is over €4 billion more than the amount stated by the company 10 months ago.

This amount does not include the group’s dual or contingent liabilities. The receiver’s report concludes that the current situation will probably culminate in the liquidation of the entire group.

How did all this come to pass? According to the receiver’s report, the collapse of the real estate bubble in Spain and the drastic reduction in public work tenders during the crisis led Isolux to massively expand its international operations, as many large Spanish companies did in the aftermath of the housing bubble collapse.

The one problem with this plan was that Spain’s public tender model for large infrastructure projects — in which bidding companies habitually underestimate total costs when submitting bids and then ask (and are invariably given) more money later — is not endorsed in many other counties, as Spanish-led consortiums discovered in places as far flung as Panama and Saudi Arabia, where Isolux was, until recently, leading a consortium to build two of Mecca’s metro lines.

Inevitably, many of the international projects failed to provide the sort of margins that companies like Isolux were traditionally accustomed to. This, together with the high financing needed for the development of concessions, led the group to take on unwieldy levels of debt.

Like Abengoa, Isolux also bet heavily on the renewable energy sector, which was given an infusion of taxpayer-funded subsidies by Spain’s previous government. Companies, both Spanish and foreign, stormed into the sector and thousands of consumers outfitted their homes with government-subsidized solar panels.

That all came to a grinding halt with the Rajoy government’s blanket withdrawal of subsidies and imposition of the so-called Sun Tax — a tax levied on consumers who generate their own electricity. According to the Rajoy administration, such a policy was necessary in order to plug a €26 billion accumulated tariff deficit — the gap between energy production costs and what end consumers pay for power.

The companies and consumers affected by the abrupt change of policy had an entirely different interpretation: the government’s real motive was to coddle and protect Spain’s energy oligopolies – Gas Natural, Endesa (now owned by Italy’s energy giant Enel), Red Electrica de España, Union Fenosa, Iberdrola and Repsol – from the threat posed by homeowners generating their own power. The chairman of Isolux subscribed to this version of events, accusing the government of ” giving into the traditional electricity companies’ lobby.”

Now, what’s left of Isolux will be auctioned off to recompense its more than 2,000 creditors. At the front of the line will be the group’s lenders. The banks with the biggest exposure are Santander (€640 million), Caixabank (€350 million),  and Bankia (€335 million) with a 28% stake in the company. Those figures are based on the original estimate of the group’s debt, but that debt has since grown four-fold and it’s still not clear who is exactly owed what.

What is becoming clear is that more and more highly leveraged companies, in particular in high-cost sectors such as construction and infrastructure, are concealing the true extent of their debt exposure. It’s only when these companies collapse under the unbearable weight of that debt that a true picture of their financial health begins to emerge.

That’s what happened with Abengoa two years ago. More recently, the same happened with the UK infrastructure giant Carillion, which collapsed in free-fall fashion last month. And now it appears to be happening with Isolux, too.

The question is what happens if cases like these turn out to be the rule rather than the exception? In the wake of Carillion’s demise, banks are beginning to sit up and pay attention, meaning that credit could become a lot harder to come by for large construction firms. If many of these companies are indeed following the Carillion rule book, overestimating revenues, cash and assets and under-reporting debt, a tightening credit environment is likely to make life even more difficult. By Don Quijones.

“Not another Carillion,” says UK government to soothe frazzled nerves, as entire industry is teetering. Read…  Crash of Outsourcing Giant with 70,000 Employees Globally Sparks New Panic

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  36 comments for “On Closer Inspection, Debt of Bankrupt Spanish Construction Firm Grows Four-Fold

  1. Caradoc says:

    Sun Tax = corporate capture.
    Trust any accounts?
    Trust financial statements if any of the big 4 involved?
    Trust pension promises?
    Trust any politician?
    Trust the banks?

    The more they protect large corporations the lower the level of trust ordinary people will have in their own Government and any of its commitments.

    Trust is an invisible glue holding society together. It’s eroding. So will societies and Governments and their cronies are to blame.

  2. Steve clayton says:

    Great article DQ. Agreed there must be more Spanish companies like this one who are ready to go bankrupt. Had a look at Bankias Q4 numbers and there doesn’t seem to be an increase in write offs. Does that mean they haven’t booked this debt off yet even though they probably know they won’t get much back?

    • caradoc says:

      When ECB turns off the spigots the zombies become apparent. Add a downturn and more widespread problems will show.

