After years of dodgy accounting and mismanagement.

By Don Quijones, Spain, UK, & Mexico, editor at WOLF STREET.

The past five days have been brutal for two once-emblematic Spanish companies, Abengoa and OHL. Four years ago, the two firms were among the 35 largest listed companies in Spain. OHL was a global construction colossus that was involved in one of the world’s most ambitious and infrastructure projects, the high-speed railway line between the Saudi Arabian cities of Mecca and Medina.

Abengoa was a world leader in the renewable energy sector, with operations across the globe. But it grew so fast and took on so much debt that it needed to hide many of its liabilities. Like Enron, it could not keep the game going on for long, and in 2015 it collapsed under the weight of its own debt. It was then given a new lease of life in the biggest court-supervised corporate restructuring in Spanish history. Abengoa’s US unit went through bankruptcy in the US. Its unit in Mexico went through insolvency proceedings in Mexico. But its new debt load keeps growing while the losses keep piling up.

In the last five days of trading, Abengoa’s most liquid stock, its “B” shares, which were already essentially worthless, slumped another 39%, to 1/4 of a cent.

The main trigger for the latest collapse was the company’s disclosure that it had racked up €213 million of losses over the first nine months of 2018. Those losses will make it even more difficult for the company to continue servicing its €4.7 billion debt pile.

In the last year, to help service its debt, it has sold off many of its most valuable assets, including a 25% share in Atlantica Yield, its most profitable subsidiary, and a cogeneration plant it had co-developed with Pemex in Tabasco, Mexico.

But that didn’t prevent the company from asking its long-term advisor, Lazard, to draw up a new agreement with creditors in September as it struggled to repay €142 million of outstanding debt to “holdout” bondholders, who refused to accept the terms of the 2016 restructuring deal. In the end, Abengoa’s current crop of creditors reluctantly agreed, once again, to restructure the firm’s debt.

But patience is wearing thin. At the beginning of October, barely a week after Abengoa’s debt was refinanced, the company’s biggest shareholder, Banco Santander, sold a third of its shares, reducing its holdings from 4.97% to 3.4%.

The second biggest shareholder is the Spanish government, with 3.15% of the stock, which it holds through two public funds. It took the government a whole year to fully confirm that it had spent a reputed €250 million of taxpayer funds on a debt-for-worthless-equity swap to help ensure that Abengoa’s 2016 refinancing deal was successful. The government’s disclosure may have come a year late but it did not come as a surprise, given that:

  1. Abengoa has, or at least had, close ties to both of Spain’s main political parties.
  2. The company employs thousands of people in the southern Spanish region of Andalusia, which boasts one of the highest levels of unemployment in the EU.
  3. Leading Spanish banks, most notably Banco Santander, were exposed to billions of euros of Abengoa’s debt prior to the refinancing deal. If the debt hadn’t been restructured and Abengoa had gone to the wall, the reverberations would have been felt throughout Spain’s banking system.

OHL: Similar Story, Same Ending?

The riches-to-rags saga of OHL, a firm whose roots stretch back over 100 years and which enjoyed very close ties to the Franco regime, shares a number of key features with Abengoa’s. Both firms tried to grow too fast, and have been chronically mismanaged and dogged with scandal. Like Abengoa, OHL has been busy selling off its family jewels in a desperate bid to stay solvent.

But that hasn’t stopped the company from shedding 88% of its market cap so far this year. In the last week alone, OHL’s shares have tumbled over 40% after the firm reported losing €1.34 billion in the first three quarters of 2018 following a string of failed or cancelled projects. To put the scale of the company’s multi-year decline into perspective, four years ago those shares were worth over €30 a piece. Today they’re worth €0.60.

Like Abengoa, OHL has hired the services of Lazard to help turn the business around. But it’s going to be tough.

On Friday, Moody’s downgraded OHL’s rating into deep junk from B3 to Caa1 [our cheat sheet for corporate credit rating scales], which is reserved for companies rated as “poor quality” and with “a very high credit risk”. Moody’s cited a number of reasons for its decision including:

  • OHL’s “ongoing substantial cash burn”.
  • Its limited likelihood of “improving cash flow generation in the coming quarters.”
  • A material deterioration on the firm’s liquidity over the last two quarters.
  • Its continued lack of “committed bank credit facilities”, which could prevent it from raising funds in the event of exceptional cash needs.

OHL has requested emergency guarantees from a number of lenders, including Santander, Caixabank and Bankia, but so far to no avail. Apparently one of the reasons for the bank’s reticence was OHL’s decision in June to splash out, in classic Carillion style, €100 million on shareholder dividends, rather than use the money to attend to its short-term funding needs. Apparently one of the biggest beneficiaries of the payout was the firm’s founding family, the Villa Mir.

To further complicate its future, OHL was recently named as one of seven major Spanish construction firms to be accused by Spain’s National Market and Competition Commission of rigging the bidding processes for major public projects throughout Spain to make it more difficult for smaller, less connected firms to compete for the projects. Given the gravity of OHL’s financial situation, the added uncertainty and reputational damage from this scandal is not going to be helpful. By Don Quijones.

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