Abengoa Default Bets Pared as Talks Continue for New Funds

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Investors reduced bets against Abengoa SA amid speculation the Spanish renewable-energy company may be able to secure new funds.

The probability of default signaled by five-year credit-default swaps dropped to 88 percent from 94 percent on Thursday, according to data provider CMA. D.E. Shaw & Co. and BlackRock Inc. pared short positions in the company’s stock.

Abengoa is seeking to raise capital and dispose of assets to cut some of its 9.8 billion euros ($10.9 billion) of gross debt and bolster its cash position. It’s discussing options including a larger share sale than previously planned and finding an anchor investor from Europe or the Middle East to underpin the offering, according to people familiar with the matter, who asked not to be identified because the deliberations are private. No decision has been made, they said.

“Investors with shorts are probably taking some profit,” said Steven Logan, the London-based head of European high yield at Aberdeen Asset Management, which manages $483 billion. “There’s still a huge amount of execution risk. Abengoa needs a transformational capital raising to give the company credibility.”

Abengoa’s press office said “the process with the banks continues advancing well,” while declining to elaborate. It previously said its credit-default swaps don’t represent the company’s creditworthiness or the value of its assets.

“Abengoa owns a number of very valuable businesses and assets,” the company e-mailed in response to questions. “We continue to make progress both in the capital increase and the divestiture plan.”

Bank Advisers

Banks are advising Abengoa to raise about 800 million euros, instead of the 650 million euros previously announced, according to the people. The company said it will complete 500 million euros of asset sales by the first quarter of 2016, in addition to the capital increase, according to a regulatory filing on Aug. 3.

Investors have been looking more closely at Abengoa’s complicated financial structure since November and betting that its plan wouldn’t be successful or sufficient.

Credit-default swaps on Abengoa were the most traded in the world last week and signaled a record 97 percent probability of default within five years on Wednesday, up from 65 percent in January. They’re still the second-highest of any company or country after Venezuela, according to data provider CMA.

A total of 545 contracts covering a gross $495 million of Abengoa’s debt changed hands last week, Depository Trust & Clearing Corp. data show.

Cutting Shorts

“An increasing number of market participants view a default of the company as a likely scenario and don’t believe in Abengoa’s ability to successfully execute the capital increase,” Felix Fischer, a credit analyst at independent research provider Lucror Analytics in Singapore, said earlier this week. Lucror has a hold recommendation on Abengoa’s bonds and credit swaps and sees its default risk as “high.”

Total short positions on the company’s shares jumped to 8.5 percent of equity on Aug. 7 from 6.68 percent on July 24, according to Spanish securities regulator CNMV. D.E. Shaw cut its short to 1.37 percent of Abengoa’s equity from 1.48 percent on Thursday.

BlackRock, which hired Abengoa’s former Chief Executive Officer Manuel Sanchez Ortega last month, reduced its position to 0.85 percent from 1.28 percent on Wednesday across its BlackRock Investment Management UK Ltd. and BlackRock Institutional Trust Company units.

Former CEO

Abengoa said in May that Sanchez Ortega left for “strictly personal reasons” and would remain a board member, while naming him to the international advisory council. He gave up the board position after joining BlackRock and kept a position on the advisory council, Abengoa said on July 27.

Sanchez Ortega’s role as head of strategic development and head of BlackRock’s Latin American infrastructure group is unrelated to funds trading Abengoa’s securities, said Stephen White, a spokesman for the world’s biggest money manager in London.

Abengoa’s 500 million euros of 6 percent notes maturing March 2021 rose to 56.5 cents today from a record low of 45 cents on Wednesday, according to data compiled by Bloomberg. The 265 million euros of 5.5 percent notes due October 2019 issued by Abengoa Greenfield SA climbed to 54 cents from 42 cents on Wednesday.

Opaque Structure

“The CDS and bond prices suggest that the market believes that a default is a real possibility,” David Newman, head of high yield at Rogge Global Partners in London, said earlier this week. Rogge manages more than $50 billion and doesn’t hold Abengoa’s bonds or stock.

Investors are concerned that the company’s debt structure is opaque and difficult to understand, he said. Seville-based Abengoa has hundreds of projects and subsidiaries, and raises funding to build power lines, water plants, solar and biomass plants worldwide.

The company classifies short-term bridge financing for projects as “non-recourse debt in process,” even though it’s guaranteed by the parent. When projects are completed, Abengoa refinances the loans with long-term debt that doesn’t have a claim on the company.

Until November, all of Abengoa’s bonds were categorized as corporate debt. Then, it reclassified some bonds as non-recourse-in-process bridge financing. The move surprised creditors, even though it was allowed in the documentation of those specific securities and still had corporate guarantees.

Guarantee Changes

Abengoa surprised the market again last month by saying it would change guarantees on its convertible and exchangeable bonds to align them with its high-yield securities. That diluted junk bondholders’ claims and added to confusion about the company’s accounting methods.

In its earnings report on July 31, Abengoa said that corporate free cash-flow for 2015 will be as much as 800 million euros lower than previously forecast. It also cut its 2015 guidance for revenue and earnings before interest, tax, depreciation and amortization as well as for net corporate leverage.

Abengoa held a conference call with investors for almost three hours after the market closed that day, a Friday. On the call, new CEO Santiago Seage answered a question about a possible equity injection by saying, “the company has no plan to do what you were suggesting - to tap capital markets in any manner.”

The company announced a rights issue the following Monday morning, on Aug. 3.

Surprising Investors

“Abengoa relies on funding, but keeps surprising and disappointing the people that give it that funding,” said Robert Baltzer, an Edinburgh-based investment manager at Baillie Gifford & Co., which oversees about 115 billion pounds and holds some of Abengoa’s bonds. “They have a job to patch things up with investors.”

Existing shareholders will have preferential rights to buy the new shares, and Abengoa’s main shareholder, Inversion Corporativa IC SA, will participate in the sale with new funds, the company said on Aug. 3.

The closely held investor and Abengoa share the same chairman, Felipe Benjumea Llorente. Calls to him were directed to Abengoa’s press office.

“Inversion Corporativa is a separate company,” according to an e-mailed statement from the press office on Thursday. “After consulting with them, they confirm that Mr. Benjumea is the chairman of IC and that, as it has publicly stated, IC will participate in the capital increase.”

Inversion Corporativa

Investors are still concerned that shareholders may not support the sale nor banks fully underwrite it, according to Lucror’s Fischer.

Inversion Corporativa, which controls 57.5 percent of Abengoa, participated in the last capital increase with the help of a 65 million-euro loan backed by existing stock worth double its value, according to its 2013 earnings report filed to the Madrid mercantile registry.

The falling value of Abengoa’s shares fueled investor concern that it may not be willing or able to anchor another capital increase by borrowing again, Fischer said. It’s unclear what other resources they have, he said.

There are already signs the company is struggling to raise funds. Since November, Abengoa has had to repay some short-term debt as it comes due instead of rolling contracts as intended. It has about 340 million euros of commercial paper outstanding.

It said on Thursday that it discontinued a notes program linked to its credit-default swaps last month to focus on simpler financing. Abengoa also reported higher cash collateral against facilities to pay suppliers in July than in May.

“For a whole swathe of the market it’s no longer investable,” Aberdeen’s Logan said. “It’s still difficult to have confidence in this company. It looks like damaged goods.”

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