Debt Ratio of Abengoa: An Evaluation

INTRODUCTION

The main objective of this final degree project is to study the financial and economic problems that ABENGOA went through, the way they entered the pre-creditor´s committee, and the impact this situation had on the company, from an accounting point of view.

In this analysis of ABENGOA my aim is to demonstrate with a study of the financial results the main factors of its crisis and how by the pre-creditor´s committee the managed to calm the situation.

Therefore, I will start to compare 2015 (the start of the crisis) and 2016, with the help of the company balance sheet and profit and loss statement. From then on I will develop a financial analysis.

Once I have analysed both years, I will compare them with the most actual results from 2017. My main purpose with this is to develop an analysis with the perspectives and expectations put in ABENGOA.

With the financial results and from an accounting point of view, I will explain the way the financial and economic situation affected the company, the consequences that made them enter the pre-creditors committee, and the actual situation in which ABENGOA is involved.

I decided to go ahead with this project, because analysing the actual situation and all the problems ABENGOA has had to face after nearly becoming one of the biggest pre-creditors committee in Spanish history, I felt it was a very interesting case which to study and analyse.

For this reason, I will try to give it an accounting point of view, involving all the concepts obtained through out the whole business degree.

1. OVERVIEW OF ABENGOA

ABENGOA is a Spanish multinational company focused in the energy, telecommunications and engineering industries, founded in 1941 in Seville by Javier Benjumea and José Manuel Abaurre. The initial share capital was 180.000 pesetas (€1.082). The most significant events are detailed below:

1941-1950:

ABENGOA developed its first projects around the south of Spain, with earnings exceeding 45 million pesetas (€ 270.456).

1950-1970:

They expanded their business through the rest of the country and also managed to increase sales up to 827 million pesetas (€ 4.970.371). However, the international expansion came in the years between 1961 and 1970; the moment in which sales grew up to 4.88 billion pesetas (€ 29.329.391). In this period ABENGOA started to operate in South America.

1971-1990:

The maturity period took place from 1971 to 1990. During these years, the company kept growing, achieving 52.39 billion pesetas (€ 314.906.303) sales.

1990-2000:

In the 90’s, the firm broke into a modernization stage, in which it specialised in very concrete activities: technology, environmental and renewable energies. By the end of the decade, they obtained 144 billion pesetas (€ 865.457.431) (ABENGOA, 2017).

After 2000:

ABENGOA became a well-known international company during the 21^st century. Before the financial crisis of 2008, the firm employed 20,000 people and generated more than € 7.000 million per year.

However, everything they built-up vanished when in 2015 Felipe Benjumea, the president of ABENGOA, presented fake financial results with revenues of 72 million Euros in the first semester of 2015. Later on the company requested a pre-creditors committee as there was an excess on the Liability side operations of more than 24 million Euros.

2. ABENGOA PRE-CREDITORS COMMITTEE

2.1. PRE-CREDITORS AND CREDITORS COMMITTEE

The pre-creditors committee, as explained in Article 5 of Spanish Bankruptcy Law (Jefatura del Estado, 2016), is the process in which a society involved in a insolvency situation or either the creditors request extra time to negotiate with investors or other financial entities to avoid bankruptcy. During this time, the company can keep on working and has the option of not making public this information to skip damaging company’s reputation.

Between 2012 and 2013 ABENGOA had serious problems when the company that audited its accounts, Deloitte, made a mistake after they skipped a huge amount of debt that ABENGOA had in its books.

2.1.1. Beginning of the crisis:

In 2015, Felipe Benjumea and his advisers presented fake results of the first 9 months of the year, when they made public profits up to 72 million Euros.

During August, after being conscious of the amount of debt they had, Abengoa agreed a capital extension of 650 million Euros with GONVARRI, but months later this company announced the end of the agreement after the bad press ABENGOA was receiving.

2.1.2. Why did ABENGOA request the pre-creditors committee?

On November 25^th of 2015, ABENGOA requested the pre-creditors committee as they couldn´t face its Liabilities side operations with a total amount of debt surpassing 9.000 million Euros.

3. ABENGOA’S FINANCIAL RESTRUCTURING AND REFINANCING

In Negotiations with Santander Bank and other financial institutions for an extension of capital, Santander asked for the cessation of Benjumea to go along with enlargement of capital, secure its viability and avoid the bankruptcy of the company. Therefore, ABENGOA announced a restructuring plan leaded by Gonzalo Urquijo.

On 16^th March, 2016, ABENGOA showed up a viability plan and proposed the restructuring and refinancing plan after negotiating the terms with their creditors and investors.

On 28^th March, 2016, the “Standstill Agreement”, in which they looked after the extension of capital and reduction of debt, was approved with a 75% of financial creditors. Later on, on the 6^th of April the judge of the Mercantile Court of Seville extends the length of the Agreement until the 28^th of October.

From April to October of 2016, ABENGOA developed the Restructuring Agreement, that was finally accepted by the Judicial courts of Seville on the 8^th of November 2016.

The Accession Period was the length of time in which the creditors had to accept or reject the restructuring plan developed by ABENGOA. If the financial creditors accepted this project, then they could choose among several conditions which we will explain later on.

Between August and September of 2016, the viability plan and the restructuring agreement were accepted. ABENGOA closed the Supplemental Accession period the 25^th of October with a support of 86% of the financial creditors (over the legal requirement 75%).

