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By Robert Smith
LONDON, Nov 25 (IFR) - Abengoa’s bonds dropped like a stone on Wednesday after the troubled Spanish energy firm announced it had started talks with creditors on insolvency proceedings, raising the prospect of a messy restructuring ahead.
Gonvarri, a division of Basque industrial group Gestamp, emerged as a potential saviour of the company earlier this month, but dashed hopes of a rescue last night when it backed away from a plan to inject 350m into the group.
Under Spanish law, Abengoa has up to four months to reach an agreement with creditors to avoid a full-blown insolvency process and a potential bankruptcy. Failure by Abengoa to reach such a deal could lead to Spain’s largest bankruptcy on record and send shockwaves through the European high-yield market.
While a bankruptcy could be avoided, the company will struggle to escape a debt restructuring, which investors say could destroy a lot of value for bondholders due to Abengoa’s extremely complex capital structure.
“This could be a three or four-year process, you’ve just got so many different classes of creditors,” said an analyst at a UK asset manager.
“It’d be ugly. Codere’s restructuring has been dragging on for years and that’s straightforward compared to Abengoa.”
The company’s bonds are now bid at cash prices as low as 12, according to Tradeweb, meaning investors expect slim recoveries in any potential restructuring.
The collapse in Abengoa’s 500m Mar 2016 was the most dramatic. That bond traded as high as 95 earlier this month after Gonvarri’s potential investment was announced, but was spotted at just 17 on Wednesday morning.
The biggest issue facing Abengoa’s different creditors is understanding their position in the company’s labyrinthine debt structure.
Aside from its fully drawn bank lines, Abengoa has raised corporate bonds out of both Abengoa SA and Abengoa Greenfield, classifying the latter as non-recourse even though they benefit from corporate guarantees.
It also recently gave its convertible and exchangeable bonds the same level of guarantees as these corporate bonds.
On top of this, Abengoa has raised more esoteric financing.
Abengoa Greenbridge, which funds the early stages of the company’s projects, has issued private notes backed by credit default swaps throughout the year.
Abengoa also raised a US$130m margin loan last month from UK hedge fund TCI Fund Management, a high-profile fund run by Chris Hohn who is best known for activist investment.
Abengoa pegged its total net debt figure at 5.6bn in its third quarter results.
The extent of Abengoa’s liquidity woes were laid bare in the company’s third quarter results released on November 13. Massive working capital outflows left it with just 346m of available cash at the end of September 30, but facing 374m of debt maturities in the final quarter of 2015.
Gonvarri’s investment required “a substantial package of financial support in favour of the Company by a group of financial institutions,” which it has not been able to agree with banks.
The liquidity drain was exacerbated by Abengoa’s reliance on “confirming lines”, reverse-factoring facilities provided by banks that allow it to pay suppliers within 180 days.
Abengoa’s co-CFO Ignacio Garcia-Alvear said on November 13 that 13 of the company’s confirming lines had been put on hold and that Abengoa was subject to “tighter payment terms with suppliers”.
The facilities tied up 1.2bn of its 2.5bn corporate liquidity position at the end of September.
The company does not class these lines as debt, but in a statement last month the European Securities and Markets Authority said that issuers of reverse-factoring facilities “should assess whether the trade payables should be reclassified as financial liabilities towards banks”.
Credit investors are also worried that the situation could trigger an event of default on Abengoa’s credit default swaps well before any agreement is reached with creditors.
“Lenders would have been reluctant to accelerate any missed amortisation payments before, but that’s changed now,” said a credit analyst at a hedge fund.
“There’s also commercial paper due to mature this week, which could also trigger a ‘failure to pay’ on the CDS.”
Abengoa did not immediately respond to a request for comment.
Abengoa has US$5.3m of commercial paper maturing on Wednesday, according to the Irish Stock Exchange. It also has 2.25m maturing on December 2.
Abengoa’s five-year CDS is bid at an upfront cost of 82%.
That means an investor seeking to buy five-year protection for a 10m notional trade would have to pay 82 percentage points upfront, in addition to a 500bp coupon for the life of the contract. (Reporting by Robert Smith, editing by Sudip Roy, Julian Baker)