After years of dodgy accounting and mismanagement.
By Don Quijones, Spain, UK, & Mexico, editor at WOLF STREET.
The past five days have been brutal for two once-emblematic Spanish companies, Abengoa and OHL. Four years ago, the two firms were among the 35 largest listed companies in Spain. OHL was a global construction colossus that was involved in one of the world’s most ambitious and costly infrastructure projects, the high-speed railway line between the Saudi Arabian cities of Mecca and Medina.
Abengoa was a world leader in the renewable energy sector, with operations across the globe. But it grew so fast and took on so much debt that it needed to hide many of its liabilities. Like Enron, it could not keep the game going on for long, and in 2015 it collapsed under the weight of its own debt. It was then given a new lease of life in the biggest court-supervised corporate restructuring in Spanish history. Abengoa’s US unit went through bankruptcy in the US. Its unit in Mexico went through insolvency proceedings in Mexico. But its new debt load keeps growing while the losses keep piling up.
In the last five days of trading, Abengoa’s most liquid stock, its “B” shares, which were already essentially worthless, slumped another 39%, to 1/4 of a cent.
The main trigger for the latest collapse was the company’s disclosure that it had racked up €213 million of losses over the first nine months of 2018. Those losses will make it even more difficult for the company to continue servicing its €4.7 billion debt pile.
In the last year, to help service its debt, it has sold off many of its most valuable assets, including a 25% share in Atlantica Yield, its most profitable subsidiary, and a cogeneration plant it had co-developed with Pemex in Tabasco, Mexico.
But that didn’t prevent the company from asking its long-term advisor, Lazard, to draw up a new agreement with creditors in September as it struggled to repay €142 million of outstanding debt to “holdout” bondholders, who refused to accept the terms of the 2016 restructuring deal. In the end, Abengoa’s current crop of creditors reluctantly agreed, once again, to restructure the firm’s debt.
But patience is wearing thin. At the beginning of October, barely a week after Abengoa’s debt was refinanced, the company’s biggest shareholder, Banco Santander, sold a third of its shares, reducing its holdings from 4.97% to 3.4%.
The second biggest shareholder is the Spanish government, with 3.15% of the stock, which it holds through two public funds. It took the government a whole year to fully confirm that it had spent a reputed €250 million of taxpayer funds on a debt-for-worthless-equity swap to help ensure that Abengoa’s 2016 refinancing deal was successful. The government’s disclosure may have come a year late but it did not come as a surprise, given that:
- Abengoa has, or at least had, close ties to both of Spain’s main political parties.
- The company employs thousands of people in the southern Spanish region of Andalusia, which boasts one of the highest levels of unemployment in the EU.
- Leading Spanish banks, most notably Banco Santander, were exposed to billions of euros of Abengoa’s debt prior to the refinancing deal. If the debt hadn’t been restructured and Abengoa had gone to the wall, the reverberations would have been felt throughout Spain’s banking system.
OHL: Similar Story, Same Ending?
The riches-to-rags saga of OHL, a firm whose roots stretch back over 100 years and which enjoyed very close ties to the Franco regime, shares a number of key features with Abengoa’s. Both firms tried to grow too fast, and have been chronically mismanaged and dogged with scandal. Like Abengoa, OHL has been busy selling off its family jewels in a desperate bid to stay solvent.
But that hasn’t stopped the company from shedding 88% of its market cap so far this year. In the last week alone, OHL’s shares have tumbled over 40% after the firm reported losing €1.34 billion in the first three quarters of 2018 following a string of failed or cancelled projects. To put the scale of the company’s multi-year decline into perspective, four years ago those shares were worth over €30 a piece. Today they’re worth €0.60.
Like Abengoa, OHL has hired the services of Lazard to help turn the business around. But it’s going to be tough.
On Friday, Moody’s downgraded OHL’s rating into deep junk from B3 to Caa1 [our cheat sheet for corporate credit rating scales], which is reserved for companies rated as “poor quality” and with “a very high credit risk”. Moody’s cited a number of reasons for its decision including:
- OHL’s “ongoing substantial cash burn”.