In January of 2017, they opened again the Supplemental Accession period until the 24^th of January, date in which 94% of the financial creditors joined the restructuring plan and the new ABENGOA.

During the Restructuring process Banks such as Bankia, Banco Popular, Banco Santander, Caixabank and Credit Agricole took part as creditors. As for the investors: Abrams Capital, The Baupost Group, Canyon Partners, The D.E. Shaw Group, Elliott Management, Oaktree and Värde took part in the Restructuring process (ABC, 2017).

The 31^st of March of 2017, ABENGOA and CNMV meet to announce completion of the restructuring agreement. The financial creditors that had not joined could never do it.

In April 2017, ABENGOA finally closed the Restructuring agreement, where the main points of the agreement were:

That the total amount of new money went up to 1.169,6 million Euros, including the money of the refinance at the end of 2015 and beginning of 2016.

This amount is divided into 3 branches:

	1st Branch	2nd Branch	3rd Branch
AMOUNT	945.1 million	194.5 million	Credit up to 30 million
MATURITY	Max. 47 months	Max. 48 months	Max. 48 months
SECURITY	A3T Mexico Atlantic Yield shares	Assets in engineering business	A3T Mexico Atlantic Yield shares
ENTITLED	-30% of future share capital	15% of future share capital	5% of future share capital

Source: Own elaboration based on Abengoa Consolidated Management Report, June 2017.

Also, new bonding lines amounting 307 million Euros, entitled to 5% of ABENGOA´s new share capital post restructuring.

The standard restructuring terms involve 97% reduction of the nominal value, while keeping 3% with 10-year maturity, without annual coupon.

Creditors who adhere to the agreement could choose between: a capitalization of 70% of pre-existing debt in exchange for 40% of ABENGOA´S new share capital post- restructuring; or the 30% left of nominal value of the pre-existing debt.

At the end of the restructuring process, shareholders will control around 5% of the share capital post-restructuring.

4. ANALYSIS OF ABENGOA’S FINANCIAL STATEMENTS

4.1. BALANCE SHEET ANALYSIS

In this section I will develop an analysis of the relative weight of the balance sheet and profit and loss statement items, as well as their evolution during the accounting period 2015-2017.

The financial structure reflects the different sources the firm uses to finance the assets, while the economic structure indicates the investment and the rights acquired.

With the vertical analysis, it is possible to determine the relative weight of a balance sheet item compared to a group of assets or to the total assets. By analysing the consecutive accounting statements, it will make it feasible to verify if the weights stay the same, or if they change over time.

On the other hand, the horizontal analysis makes it possible to compare the weight of each item with the weight corresponding to a referential moment.

The study of the vertical analysis of the balance sheet asset side, covering from 2015-2017, helps us identify the items with higher weight for ABENGOA:

Table 4.1. Analysis of the Economic Structure of ABENGOA (€ Thousands)
				31/12/15			31/12/16			31/12/17
					%			%			%
	Intangible Assets		1.445.977		8,70%	76.097		0,77%	63.574		1,00%
	Tangible Fixed Assets		1.154.074		6,94%	177.438		1,79%	171.410		2,70%
	Fixed Assets in Projects		3.359.663		20,21%	397.655		4,01%	164.672		2,59%
	Investments in Associates		1.197.691		7,20%	823.179		8,30%	33.873		0,53%
	Long-Term Investments		1.113.727		6,70%	64.931		0,65%	40.753		0,64%
	Deferred Tax Assets		1.584.751		9,53%	615.226		6,21%	375.814		5,91%
	Total Non-Current Assets		9.855.883		59,28%	2.154.526		21,73%	850.096		13,37%
	Inventories		311.262		1,87%	99.806		1,01%	74.696		1,17%
	Accounts Receivable		2.004.436		12,06%	1.327.449		13,39%	964.777		15,17%
	Short-Term Investments		518.821		3,12%	149.892		1,51%	194.964		3,07%
	Cash and Cash Equivalents		680.938		4,10%	277.789		2,80%	195.870		3,08%
	Assets Kept for Sales		3.255.859		19,58%	5.904.492		59,56%	4.078.194		64,14%
	Total Current Assets		6.771.316		40,72%	7.759.428		78,27%	5.508.501		86,63%
	TOTAL ASSETS		16.627.199		100,00%	9.913.954		100,00%	6.358.597		100,00%

Source: Own elaboration based on Abengoa Annual Report, years 2015, 2016 and 2017.

At the end of 2015, the Current Assets represented 40,72% of the total assets. However, we can observe a variation of the distribution of the assets: at the end of 2016, the Current Assets represented a 78,2% of the total assets, and in 2017, 86,63% of the total assets. This means a radical change of the firm´s economic structure.

Analysing the Non-Current Assets in more detail, there is an important change in the Intangible Assets, as the Goodwill value changes from 364.420 (€ Thousands) at the end of 2015, to zero in 2016. The perceived ABENGOA’s loss of value for the investors was reflected in the complete loss of its Goodwill.

This decrease from 2015 to 2017 is also caused by the lack of hope of the company in the bioenergy activity. The decision of not continuing with bioenergy business was the main strategy stablished in the Viability Plan. Therefore, the reduction of 1.382.403 thousand Euros from 2015 to 2017 of this item is related to selling the bioenergy business.

Likewise, the rest of Fixed Assets suffered a huge decrease during 2016.

