Why Is Abengoa Imploding?

Bondholders face potential losses as fundraising is abandoned

For a company that makes money turning sunlight into electricity, Abengoa shows a troglodytic aversion to transparency -- as investors are now finding out to their cost.

The Spanish builder and operator of renewable energy projects is to take the first step in filing for protection from its creditors, after a potential white knight savior abandoned a promise to invest 350 million euros ($371 million) to ensure its survival. But the root causes of its problems go back much further than that.

Abengoa has a special business model. Instead of simply building projects or operating them, it does both, raising money from bond markets to finance its expansion. As it grew and grew, the company had to issue more bonds and refinance its increasing pile of debt.

Ain't no sunshine

The result was almost 9 billion euros of gross borrowings spread over hundreds of small subsidiaries. To make it worse, Abengoa couldn't resist fiddling with its financing. A year ago, the company surprised investors by reclassifying some bonds as non-recourse bridge financing. Then in July, it changed some guarantees on its convertible and exchangeable bonds, a move that diluted junk bondholders claims.

All this running-harder-to-stand-still hid the basic problem: a cash flow shortage. In the third quarter of this year it had 510 million euros of negative cashflow that cut its available cash sources to 346 million euros, according to Moody's.

The departure of CEO Manuel Sanchez Ortega in May after five years raised flags with investors. As did the company's explanation that his exit was for "strictly personal reasons.'' Now installed at Blackrock, he needs to explain just what happened.

As recently as October, Abengoa was able to raise 285 million euros from the bond market to refinance two solar-thermal power plants. But that was because the bonds were tied to the revenue from the projects rather than any confidence in Abengoa.

Spain's Labor Minister, Fatima Banez, on Wednesday offered to help, saying her government wants to send a message of "tranquility, of dialog and negotiation" to the company. That's misguided, even if Abengoa does employ more than 24,000 people. However credulous they have been so far, investors now need to get transparency, answers and control.

It's not clear the fundraising would have been big enough to salvage the company. The question now is what losses the bondholders face, and the early signs are bad. Abengoa's bonds were trading as low as 10 cents on the euro today. Santander and other Spanish banks fell in early trading on Wednesday on speculation that they will suffer as a result.

Abengoa's unique structure may limit the impact on other renewable projects. For creditors, though, the future looks like one enormous dark cloud.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

    To contact the author of this story:
    Edward Evans in London at eevans3@bloomberg.net

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    James Boxell at jboxell@bloomberg.net

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