  3. Matt P says:

    So basically this company existed due to the largess of the government, and once the government could not no longer pay them for their shoddy work and they had to go do real projects in a free market, they collapsed.

    Government bidding processes are a joke all over the world. Public projects should be publicly run, not bid out to corrupt, incompetent companies who will inevitably extract more money than the project was worth because the government refuses to let projects fail.

    • Nick Kelly says:

      Let’s see… the govt makes a mess of the bidding process, and the solution is to have the govt take over the whole thing?
      Where this happens the govt corruption exceeds all others.

    • MC01 says:

      I only have one objection to raise: Spain has some of the best laid down and maintained roads I’ve ever seen if not the best. Even the collapse of the housing bubble did not affect that.
      Maybe they fear if roads start falling apart they’ll lose the lucrative business us riders bring to them.

      • Maninthesun says:

        I think the Road tax money is ring fenced so you pay local they then take a bit. Pass it on the next layer does the same all the way up to Madrid and they cannot steel the money for anything else

    • Javert Chip says:

      Matt P

      You actually believe the corrupt government could run the projects any better than incompetent private companies?

      • Matt P says:

        Some things are just better to be wholly run by the government – healthcare, defense, public works – it’s the mixing public and private that brings problems.

  4. Bobber says:

    We need more failures like this to restart capitalism. Some companies should win, others should fail. Based on Abengoa’s decision-making, they had it coming. They were out on a debt limb and begging to go out of business.

    • Vinman says:

      True unfortunately Low Interest rates have kept these Zombie companies alive for way too long keeping business and capital away from the more responsible and innovative companies .

    • Javert Chip says:

      Speaking as a capitalist, trying to “…bring capitalism…” to a socialist system won’t get you very far.

      Citizens need to hold their government responsible (as in voting ineffective people out of office, and sending corrupt politicians & businessmen to jail)

  5. 2banana says:

    There are few lessons in there…


    Like Abengoa, Isolux also bet heavily on the renewable energy sector, which was given an infusion of taxpayer-funded subsidies by Spain’s previous government. Companies, both Spanish and foreign, stormed into the sector and thousands of consumers outfitted their homes with government-subsidized solar panels.

    That all came to a grinding halt with the Rajoy government’s blanket withdrawal of subsidies and imposition of the so-called Sun Tax — a tax levied on consumers who generate their own electricity.

    • nicko2 says:

      That sun tax reeks of corrupt influence of old entrenched energy companies, similar to. Trump’s push for clean coal jobs. Well, technology advances regardless, the dirty energy cartels can’t compete against relentless innovation.

  6. george mcduffee says:

    Excellent well written article.

    If only these problems were confined to the UK and Spain…

    Unfortunately the problem of over-valued virtual “assets” and under-valued real debts seems to be systemic world-wide. The current poster child for this in the U. S. is General Electric.

    It now appears the only way to get an honest set of books is through the bankruptcy and liquidation process. Any possibility of successful criminal prosecutions or civil actions against the individual management?

  7. Mark says:

    During the liquidation process all claims against the company have to be registered and it is the liquidators legal duty to bring them down as much as possible as well as claw back as many payments made prior to the hand over of the company as they can. Furthermore there is significant leeway in how unfinished products and ongoing projects have to be reported in accordance with IFRS. Since the company was in financial trouble for some time as stated in the article it should be expected that it followed the usual behaviour of all such enterprises and tried to pay very late or not at all during the last few months of operations, which adds significant further claims compared to the numbers in the latest accounts (which are most likely dated 31.12.2016 in this case). Another legal question is at what point was the company actually bankrupt and did management/ownership conceal the fact, which is a felony. I hope this adds some perspective and shows how an increase in liabilities like this can happen without necessarily something nefarious going on, without taking any position in this specific case since I have no knowledge of it.
    As an aside, it should always be taking for granted that companies of any size massage their accounts for many different reasons – in the US GE under previous management used to be (in)famous for always hitting their financial targets if I remember correctly.

  8. bev kennedy says:

    Interesting how most mainstream media focus on consumer debt ignoring. Corporate debt and rising interest rates

    • Steve clayton says:

      Agreed Bev, I think this is the next big financial news story, large corporate debt and the banks unwillingness to lend more.

  9. Javert Chip says:

    The glass is really half-full, and we should look at the positive side of this (especially since it happens so often):

    Think of all the socialist managers & politicians that are getting rich. (sigh!).