Regarding the Tangible Fixed Assets, the most notable variation during 2016 corresponds to the loss of control of its filial company Abengoa Bioenergy Netherlands, B.V., as this one initiated the liquidation process after being declared in bankruptcy in May 2016. This fact supposed ‘the loss of control over this Company has generated the disposal of all the assets and liabilities related to the Company at book value on the date in which the loss of control was effective’ (ABENGOA, 2016).

There is also a decrease motivated by the reclassification of the net assets related to the Bioenergy business as assets held for sale.

Regarding 2017, the biggest change has to do with a decrease amounting 6 million Euros originated by the sale of Abentel Telecomunicaciones company, the Inabensa Bharat factory in India, and Abengoa Concessões Brasil Holding offices. There is also an increase due to the reclassification related to Centro Tecnológico Palmas Altas from fixed assets in projects.

For Fixed Assets in Projects we can see a variation from 2015 to 2016-2017 of more than 16%; this is related to the lines of transmission in Brazil and Peru, and also to the I3T project in Mexico, and other projects sold in United States and Africa.

While in 2016 this balance sheet item had the highest weight compared to the total assets, representing the 20,21%, it dropped to 4,01% in 2016 and to 2,59% in 2017.

The decrease in 2015 is in part caused by projects such as the transmission lines in Brazil with an amount of 665 million Euros, thermo-solar plants in Chile for 653 million, Mexican water projects (such as El Zapotillo) for 389 million Euros, Water projects in Africa and United states for 98 million Euros. Also the construction in Brazil for a Hospital amounting 40 million Euros and projects in Uruguay for 28 million Euros.

In 2016, the most significant decrease of fixed assets in projects is due to the transmission lines in Brazil, while for 2017, the reduction relies on the reclassification of the Zapotillo water project in Mexico.

In relation with Investments in Associates, the loss of power that Abengoa had over Atlantic Yield was the main reason influencing the change in 2015. As for 2016, the depreciation amounted 244 million Euros corresponding to the sale of Explotaciones Varias S.L. and the sale for 5 million Euros of Xina thermo-solar project cause a slight reduction. Once again, in 2017 Atlantic Yield and affiliates reclassification of assets make a big reduction of Abengoa´s investments in associates.

Regarding the increase of the Current Assets value (40,72% in 2015; 78,27% in 2016 and 86,63% in 2017) with respect to the total assets value, this increase is mainly due to the increment of the Assets Kept for Sales. At the end of 2015, this item represented a 19,58% of the total assets, with €3.255.859 thousands, and increased until €5.904.492 thousands in 2016, what means a 59,56% of the total assets. At the end of 2017, the number decreased but the percentage in terms of total assets remains very high, being the balance sheet item with the highest weight at the end of 2017, with 64,14%.

For the rest of the Current Assets items, in Inventories, the reduction from 2015 to 2017 is related to the sales of the bioenergy business, that takes us to the reduction of inventories plants. Even there is a reduction, it is not significant as Inventories haven’t got a big role in the company’s balance.

In relation to Accounts Receivable, the biggest change comes in 2016, caused by the construction crisis that affected the whole country. The firm was affected as the main activities were construction and engineering. A slowdown in construction and unpaid projects made a reduction amounting 700 million Euros. In this period ABENGOA had to cover these unpaid projects with long-term provisions.

For Cash and Cash Equivalents, a reduction in development of projects and a huge amount of unpaid projects in the construction industry affecting in 2016 could have been the main cause of the reduction in Cash and Cash Equivalents.

As we can observe, Assets Kept for Sales is the only item of current assets that increased from 2015 to 2017. We can deduce this item represents 65% of the value in current assets because in 2016, during the restructuring Agreement, the company had to give up the projects that were less profitable. Specially projects out of activities involved in construction and engineering, as they had less future perspective.

At the same time in 2017, the Asset Kept for Sales is reduced by 2.000 million Euros due mainly to the sales in Atlantic Yield and many projects in United States and South America.

As for both Long-Term Investments and Short-Term Investments the decrease from 2015 to 2017 is related to the disinvestment process of El Zapotillo in Mexico and Atlantic Yield.

In 2015, there is a big difference of 60% to 40% between Non-Current Assets and Current Assets that is mainly because these kind of companies in which all the projects are normally long-term, they usually get paid by clients between three and six months after the project has finished. So Inventory and Cash represent a small portion of the whole firm’s constitution. At the same time, it is remarkable the changes occurred between 2015 to 2017, as later on Current Assets gain a lot of value as they represent up to 87% of the Total Assets. From these, 64% is part of Assets Kept for Sales.

As mentioned through the financial analysis, Assets Kept for Sales is the only item that increased out of the Total Assets along the pre-creditors committee and the restructuring agreement process.

