“Lack of collateral” damage: Abengoa’s descent into fiscal hell, and its hopes for redemption

March 7, 2016 |

BD-TS-Abengoa-030816-smDigest readers will have noted that Abengoa shares jumped 41% on Friday and another 38 percent in Monday morning trading. What’s the good news? Let’s review.

The state of play

For Abengoa Bioenergy, a break-up and sale.

Last week, we reported that potential buyers of Abengoa Bioenergy’s six first generation ethanol facilities have been looking at acquiring the assets even before the company’s announcement that they would be put up for sale.

We reported last month that company has already received possible offers from investment funds, as well as from a local Brazilian investor for the Brazilian piece.

Bankruptcy proceedings

Last month, Abengoa Bioenergy US Holding, LLC filed for Chapter 11 bankruptcy relief in the US Bankruptcy Court for the Eastern District of Missouri on behalf of itself and 5 of its US bioenergy subsidiaries. The companies involved in the filings include the US holding company; companies that own and operate four of Abengoa Bioenergy’s six US starch ethanol plants; as well as various support/service companies for Abengoa’s US bioenergy operations. The cellulosic ethanol project is not in bankruptcy.

This action follows the filing of two separate involuntary bankruptcy proceedings in Nebraska and Kansas earlier this month concerning the company’s starch ethanol facilities located in Ravenna and York, NE; in Colwich, KS; and in Portales, NM, and motions have been filed in the Nebraska and Kansas courts to transfer those involuntary filings to St. Louis for consolidated administration.

Abengoa Bioenergy CEO Antonio Vallespir said, “Filing and consolidating the cases in St. Louis…provides the opportunity for a coordinated and supervised reorganization or sale process, while still allowing each involved debtor company substantial control over its own costs, debts and assets.

Getting cash for operations

For now, US bankrupcy courts are allowing Abengoa to borrow money to operate its US facilities, giving a preliminary OK to raising up to $7 million in debtor-in-possession financing. This, despite opposition from existing creditors who expressed fears that cash would be transferred from the US to Spain to prop up the parent. At the  end of the month, Abengoa expects to be back in court with a DIP financing deal for final OK.

The credit markets

Clearly, lot’s of unhappy there. Moody’s  downgraded the corporate family rating of Abengoa and its senior unsecured ratings to Ca, from Caa3. The outlook on the ratings remains negative. “The downgrade reflects Moody’s view that based on the company’s reported year-end 2015 debt levels and the viability plan published on 16 February 2016, the expected recovery rate will no longer be commensurate with a Caa3 rating and more likely be in a range consistent with a Ca rating level,’ the rating service said, adding, “in addition, an event of default is highly likely and chances to avert this are diminishing the longer the current creditor protection process according to Article 5 bis of the Spanish Insolvency Lay (Ley Concursal) lasts.”

Earnings

Well, they’re dismal. The company reported a 1.2B loss in 2015 — which it attributed primarily to the 878M cost of the new “financial viability plan”.

What’s operating, what’s not.  Two of the plants are currently operating, which in addition to the second generation facility in Hugoton, Kansas, are not part of the company’s Chapter 11 proceedings.

For now, though out of bankruptcy, the cellulosic project in Hugoton has suspended production. Previously, the technology is running, but not running continuously at the production rate Abengoa needs — so read this as “production suspended due to corporate financing woes” rather than “technology failure”. And Abengoa has indicated that the project would be in “ramp-up” throughout 2016.

What happens next?

It is anticipated that assets in Europe, Brazil and the US will be sold off piecemeal or by region rather than all going to one major global entity as may have been expected when the company first announced its financial troubles.

Meanwhile, Abengoa S.A. is currently in the process of negotiating a viability plan for the global organization of the company and aims to maintain business activity in all areas.

The thrust of the plan is selling off assets and writing down paper to reduce debt to around 3B from today’s €9B.

Once bioenergy has been peeled off, the company will focus on engineering, EPC for third clients and some project development especially in solar and thermal solar technologies. In order to pay off immediate debts as required by the bankruptcy court, it will sell off various properties in Spain, Germany and the Middle East, including its headquarters in Seville, for around $163 million. In addition, it will look to sell various energy, water and other installations located around the world for another $1.3 billion.

Any good news?

Well, debt did come down in 2015 — a total of €888 million, to be exact. But the company said it would need an infusion of €1.66 billion to emerge as a smaller, lower-risk company.