- Its limited likelihood of “improving cash flow generation in the coming quarters.”
- A material deterioration on the firm’s liquidity over the last two quarters.
- Its continued lack of “committed bank credit facilities”, which could prevent it from raising funds in the event of exceptional cash needs.
OHL has requested emergency guarantees from a number of lenders, including Santander, Caixabank and Bankia, but so far to no avail. Apparently one of the reasons for the bank’s reticence was OHL’s decision in June to splash out, in classic Carillion style, €100 million on shareholder dividends, rather than use the money to attend to its short-term funding needs. Apparently one of the biggest beneficiaries of the payout was the firm’s founding family, the Villa Mir.
To further complicate its future, OHL was recently named as one of seven major Spanish construction firms to be accused by Spain’s National Market and Competition Commission of rigging the bidding processes for major public projects throughout Spain to make it more difficult for smaller, less connected firms to compete for the projects. Given the gravity of OHL’s financial situation, the added uncertainty and reputational damage from this scandal is not going to be helpful. By Don Quijones.
The outsourcing & construction giant with 70,000 employees is “circling the drain.” Read… Is the UK’s “Next Carillion” About to Fall?
Enjoy reading WOLF STREET and want to support it? You can donate. I appreciate it immensely. Click on the beer and iced-tea mug to find out how:
Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.
……..”slumped another 39%, to 1/4 of a cent.”.
It’s a pity that I cannot invest ten euros and get some fancy stock certificates. This all electronic record keeping really restricts the wallpaper industry.
I apologize for being so glib as your reports are most informative.
My personal trainer is always telling me, “it really doesn’t matter how much you work out, you can’t out work poor nutrition.”
I think that’s where we are with heavily indebted companies. It doesn’t matter what their business model is; they simply can’t finance the debt load, especially in the face of rising rates and secular stagnation.
I love DQ’s writing style.
The two lines that had me spitting coffee all over my computer screen were:
1) “In the last five days of trading, Abengoa’s most liquid stock, its “B” shares, which were already essentially worthless, slumped another 39%, to 1/4 of a cent” – THE STOCK LITERALLY ISN’T WORTH THE PAPER IT’S PRINTED ON.
2) “Apparently one of the biggest beneficiaries of [June’s €100 million] payout was the firm’s founding family, the Villa Mir” – PRESUMABLY WHEN THIS IS RESTRUCTURED, THE BONDHOLDERS LOSE ANOTHER €100 MILLION, WHICH APPARENTLY WAS STOLEN IN BROAD DAYLIGHT – PURE GENIUS!
I’m no expert on foreign accounting practices, however, I do know the rest the of the world uses IFRS vs our US GAAP when analyzing the differences in my mind it would appear that IFRS better protected the users of financial information. However, these major bankruptcies have demonstrated that those on top seem incapable of suffering the consequences of their actions.
Surely these two companies the next time they’re audited will have a going concern question to answer?
Ummm…Steve?
…this is Spain we’re talking about.
Back in October I was in Aragon and saw an Abengoa solar power plant in the Bardenas Reales. It’s one of those new power plants, with panels that can pivot on their supports to maximize efficiency. The process is wholly automated: very slick and advanced stuff.
However most of the panels were in random crooked positions, obviously not working as intended, and the whole plant was in a general state of disrepair.
What company would allow such an expensive revenue-generating asset to decay in such fashion? Even if Abengoa cannot pay for maintenance, I am sure they can sell it to raise some quick cash. The copper wire alone must be worth something to somebody.
That of course implies that Abengoa wanted that solar power plant to work efficiently to generate a steady stream of revenue when it was built. I also have the lingering suspicion that plant is a collateral backing part of that ever-increasing mountain of debt, perhaps on the books at many times what it’s really worth. Obscenely inflated collaterals are extremely common occurences in the European banking system.
It’s things like this (not to mention the truly absurd ethanol mandate) that have shaped the general perception of renewable energies as some sort of all-you-can-eat buffet paid for by the taxpayer instead of extremely valuable resources.