After the analysis of the main balance sheet asset items, I will analyse the Liabilities and Net equity side operations.  The analysis of the vertical percentages of these items, corresponding to the period 2015 and 2017, makes it possible to identify the items with the highest weight:

Table 4.2. Analysis of the Financial Structure of ABENGOA (€ Thousands)
			31/12/15			31/12/16			31/12/17
				%			%			%
Common Stock		1.841		0,01%	1.834		0,02%	36.089		0,57%
Parent Company Reserves		1.784.044		10,73%	721.964		7,28%	-5.888.236		-92,60%
Other Reserves		-79.473		-0,48%	-41.694		-0,42%	-1.896		-0,03%
Translation Differences		-1.030.413		-6,20%	-845.411		-8,53%	-1.187.518		-18,68%
Retained Earnings		-613.717		-3,69%	-7.171.830		-72,34%	4.171.700		65,61%
Non-Controlling Interests		390.633		2,35%	555.169		5,60%	462.073		7,27%
Total Net Equity		452.915		2,72%	-6.779.968		-68,39%	-2.407.788		-37,87%
Projects Financing		503.509		3,03%	12.563		0,13%	11.197		0,18%
Corporate Financing		371.525		2,23%	267.029		2,69%	1.611.231		25,34%
Subsidies and Other Liabilities		234.193		1,41%	65.940		0,67%	52.275		0,82%
Provisions for Other Liabilities and Expenses		62.765		0,38%	50.819		0,51%	53.866		0,85%
Derivative Financial Instruments		38.002		0,23%	5.535		0,06%	/		0,00%
Tax Liabilities		317.689		1,91%	172.856		1,74%	523.286		8,23%
Employees Benefit Obligations		3.631		0,02%	3.234		0,03%	8.088		0,13%
Long-Term Liabilities		1.531.314		9,21%	577.976		5,83%	2.259.943		35,54%
Projects Financing		2.566.597		15,44%	2.002.941		20,20%	96.754		1,52%
Corporate Financing		6.196.546		37,27%	7.398.122		74,62%	2.032.528		31,97%
Accounts Payable		4.379.252		26,34%	2.654.260		26,77%	1.882.217		29,60%
Current Tax Liabilities		195.446		1,18%	145.546		1,47%	128.260		2,02%
Derivative Financial Instruments		107.917		0,65%	11.598		0,12%	/		0,00%
Provisions for Other Liabilities and Expenses		5.789		0,03%	16.942		0,17%	23.286		0,37%
Liabilities Kept for Sale		1.191.423		7,17%	3.886.537		39,20%	2.343.397		36,85%
Current Liabilities		14.642.970		88,07%	16.115.946		162,56%	6.506.442		102,33%
TOTAL LIABILITIES AND NET EQUITY		16.627.199		100,00%	9.913.954		100,00%	6.358.597		100,00%

Source: Own elaboration based on Abengoa Annual Report, years 2015, 2016 and 2017.

At the end of 2015, the Net Equity represented a 2,72% of the totality of the financial structure. To check these numbers, as in 2016 and 2017 the Net Equity is negative and does not represent the normal financial structure of a firm, I analysed the Net Equity and Liabilities of ABENGOA, corresponding to the years 2011 to 2014 to have a better reference. The results show that during these four years, the Net Equity is around 10% of the total financial structure (9,19% in 2011, 8,91% in 2012, 8,95% in 2013 and 10,48% in 2014).

Considering this, it makes sense that the negative results of 2016 and 2017 are due to the increased negative Retained Earnings in the case of 2016, and to the negative Company Reserves in 2017, which descended to -5.888.236 thousand Euros, representing a -92,60%. We could say that the negative Retained Earnings of 2015 and 2016, are compensated in 2017 against the company reserves to pay debt.

In 2015 the Common Stock amounted a total of 1.841.000 Euros, with 941,533,858 shares. These shares were split into Class A shares and Class B shares. Class A with an amount of 83,467,081 and each had a nominal value of 0,02 Euros. As for the Class B, the total amount of shares was of 858,066,777 with a nominal value of 0,0002 Euros per share.

In 2016 the total share capital was €1,834,252.65 corresponding to 941,805,965 shares, divided into 83.125.831 shares of class A with a nominal value of 0,02 Euro per share and 858.680.134 shares of class B with a nominal value of 0.0002 Euros per share.

In 2017 the total share capital increased to €36,088,747.70 corresponding to 18,836,119,300 shares, divided into 1,632,400,194 shares of class A with a nominal value of 0,02 Euro per share and 17,203,719,106 shares of class B with a nominal value of 0.0002 Euros per share.

Therefore, we can see a difference from 2015 to 2017 amounting 35 million Euros of capital that is related to the extension of capital from the Restructuring Agreement with creditors.

Regarding Translation Differences, the appreciation of the Dollar against the Euro and Brazilian Real against the Euro makes the translation differences bigger during periods 2015 to 2017.

On the other hand, from 2015 to 2016 the decrease in Retained Earnings mainly comes due to the negative income the company has at the end of 2016. This is caused by the reclassification of the Atlantic Yield and the big Rioglass interests. In 2017 the firm noticed a big difference as a positive net profits at the end of the year. Going from -7.171.830 thousand Euros to earnings up to 4.171 million Euros.

The increase in 2016 in Non-Controlling Interests is due to the appreciation of the Brazilian Real towards the Euro. The change from 2016 to 2017 is related to the transmission lines in Brazil for a total of 348 million Euros in 2017 and 455 million Euros in 2016.

Also in 2017 the Bioenergy business had a big effect in the Non-Controlling Interests due to the sale of this activity in the whole of Europe.

Regarding the external financing, ABENGOA relies on Current Liabilities more than on Long-Term Liabilities.

In the side of the Long-Term Liabilities, in Projects Financing the main reduction of nearly 490 million Euros took part from 2015 to 2016 and was fully caused by the transfer to Liabilities Kept for Sale of specific transmission lines and the bioenergy business. These sales were part of the presentation included in the Viability Plan.

Regarding Corporate Financing, the huge increase of finance in 2017 amounting 1.400 million Euros is related to the Restructuring Agreement in which ABENGOA negotiated in majority among loans and borrowings by banks and investors mentioned above.

