ICC Commercial Crime Service

Energy Crisis: How Spain May Pull Abengoa from the Brink

On Dec. 18, Spain’s High Court said it would investigate claims of mismanagement by Abengoa creditors’ against the former chairman and the former CEO of the engineering and energy firm struggling with serious financial problems. In its ruling, the High Court asked Felipe Benjumea, the former chairman whose father founded the company, to post a bond of 11.5 million euros ($12.5 million) to cover potential liabilities within 24 hours.

Santiago Seage, chairman of the board of Abengoa Yield, the U.S. business of Spain's Abengoa, stepped down in November, according to a statement to U.S. Securities and Exchange Commission late on Wednesday. Days before Seage’s resignation, Abengoa had begun insolvency proceedings after a potential investor said it would not inject fresh capital into the energy firm. However, according to the company, Seage remains chief executive of Abengoa and a managing director of Abengoa Yield. Its current board chair is Daniel Villalba former lead independent director.

Q. According to a recent report by Reuters, “Abengoa, which is trying to avoid becoming Spain's biggest-ever bankruptcy, has been brought to its knees by a large debt pile after rapid expansion into the clean energy business.”

How did the company and its former chairman get to this point? What missteps are at the core of its financial troubles? (Did the executives pile up debt and then parachute out with large severance packages?)

A. The current state of Abengoa, is a consequence of its efforts to become the world leader of solar energy systems, a strongly regulated field that demands enormous investments in still-developing technologies, with the risks that this entails. Certainly, Abengoa achieved its goal, but the financing and development in renewable energy has been way more expensive than expected.

The primary drawback for this kind of project is the requirement of large amount of funds. Initially, when financing was easily found, that drawback did not come to the fore. As time passed, and the lack of bank financing became a problem, the company was obliged to find new investors, which expanded its already large debt load. Thus, some in the media point out that the debt was not only the cause of Abengoa’s crisis, but the lack of cash flow, that obliged the company to start issuing more bonds in order to achieve liquidity.

In early November last year the solution for the company was announced. Gestamp agreed to inject €350 million into the company – that amount would provide 28% of the capital of Abengoa - in exchange for becoming the leading shareholder and displacing the founding families.

The Abengoa-Gestamp agreement was conditioned, among others, by the maintaining and assurance of the capital increase accomplished by insurance companies that was announced in September, and by the attainment of financial support from financial institutions. Nonetheless, two weeks later, the managing director of Gestamp stated that the company would withdraw the agreement with Abengoa.

Therefore, despite its effort to restore its balance sheets, which included a recent capital increase, a fall in its share in the North American Abengoa Yield, a plan of assets sale, the resignation of former Chairman Felipe Benjumea, the suspension on dividend distribution, among others; the financial debt is at the present time up to €25,000 million, and caused a momentary stock market crash in Spain, dismissal of thousands of employees and finally the formal request to enter into pre-insolvency protection.

There is more bad news. Abengoa has been given, under Spanish Law, up to four months to reach an agreement with creditors to reach financial stability and to avoid a full-blown insolvency and a potential bankruptcy.

Q. The court said it would probe compensation payments handed out to former Chairman Felipe Benjumea and ex-Chief Executive Manuel Sanchez Ortega, after a complaint over their severance payments from some Abengoa bondholders. Why such a high bond to cover potential liabilities?

A. The bonds that will have to be deposited by Felipe Benjumea and Manuel Sánchez Ortega are of €11,5 million and €4.5 million, respectively, and correspond with the compensation payments handed out to them when Benjumea stepped down as Chairman and Sánchez Ortega resigned as Chief Executive. The complete bond of €16 million is the result of the lawsuit filed by a group of Abengoa bondholders to the National High Court.

The group of bondholders accuses the two former top executives of collecting millions in compensation payments and then abandoning Abengoa, even though they knew the financial state of company, and that a request to enter into pre-insolvency protection might need to be filed.

The prosecutor José Perals claimed the successful application of the lawsuit filed against Benjumea and Sánchez Ortega for the offence of disloyal mismanagement. He also claimed the approval of the bonds in order to cover potential liabilities, alleging there are multiple shareholders and bondholders harmed by the Abengoa crisis, the amount of the alleged fraud would have repercussions in the national economy since the company has a workforce of 6,999 employees in Spain, it is listed on the stock exchange and holds a debt of around €20,000 million.

Q. The U.S. Department of Energy granted the company a loan guarantee of more than $1 billion to build four solar energy plants in California and Arizona. Only one has been built, and now the company is on the verge of bankruptcy. Some critics have called the Abengoa scandal, another Solyndra. Is it? Why or why not?

A. Indeed, the current state of Abengoa is launching a debate where the Spanish company is compared to Solyndra after its full bankruptcy in 2011 despite being supported by the Government of Obama with up to $536 million in federal loan guarantees from the Department of Energy of the United States in addition to tax exemptions.

For its part, Abengoa has received more than $1 million in federal loan guarantees from the same Department. Nonetheless, is it soon to establish a similarity between both companies and its financial situation respectively, since Abengoa has only filed its request to enter into pre-insolvency protection, process established under Article 5 of Bankruptcy Law whose aim is to allow the company to begin the negotiation process with its creditors and to reach an or some agreements to guarantee its financial viability.