    The only problem way out on the horizon is shearing the socialist sheep goes hand-inland with socialist systems self-destructing.

  10. gorbachov says:

    But the auditors said……………

  11. JB says:

    The meme seems to be repeated . Asset stripping enabled by cheap money. The “going concern” business model has been abandoned.

    • Javert Chip says:

      Amusing comment.

      With roughly 27M corporations (C, S LLC) in the USA (world-wide who knows?) & you know they have abandoned the “going concern” business model.

      There are, however, a number of large (very large…) bad apples. It is a stunning indictment of GE management (and their current board of directors) that GE has been caught in their current “Ooops! We screwed up to the tune of millions of dollars” moment.

      There are also government regulators who, not necessarily for detecting the errors (some yes; some no), exist to enforcing accountability. And time & time again, regulators refuse to do exactly that.

      It is very difficult to prove individual criminal intent with most business issues, but it isn’t difficult to view corporate-world at arms-length and recognize the bad apples.

      Anybody can make a mistake, but if the mistakes are frequent or big enough, there should be consequences to ensure the system works.

      • MaryR says:

        As the fantastical fictions about EPS show, even the main US regulator the SEC apparently does not enforce a standardized GAAP accounting basis.

        Nothing can be fairly compared in the face of manipulated financial statements and fake earnings; investors have to guess how deep the lies run whether in the US, Spain, China, or elsewhere.

        GE and and Isolux are just the canaries in the coal mine of “legalized” corporate fraud.

  12. California Bob says:

    “Companies, both Spanish and foreign, stormed into the sector and thousands of consumers outfitted their homes with government-subsidized sonar panels.”

    Ping once if you wish to defect.

  13. Ian says:

    ”imposition of the so-called Sun Tax — a tax levied on consumers who generate their own electricity”

    Fascism. Don’t ever tell me the west operates a truly capitalistic system.

    • robt says:

      More like socialism. The socialist party in Canada wanted to tax ‘heuristic income’, which was income defined as the amount of money you didn’t have to pay on a mortgage because you had paid off the mortgage and owned the property clear.
      Presumably they would want to take the revenue and subsidize people who didn’t manage their affairs well and got in over their heads.

  14. fajensen says:

    Common Factors – KPMG, Ernest & Young or … ?

    My sisters husband is a business economist (cand. econ.) – according to him, the big auditing companies actively develop some cookie-cutter “Bright Idea”, for tax evasion, “free cash flow” by paying bills too late or whatever, and then they peddle it everywhere to business at seminars and other events where they offer their consultancy services (so basically everyone pays everyone too late).

    Also, banks often does not bother to check at all if some “entrepreneur” applying for more credit for some agressive “growff”-scheme is not in fact doing the exact same business with five-six other banks.

    This “underreporting” of commitments might be systemic. When those interest rates finally go up for good, I suspect it will be quite a fun ride!

    • WES says:

      Hi fajensen:

      Yes to paraphrase; the tide of rising interest rates will reveal who has been swimming naked!

  15. raxadian says:

    The sun tax, the tax to listening to radio and or TV at the barber and so on… at this rate Spain will lead the top lost of most ridiculous and or unfair taxes.

    Oh wait didn’t they have an internet tax too?

  16. mean chicken says:

    The only entities which can survive the crash as it was, weren’t overlevered. The one exception is banks which were of course bailed out.

    But the EU is a completely different animal than the US considering their QE is structured quite differently and it remains to be seen if it can work. I have big doubts, more like it blows up in spectacular fashion.

    • raxadian says:

      Spain and Italy are becoming a headache to the rest of the EU. To the point certain interests are pushing for a regulatory change so those two don’t drag the rest of the Eurozone down.

      If that change will happen or not depends on how much more “mud” is discovered at the feet of these false idols.

      But of course Brexit complicates everything so unless Italy and Spain can’t keep faking it for a while any of those changes are likely to happen post Brexit.

      In other news, due to the rising cost of life and the cuts on pensions some retired people in Italy and Spain have moved to certain third world countries were 500 Euros are a lot of money, specially if they have relatives there and is easy to stay.

      Countries like Argentina, Chile and Uruguay for example.

  17. desmond says:

    also the ECB will not be blameless as they print QE to buy bonds from distressed private corporations thus enabling them to borrow more cheaply. Also note that Rajoys government is not a socialist gov.

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