Also, as explained in ABENGOA’s annual report of 2016 (ABENGOA, 2016), as a consequence of contractual defaults in reaction to the events that took place by the end of 2015 and that took the company to the pre-creditors committee, some of the Corporate Financing had to be considered as a Current Liability instead of a Long-term Liability, as in that moment it was enforceable in the short term.

For Employees Benefit Obligations, the increase in the period 2015-2017 is a consequence of the consideration of ABENGOA´s main directors that their remuneration does not go linked with the work they have to do in this important process for the firm.

As for Short-Term Liabilities, for Project Financing the Restructuring process had several obligations in which projects financing was top list. The company had to face the huge amount of debt to keep on with the plan, this meant a reduction due to debt-write offs of Project Finance. This was taken through 2017 with a reduction up to 1.906 million Euros.

In relation to Corporate Financing, the increase of 1.200 million Euros in 2016 is divided in several financial operations: 147 million Euros related to matured and unpaid derivatives, 386 million Euros on bank guaranties, more than 300 million Euros in liquidity lines, 128 million related to an agreement for the sale of transmission lines in Brazil; and 209 million Euros from the sale of Bioenergy business.

Finally, for Accounts Payable at the end of 2015 the total amount of trade payables and other current liabilities due and unpaid (principal and interest) amounted 604 million Euros.

At the end of 2016 the total amount of trade payables and other current liabilities due and unpaid (principal and interest) amounted 974 million Euros.

While at the closing of 2017 the total amount of trade payables and other current liabilities due and unpaid (principal and interest) amounted 583 million Euros. Default interests for the above mentioned liabilities were recognized.

It is also remarkable the sale of all the Derivative Financial Instruments in 2017, both the short-term as the long-term ones, and the great increase of Provisions for other Liabilities and Expenses, which were increased from 5.789 thousand Euros in 2015 to 16.942 thousand Euros in 2016, and to 23.286 thousand Euros in 2017, which reflects the necessity of the firm to provide them due to its financial situation.

4.2. PROFIT AND LOSS STATEMENT ANALYSIS

The Profit and Loss Statement reflects the economic flows that explain the outcome obtained by the firm during a specific period of time.

On the Table 4.3 is reflected the information of ABENGOA’s profit and gross statements of the years 2015 to 2017:

Table 4.3. Analysis of the Profit and Loss Statement of ABENGOA (€ Thousands)
		31/12/15		31/12/16		31/12/17
			%		%		%
	Operating Revenue	3.646.765	100%	1.510.053	100%	1.479.768	100%
	Inventories of Finished Goods and Work in Progress Changes	8.331	0,23%	-10.387	-0,69%	615	0,04%
	Other Operating Income	124.340	3,41%	65.753	4,35%	161.869	10,94%
	Raw Materials and Consumables Used	-2.049.052	-56,19%	-978.532	-64,80%	-773.113	-52,25%
	Employee Benefit Expenses	-713.275	-19,56%	-440.312	-29,16%	-344.156	-23,26%
	Depreciation, Amortization and Impairment Charges	-372.821	-10,22%	-1.900.720	-125,87%	-405.011	-27,37%
	Other Operating Expenses	-673.660	-18,47%	-387.793	-25,68%	-398.052	-26,90%
	Operating Profit	-29.372	-0,81%	-2.141.938	-141,85%	-278.080	-18,79%
	Financial Revenues	56.729	1,56%	15.692	1,04%	21.222	1,43%
	Financial Expenses	-653.590	-17,92%	-679.575	-45,00%	-438.094	-29,61%
	Net Exchange Differences	-11.176	-0,31%	9.060	0,60%	50.206	3,39%
	Other Net Finance Income and Expenses	-89.567	-2,46%	-506.958	-33,57%	6.121.989	413,71%
	Financial Results	-697.604	-19,13%	-1.161.781	-76,94%	5.755.323	388,9%
	Share of Profit (Loss) of Associates under the Equity Method	-8.307	-0,23%	-587.375	-38,90%	-72.680	-4,91%
	Profit before Income Tax	-735.283	-20,16%	-3.891.094	-257,68%	5.404.563	365,2%
	Income Tax	-88.427	-2,42%	-371.566	-24,61%	-824.726	-55,73%
	Net Income from Continuing Operations	-823.710	-22,59%	-4.262.660	-282,29%	4.579.837	309,5%
	Profit from Discontinued Operations, Net of Tax	-518.980	-14,23%	-3.352.377	-222,00%	-295.819	-19,99%
	Net Income	-1.342.690	-36,82%	-7.615.037	-504,29%	4.284.018	289,5 %

Source: Own elaboration based on Abengoa Profit and Loss Statement, years 2015, 2016 and 2017.

In the first place, it is remarkable how the Operating Profit is negative during these three years, something not common for a company operating in the energy and engineering sector and with the business experience of ABENGOA. Especially alarming is the result obtained in 2016, when the Operating Profit represented a -141,85% of the Operating Revenue. These data reflect poor business operations, that leaves the company relying on financial operations in order to achieve positive net earnings. This amount is due to the moment in which ABENGOA lacked resources.

In 2015 Operating Profit over Operating Revenue percentage was -0,81%, near the unity, but still reflecting a poor year in terms of sales or operating costs. Finally, in 2017 it represented -18,79%. Again, a worrying result, but it is noticeable the progression on the previous year (-141,85%).

