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Spain’s biggest-ever corporate bankruptcy has been averted, or at least delayed, by a commercial court in Seville’s approval in November of a €7.5 billion restructuring agreement for engineering and construction firm Abengoa.
The agreement won support from 86% of creditors (well above the 75% minimum) in late October, prolonging the life of a company that operates in more than 80 countries and has hundreds of subsidiaries.
However, bankers in Madrid express doubts about whether Abengoa will be able to afford the terms of the deal, or whether its default and restructuring has irreparably damaged the debt-dependent and extremely complex business model of the Madrid-listed firm.
The company is giving existing creditors (mainly big Spanish banks, plus Crédit Agricole) a 40% stake. They also get €2.6 billion of unsecured debt claims deferred for five years, with cash interest of 0.25%. Another €1.2 billion of new money is coming from 10 funds, mostly based in London and New York, at a much higher charge.
This new money is awarded interest of 5% cash and 9% payment in kind, fees, 50% of the equity, and guarantees including Abengoa’s shares in Atlantica Yield, its New York-listed affiliate containing up-and-running water and power plants.
Cut in half
Abengoa will cut its debt by more than half in the restructuring. But one investment banker not involved in the transaction sees the arrangement as essentially a pricey margin loan from hedge funds against the completed assets, which he believes are their real target.
“The company will default again, and the new capital providers will have to enforce on the guarantee,” he says.The company’s technical capacity is not in doubt, and management plans a new efficiency drive and divestments. Jose Maria Jauregui, a Spanish restructuring specialist at Lazard, advised Abengoa.
Questions about debt sustainability are particularly important for engineering, procurement and construction (EPC) contractors as they need to give confidence in their financial position to sell their product, says Jauregui, to a much greater extent than other industries (consumer goods companies, for example).
Surety providers like banks, insurers and export credit agencies must provide a guarantee that EPC firms will complete a project, but that comes at a higher cost if the contractor’s creditworthiness is weak, which must be factored into the price of bids.
One source of hope, at least, is that Abengoa’s restructuring comes with €307 million of bonding lines – offering the assurances its clients need and a leg-up for Abengoa to win new business.
Court approval of the restructuring comes a year after Abengoa said it would seek creditor protection under Spanish insolvency law, in late November 2015, after concerns over its debt snowballed and a plan to raise capital from Spanish steel firm Gonvarri failed.
Spanish EPC firms’ debt ballooned after they turned to Latin America as domestic business dried up during the eurozone crisis.
Isolux Corsán, another Spanish firm in the same business, filed for creditor protection over the summer. It gained judicial approval for its €2 billion restructuring in late October.
Restructuring specialists in Madrid say the legal framework for restructuring has shifted since the eurozone crisis to the benefit of creditors and providers of new funding much faster in Spain than in Italy, even if extend-and-pretend forbearance remains common, particularly at smaller Spanish banks. Distressed debt buyers are more active, and banks are better able to afford write-downs. “Changes to the Spanish restructuring law since the crisis have had an impact on how deals are negotiated and on the outcome of the negotiations,” says Jauregui.
Abengoa will therefore be both a precedent and indication of the success of efforts to reform Spain’s restructuring environment.
A source familiar with the Isolux deal says the various parties learned lessons from Abengoa. In addition to its smaller size and partial ownership by CaixaBank, this helped it get agreement more quickly, perhaps increasing its chances of a longer-term return to health. Shareholders were quicker to relinquish control; banks were quicker to put in capital; and investment funds’ price expectations were more realistic.
Comfort
Felipe Benjumea stepped down as chairman of Abengoa in September 2015 after almost a quarter of a century, but remained the most powerful of the owners. His pre-agreement to the restructuring would then have been key because a general shareholders’ meeting must approve the terms.
Jauregui says Abengoa, like Isolux, is another case of how Spanish banks are increasingly comfortable with complex restructurings and debt-for-equity swaps, and how international investors are active in restructurings in the country.
In the Abengoa deal, the former shareholders are retaining just 5% of the shares. Creditors will also own at least 90% of Isolux after the transaction, which brings at least €200 million of new money in return for interest at 5% cash and 5% payment in kind, plus existing rates on refinancing facilities and equity warrants covering 50% of the company’s voting rights.
Gaming company Codere refinanced debt in an €800 million bond sale last month, two years after it too had international investors participate in its restructuring, including Canyon Capital Finance, one of Abengoa’s new creditors. Like Abengoa and Isolux, it also had bonds outstanding – another relative novelty, as Spanish firms had to seek alternatives to bank loans after the eurozone crisis.