What dragged Abengoa down?

Last week, we reported that despite Abengoa’s assurances that its ethanol plants are operating as normal, the market is concerned about the company’s ability to meet spot demand in addition to term contracts. This concern has helped to pushed up European ethanol prices beyond current two-year highs that have been sparked by a tight physicals market. Imports are expected in the new year while a few vessels have been chartered for December delivery, but it’s not enough to rein in the distressed market.

Last Thanksgiving, that NASDAQ shares in Abengoa SA plunged 49% in one day (Wednesday) after the embattled renewable energy developer said it would seek bankruptcy protection as it seeks to reorganize nearly $9.4 billion in debt. The protective filing was announced after an expected infusion of nearly $300 million from Spanish steelmaker Gonvarri did not materialize. We reported on the insolvency proceedings here.

It didn’t help that the Obama Administration crushed cellulosic ethanol this week with news that they would not aggressively set cellulosic targets or bump overall ethanol numbers — leaving cellulosic projects in the unenviable position of competing for market share with first-gen ethanol.

Observers pointed to the EPA’s 230 million gallon target for cellulosic biofuels for 2016 — almost double the 123 million target for 2015 — but biogas producers as of September had ratcheted up production sharply and had reached a 160 million gallon annual rate, leaving not much headroom for either liquid cellulosic biofuels of any flavor.

The big risk factors going forward

One battle royal underway in the EU — how much equity will Inversion (controlled by the family of Abengoa founder Javier Benjumea) hold? Originally it sought to emerge from restructuring with a 12.5 percent, down from 51 percent today, with a window of opportunity to increase the holding back to 30 percent if financial milestones were met. But, that proposal died with creditors, and Inversion has scaled it’s proposal back to a 5 percent holding. That scale-back is the source of the jump in Abengoa equity in recent days.

Abengoa Yield?

Popular amongst companies these days is to establish a yield co to receive revenues associated with ongoing projects. That was Abengoa Yield — which primarily would receive solar revenues from what Abengoa refers to as “concessional projectsZÆ as opposed to turn-key engineering and construction projects. The stink on the Abengoa brand is stong enough that the unit is being re-named Atlantica Yield. Meanwhile, Abengoa has reduced its holding to 42 percent and independent directors now hold five of the 8 board seats.

What about the cellulosic ethanol project?

Late last month, the latest report from Lux Research says that Abengoa’s second-generation ethanol facility in Hugoton has the most expensive production cost in the world at about $4.55 per gallon while Raizen has the lowest at $2.17 per gallon. The report says the problem comes from feedstock cost, accounting for around 40% of the production cost, with Abengoa having to pay $90 per dry ton of stover while Raizen only pays $38 for its bagasse.

True, not true? Alas for fans of Lux (and we’re among them), they missed the boat on this one. Every source we’ve checked with confirms that Abengoa’s feedstock costs are materially lower than reported in the Lux report, which drew on third-party sources, primarily academic estimates, as opposed to in-field supplier checks.

Will Abengoa keep the cellulosic ethanol business?

It might, but probably won;t. The financial viability plan does not specifically assign the cellulosic project for sale, and Bloomberg reported an emailed statement that the viability plan includes  “the sale of all non-core assets including all the first generation biofuel ones.”

What does it say about bioenergy, generally?

As we can see in this related 8-Slide Guide to the Abengoa Financial Viability plan, and including the highlights from the Q3 financial report, the company is making very little money from bioenergy at the moment. Overall, a 2% return on revenue — and that’s before a consideration of debt costs.

So, that’s put pressure on the overall business that it didn’t need. But hardly is the source of all of Abngoa’s troubles. Overall, it’s project debt stands at $1.0 billion, and given an estimated capex of $2 per gallon of conventional ethanol capacity, the construction of Abengoa’s 500+ million gallon ethanol network would have cost around a billion dollars, or around €900 million.

We expect that the assets will be bought by existing players on the scene, for a substantial discount to their “top of the market” value. For now, the shutdown of production capacity may well relieve some price pressure on ethanol, good for other producers fighting similar margin headwinds. In the long-run, we expect that the Abengoa Bioenergy assets in the US, in particular, will remain operational for some time, though not under the Abengoa flag and not likely sitting in one portfolio.

Likely bidders?

Green Plains, Pacific Ethanol, FHR and Valero have shown an appetite for acquisitions at the right price, in the past.

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