Therefore, and since the company has four months to reach an out-of-court agreement with its creditors, it must be expected those four months to go by before giving a precise answer to the question asked, because despite the negative forecast, there are many interested in Abengoa’s economy recovery.

Q. Is there any indication that the U.S. government may be weighing in on this issue to protect its interests, fairly soon?

A. The American Government is one of those interested in the recovery of the Spanish company, mainly because of the enormous investment done in order to set up the company and make it grow, as well as for the development and building of -- in different American cities, but also because of the interest of the Government in boosting the green energy projects.

Therefore, the Bank of America has become one of the largest creditors of Abengoa. Its debt is linked to project finance, so it is paid back from the cash flow generated by the project itself, hence it implies less risk. Even so, the potential fall of Abengoa could bring on questions and request of information to the Obama administration, about the federal loans granted to the company. Thus, the outstanding interest is unavoidable from the American Government in the economic recovery of Abengoa.

Q. With Sanchez now at the investment firm Blackrock, the ruling also asked the Spanish stock market regulator for information on trading in Abengoa shares by Blackrock, since Aug 1. Is the court looking for evidence of insider trading based on allegations by Abengoa investors?

A. Indeed, the judge conducting the case has asked the Spanish stock market regulator (CNMV) to submit information on trading in Abengoa shares by BlackRock since August first of this year, and to the auditing firm Deloitte for a copy of the annual report of the income account of Abengoa.

The departure of Manuel Sánchez Ortega on the 19th of May this year after five years heading the company was explained by himself as “an exit for strictly personal reasons”. One month and a half later, on July 8th, Sánchez Ortega was announced as the new signing of BlackRock, one of the world’s largest asset manager.

In April this year Abengoa’s shares were trading at €3,570 (class A) and €3,299 (class B). However, in November the shares closed up €0,440 (class A) and €0,292 (class B). The value of the four million class B shares was up by €13 million in April and it dropped in November to €1,1 million. Regarding class B shares, they value changed from €1 million to €132,000.

This difference in value, around €13 million, is the profit BlackRock could experience after receiving the privileged information from Sánchez Ortega. That is why the bondholders accused Sánchez Ortega of insider trading in order to cause profit growth to BlackRock through the downward acquisition of shares of Abengoa. They stated all this in the filed lawsuit.

Q. Is there hope for the company? What potential solutions do you see? What other questions should investors be asking if any in terms of asset recovery?

There is hope for the recovery of Abengoa. Several measures are being taken in order to guarantee its financial viability as soon as possible. At the end of October of last year, The Children's Investment (TCI), through Talos Capital, settled a loan agreement with Abengoa. The borrowed amount was $130 million, using approximately 14% of Abengoa Yieldco’s capital as the guarantee.

Analysts have predicted that the company will receive a liquidity injection of around €100 million, which will be used to pay salaries, to the most urgent providers and to maintain current operations until the end of January. Creditor banks, organized in the denominated G7 (Santander, Bankia, Popular, CaixaBank y Sabadell, junto a HSBC y Société Générale) would provide the needed injection of additional funding.

The purpose of the Banks is not, however, to prevent the bankruptcy, but to facilitate the temporary financing that Abengoa needs in order to cover expenditure of the current financial year.

Another relevant measure is the plan Abengoa and the creditor Banks are working on currently. The plan would cut costs by around 40%, which could lead to layoffs of 15% of employees in Spain, disinvestments between €2,500 million and €3,000 million, the cessation of promoting and financing projects, and focusing exclusively in the field of engineering and construction for third parties.

This viability plan shall be on-going on the January 18, to prevent further requests for more funding from the banks. Before March 28th the plan shall be completed with the restructured and newly named Nueva Abengoa. This is the closing date set by the Judge in order to reach an agreement with creditors to avoid bankruptcy.

Lastly, regarding potential solutions, the G7 has suggested in one hand, the sale of the branch YieldCo in order to obtain profits, or to use it as a guarantee of a loan otherwise (as it has been done already), as well as to split up the debt of Abengoa in subsidiaries and branches, so that each one of them can reach its own solution. In addition, the G7 is looking beyond the company to other national corporations for help. In fact, the G7 already has a candidate to become Abengoa’s leading partner. The company, Ferrovial, has the capacity to address an eventual capital increase, and whose available cash balance amounts to €2,498 million, not to mention the lines of credit worth €1,284 million.

A great deal of effort is being expended to save Abengoa, not just because of the number of workers, or its importance in the renewable energy field, but because it is a business of reference in Spain, and no one wants to see it fail. Its recovery would have important economic consequences both domestically and internationally.

Fernando Gonzalez has over 25 years of litigation experience. Fernando is listed in Chambers Global and Chambers Europe as a commercial litigator who “embodies [the firm’s] work ethic through his emphasis on client service and ability to understand problems quickly and propose pragmatic solutions.” He is also identified as a legal expert in asset recovery in Spain, representing Squire Patton Boggs in that area in Who’s Who Legal 100 2015.





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