The items included on Operating Profit are: Changes in Inventories of Finished Goods and Work in Progress, Other Operating Income, Raw Materials and Consumables Used, Employee Benefit Expenses, Depreciation, Amortization and Impairment Charges and Other Operating Expenses.

Out of all, there is a great decrease on Changes in Inventories of Finished Goods and Work in Progress in 2016 and 2017 compared to 2015.

Employee Benefit Expenses, which was -713.275 thousand Euros in 2015 is reduced to -440.312 and -344.156 thousand Euros in 2016 and 2017 respectively, which indicates a significant reduction in the number or employees or their benefits.

It is also remarkable the changes in Depreciation, Amortization and Impairment Charges, valued in -372.821, -1.900.720 and -405.011 thousand Euros in 2015, 2016 and 2017 respectively; here, ABENGOA had to recognise huge losses due to deterioration in 2016, what represented -125,87% of the Operating Revenue that year.

Regarding the Financial Results, which include Financial Revenues, Financial Expenses, Net Exchange Differences and Other Net Financial Income and Expenses, ABENGOA presents negative balances in 2015 and 2016 with
-697.604 and -1.161.781 thousand Euros for each year, whereas there is a meaningful variation in 2017, obtaining an overall financial result of 5.755.323 thousand Euros.

Going into detail, it is significant the decrease in Financial Revenues in 2016 with respect to the previous year; these went from 56.729 to 15.692 thousand year. According to ABENGOA’s notes to the consolidated financial statements of 2016, the Financial Revenues decreased as a consequence of change in the temporal value component of interest rate derivative hedges (ABENGOA, 2016).

However, although still away from the Financial Revenues obtained in 2015, in 2017 the company managed to increase them to 21.222 thousand Euros, thanks to the incorporation of the interest rate hedge derivatives achieved in the Financial Restructuring Agreement to the profit and loss statement. Financial Expenses also decreased in 2017, contributing to an overall better financial result.

The biggest changes regarding the Financial Results are found in Net Exchange Differences and Other Net Finance Income and Expenses. Regarding the Net Exchange Differences, ABENGOA presented a value of -11.176 thousand Euros in 2015, but it increased to 9.060 and 50.206 thousand Euros in the following years.

On the other hand, Other Net Finance Income and Expenses suffered a great fall in 2016 (from -89.567 to -506.958 thousand Euros), as a result of the negative balance between the profits from the sale of financial assets and the benefit from the exchange of Atlantic Yield convertible bonds into Atlantic Yield shares, and because of the increase of Other Financial Expenses (see Exhibit 1).

Nevertheless, in 2017 ABENGOA achieved a positive result of Other Net Finance Income and Expenses, presenting a considerable increase (6.121.989 thousand Euros). The main variations are consequence of the Financial Income due to Restructuration, specifically 6.376.379 thousand Euros profit, and of the outstanding reduction of Other Financial Expenses (see Exhibit 2).

Another aspect to take into account is the increase in Income Tax in 2017 up to 824,7 million Euros, consequence of the Profit before Income Tax generated during this year, as opposed to the losses registered in both 2015 and 2016, that lead to an increase in the Corporate Tax Expenses.

Finally, comparing the Net Income with the Net Income from Continuing Operations, it is observable that losses in the years 2015 and 2016 are not related to the continuing operations, representing around half of them, whereas these had a great and positive impact on the Net Income of 2017.

To conclude, after the ABENGOA Profit and Loss Statement analysis of ABENGOA, we could say that the company recovered itself from the great losses of 2016 thanks to the positive Financial Results, attributable to the Financial Restructuring that took place during 2017, however, the firm still has to make changes in order to achieve a positive Operating Profit and to improve its activity results.

4.3. ANALYSIS OF THE FINANCIAL SITUATION: LIQUIDITY, SOLVENCY AND PROFITABILITY

Quoting Corona, Bejarano and González (CORONA, 2015), the objective of the financial analysis is to know if, after decided the desired investments, the company has an appropriate financial structure that guarantees the equilibrium, at the minimum cost and with a suitable availability, not only at the moment of the obtaining, but also regarding the period of the return.

For this analysis, we can differentiate between the financial analysis in the short run, and in the long run.

Analysis of the financial situation in the short run

The financial analysis in the short run, or liquidity, helps evaluate the firm’s capacity to pay back its obligations in the short run, with its available resources.

Working Capital

The main component of the company’s liquidity is the Working Capital, which is the difference between the Current Assets and the Current Liabilities. This is useful to determine how much of the Current Assets is financed by permanent sources.

Formula:

Working Capital = Current Assets – Current Liabilities

There are three possibilities of working capital:

• If it is greater than zero, part of the Current Assets is being financed with permanent sources, as the Currents Assets are greater than the Current Liabilities.
• If the working capital is equal to zero, the Current Assets are wholly financed by the Current Liabilities. The company would have the necessary sources to face its short-term obligations, but it would not have a margin.
• Finally, if the working capital is less than zero, the company has to face a lack of liquidity situation, as the Current Liabilities are greater than the Current Assets and, therefore, it has no enough assets to pay back the short-term obligations.

Consequently, the working capital is the firm’s capacity to pay back the short-term obligations and, at the same time, have a margin to invest or being able to maintain its activity.

The ABENGOA’s Working Capital for the period between 2015 and 2017 is presented below:

Working Capital of ABENGOA (€ Thousands)
	2015	2016	2017
Working Capital	-7.871.654	-8.356.518	-997.941

Source: Own elaboration based on Abengoa financial data.