Quite so.
The ill-informed believe -as they have been taught – that these so-called ‘renewables’ are The Future.
They are, of course, nothing of the kind, and are not resources, but technologies, a mere extension of fossil fuels, and of very limited use to our economies.
On the other hand, the smart subsidy-vultures know what they are about in the short-term, and have no scruples regarding the junk with which these projects are littering Europe.
But this all just part of the irrationality which plagues a complex civilization in collapse, as ours is.
The corruption, of course, is as old as the hills of the Bardenas themselves……
That narrative is also as old as the hills, more popular than necessarily true, and can be self-fulfilling.
In many societies, nearly everyone is complicit in the corruption, to some degree -even if they hid the truth form themselves.
I’m always greatly amused by ‘anti-corruption’ Left radicals getting right down to it when they get into office in Spain – jobs for family and friends, and so on.
Cynic on the corruption, but EchoDelta on ‘renewable’ energy.
The technology (of all kinds) is a resource, the energy it retrieves also. A lot of it does not fit to current scale, but modern western direction is energy resource spoilt for now. There are a lot of reasonable applications for energy tech of all kinds.
MC01 – a lot of copper gets taken in Spain, even power supply to urbanisation or street lighting gets switched off sometimes as the cabling is made off with.Though I doubt that is what happened with your pv plant, it would be no surprise.
I get the impression from your series of articles that virtually every major business institution in Spain is corrupt and bankrupt. Are there no healthy corporations in Spain?
Hi Mike, not just Spain I get the impression in Europe there’s a load of companies ready to implode due to debt-losses. The problem I see is you can sell off profitable parts of the business to reduce debts then you’re just left with the unprofitable parts. No point carrying on might as well go under.
“I get the impression in Europe there’s a load of companies ready to implode due to debt-losses. ”
….not to mention a few governments and nations as well.
Steve,
Being European, I’ll be the last to deny that there are lots of companies here staggering under a heavy debt load.
However, I have a nagging feeling that this phenomenon is not unheard of in the USA either. To put it mildly.
And let’s not even talk about China, Japan, South-America…
The whole world is drowning in debt. The unwind will be spectacular.
Drowning not only in debt but in fraud.
And every government knows it.
The reason they keep the charade going is
1) graft, in the form of campaign$, employment, gift and outright bribes
2) the fake valuations allow the banks to survive when they would have died quite a while ago.
Agreed Jon, everyday you hear stories such as GE, Vallourec looking to sell assets to reduce debt. At some point they’re going to have nothing left to sell.
Corporate greed and unchecked capitalism let’s give them everything….jail the citizens let the wealthy and corporate go free …..its been that way for centuries….purge…. steal and enjoy…..way of the world
I wonder if Lazard is asking to be paid in advance.
What is it about us people that we cannot see reality ??
That we do not learn from mistakes ??
& even others mistakes !!
“IT COLLAPSED UNDER THE WEIGHT OF ITS OWN DEBT”
Shouldn’t that have told us, that the persons running this company had developed a sense of themselves being the beginning & the end of all things.
Gods on high.
But also ….. like any other JUNKY –
They had a monkey on their backs.
When do we say,
“Hey man, they are only human & as a result they have fallen off the rails” ??
“They are mad crazy like a cow who’s been at the St John’s Wort”
“Whatever you do, do not give them more money.”
When will we learn ??
Do you know how much money stands to be made by running up debt and then defaulting? Its the oldest business model on the planet.
And the most profitable.
That’s why governments do it.
“It took the government a whole year to fully confirm that it had spent a reputed €250 million of taxpayer funds on a debt-for-worthless-equity swap to help ensure that Abengoa’s 2016 refinancing deal was successful”
The Spanish government wasn’t the only government that paid billions for worthless debt, then hid it from the taxpayers.
The US federal government still hasn’t disclosed past and future potential losses from the 2016 “election year” deal.
Don Quijones, what do you think about the sustainability of the public pension system in Spain?, it may be worth of an analysis