With the results of the working capital, we can observe how ABENGOA has faced an unfavourable credit-risk situation, as the Current Liabilities are greater than the Current Assets, which can lead the company having an insolvency situation in the short run, which is what actually happened. In any case, it is remarkable the decrease of this difference in 2017, which reflects that, although the firm is not in a good situation yet, it has considerably reduced the amount of Current Liabilities.

Current Ratio

This ratio is useful to determine the company’s capacity to face the Current Liabilities with the Current Assets, also called Short-Term Solvency ratio.

Although the appropriate value of this ratio depends on the company’s activity, there is an acceptance that it is appropriate a value greater than the unity. Anyway, a too high value could mean an excess of investment on Current Assets or an un-exploitation of the Current Liabilities.

Formula:

Current Ratio = Current Assets / Current Liabilities

Current Ratio of ABENGOA
	2015	2016	2017
Current Ratio	0,462	0,481	0,847

Source: Own elaboration based on Abengoa financial data.

As we can appreciate, the Short-Term Solvency ratio is below the unity of the three years. In the case of 2015 and 2016 it is too low, what a priori indicates a lack of solvency, meaning the company could only cover 46 and 48 per cent of its current liabilities.

In 2017, although the ratio is not above the unity, it represents a huge improvement in terms of restructuring. As in this case, the company could cover 85% of its current liabilities.

Therefore, for every Euro of current liabilities, ABENGOA has 0,46; 0,48 and 0,84 of current assets in its corresponding year.

Acid Test

The Acid Test ratio objective is to outline the capacity of a firm to pay back the short-term obligations using only assets that don’t need to be sold or transformed to be convertible into cash.

This is very useful as the heterogeneity of the items composing the Current Assets implies that some of them can be not very liquid in a certain moment. Therefore, it provides a more rigorous assessment of the firm’s ability to pay its Current Liabilities.

Possible formulas for the Acid Test ratio are Cash, Marketable Securities and Accounts Receivable, divided by Current Liabilities, or Current Assets minus Inventory, divided by Current Liabilities. If the value of the ratio is below the unity, the company could face suspension of payments as a consequence of not having liquid assets available. On the other hand, if the ratio value is too greater than the unity, the company could be losing profitability for having unused assets that could be used to invest.

Formula:

Acid Test = (Current Assets – Inventory) / Current Liabilities

Acid Test Ratio of ABENGOA
	2015	2016	2017
Acid Test Ratio	0,441	0,475	0,835

Source: Own elaboration based on Abengoa financial data.

From the Acid Test ratio, and comparing it to the Short-Term Solvency ratio, we can deduce that the inventory doesn’t have much weight on the total Current Assets, in fact, the inventory only represents between 1% to 2% during these three years. This reflects that ABENGOA faces serious liquidity issues.

Analysis of the financial situation in the long run

The financial equilibrium in the long run requires the Receivables to be enough to pay the necessary liabilities.

The long-run financial risk is related to the company’s solvency, this is, the company’s stability and ability to meet its payment obligations, including those in the long-term.

Long-term Solvency Ratio

The Long-term Solvency ratio is determined by the quotient between the total assets and the total liabilities.

Formula:

Long-Term Solvency Ratio = Total Assets / Total Debt

A value under the unity predicts a bankruptcy situation, as the company is not able to pay its financial obligations, even if it liquidates the totality of the assets. If the ratio value equals the unity, the assets cover just the liabilities. It is also an extreme situation. Therefore, the ratio must be the greatest as possible than the unity.

Long-term Solvency Ratio of ABENGOA
	2015	2016	2017
Long-term Solvency Ratio	1,028	0,594	0,725

Source: Own elaboration based on Abengoa financial data.

In 2015 the ratio is greater than the unity but with a very low margin, the year after the company experienced a great insolvency, as we can deduct from the numbers, and in 2017 ABENGOA managed to reduce its insolvency, and probably the ratio reflects the process of restructuring that is being faced by the company, but it is still far away from the normal solvency levels.

Permanent Capital Ratio

The Permanent Capital Ratio indicates how many times the firm’s long term assets can be financed with its long term financing sources.

Formula:

Permanent Capital = (Equity + Long-Term Debt) / Long-Term Assets

Permanent Capital Ratio of Abengoa
	2015	2016	2017
Permanent Capital Ratio	0,201	-2,879	-0,174

Source: Own elaboration based on Abengoa financial data.

Even the results are not the most attractive at first sight, we have to add that ABENGOA nearly became the biggest bankruptcy due to the huge amount they held.

But although there is the huge improvement from 2016 to 2017, the company is still not able to finance its long-term assets with long-term financing resources. In 2015, before the Bankruptcy Agreement, it was stable, but now it is not.

Debt Ratio

The debt ratio indicates the percentage of a company’s total assets that is financed by debt.

Formula:

Debt Ratio = Total Debt / Total Assets

Debt Ratio of Abengoa
	2015	2016	2017
Debt Ratio	0,973	1,684	1,379

Source: Own elaboration based on Abengoa financial data.

As we can appreciate, in 2015 the debt ratio is reasonable, but in 2016 the percentage is too high, meaning the company cannot pay back the whole debt with the total assets. Also, the company is using an extreme amount of financial leverage, which increases its financial risk in the form of fixed interest payments.

Debt to Equity Ratio

The Debt to Equity Ratio represents the percentage of financing that comes from creditors relative to investors.

Formula:

Debt to Equity Ratio = Total Debt / Equity

Debt to Equity Ratio of Abengoa
	2015	2016	2017
Debt to Equity Ratio	35,712	-2,462	-3,641

Source: Own elaboration based on Abengoa financial data.

For Debt to Equity Ratio, if it is equal to 1, it means the company uses the same amount of debt as equity, leaving nothing for shareholders in the case of a future liquidation.

As we can see in 2015, there is a huge amount of debt that cannot be faced with equity in the firm. The ratio of 35,71 corresponds to the same year in which ABENGOA found out the excess of liabilities amounting more than 9.000 million Euros.

Analysis of the firm’s profitability

Net Profit Margin

The Net Profit Margin ratio compares the net income with the net revenue. This ratio shows the capacity the firm has to transform sales into earnings for the benefit of shareholders.

Formula:

Net Profit Margin = Net Income / Net Revenue

Net Profit Margin Ratio of Abengoa
	2015	2016	2017
Net Profit Margin Ratio	-0,368	-5,043	2,895

Source: Own elaboration based on Abengoa financial data.

ABENGOA presents a very low Net Profit Margin Ratio in 2015 and 2016, as it matches with the bad moment the company went through, period when they didn’t have the total support of investors and creditors.  But with the Restructuring Agreement in 2017 we can see an evolution from a negative Net Profit Margin Ratio to a revenue of 0,0289 Euros for every Euro invested.

Return on Assets (ROA)

The Return on Assets is calculated as net income by total assets. This ratio demonstrates how efficient a firm is using its assets.

During 2015-2016 ABENGOA got stuck with the projects and therefore they weren’t able to generate earnings using their them. But later in 2017, with the implementation of the restructuring agreement the ratio increases positively, matching with the period when Gonzalo Urquijo was handling the situation.

Formula:

ROA = Net Income / Total Assets

Return on Assets Ratio of Abengoa
	2015	2016	2017
Return on Assets Ratio	-0,081	-0,768	0,674

Source: Own elaboration based on Abengoa financial data.

Return on Equity (ROE)

The Return on Equity is calculated as net income less preferred dividends against total shareholders’ equity.

It measures the total level of income attributed to shareholders against investment that shareholders put in the firm. It takes into account the amount of debt the firms use.

Formula:

ROE = Net Income / Net Equity

Return on Equity Ratio of Abengoa
	2015	2016	2017
Return on Equity Ratio	-2,965	1,123	-1,779

Source: Own elaboration based on Abengoa financial data.

In general, regarding the company’s ROE-ROA, there is a large disagreement meaning ABENGOA incorporated a large amount of capital from investors to avoid bankruptcy. If we go back to liquidity and solvency ratios we can observe this is true.

5. DELOITTE AUDIT REPORTS

Deloitte has been the auditing firm responsible for the inspection and approval of ABENGOA’s financial statements since 2012. Until the audit report corresponding to the financial statements of 2015, Deloitte didn’t draw attention to the accounting issues that were generating an imbalance and uncertainty about the capacity of the firm to continue its operations.

5.1. 2015 AUDIT REPORT

On the audit reports of the years 2012 to 2015, Deloitte verifies that ABENGOA’s financial statements showed a reliable picture of its condition, and states that the company was able to continue its activity with normality.

The auditing firm didn’t detect the disparity on the balance sheets, what could have mitigated the losses if these were corrected in time.

However, Deloitte warned the company problems on November 13^th, only a few days before ABENGOA requested the pre-creditors committee on November 25^th of 2015 (El Economista, 2015).

Deloitte presents the audit report corresponding to the year 2015, on April 20^th of 2016, when the auditor includes an emphasis of matter highlighting the request of the aforementioned pre-creditors committee, and the viability plan and proposed restructuring and refinancing plan presented by ABENGOA on March 2016. Therefore, the auditing firm emphasises the uncertainty about the continuing of the company activity. In addition, Deloitte observes that the assets recovery and the payments fulfilment would depend on the success of the financial restructuring measures, as well as on the decisions the future managers of the company would make in relation to the assets disposal or the firm’s line of business (Deloitte, 2016).

5.2. 2016 AUDIT REPORT

On the report corresponding to 2016, Deloitte draws attention to the signing of the Abengoa Restructuring Agreement with several financial institutions and new investors on 24^th September, 2016.

It also points out the standstill of most of the company operations, as a consequence of the difficulty to access to enough financing, what in turn, impeded the meet of the payments of credit concessions and existing projects, and brought about that filial corporations overseas ended up with the liquidation of the companies or assets out of ABENGOA Group control.

Additionally, the auditing firm calls attention to the negative net equity of the company, what left the firm in a cause of dissolution. However, Deloitte points out that, even though there was an uncertainty situation, the restructuring plan of ABENGOA would let the firm re-establish its financial equilibrium (Deloitte, 2017).

5.3 2017 AUDIT REPORT

Regarding the audit report corresponding to 2017, Deloitte highlights the negative evolution of the financial and operating areas during the last three years, what has led to creditors’ committees and insolvency proceedings. Furthermore, ABENGOA has to sell certain lines of business and projects in course, as the Revised Viability Plan considers that these are not strategic to the firm’s overcoming.

In summary, the auditor manifests the doubts with respect to the firm’s ability to solve the situation and resume its normal activity (Deloitte, 2018).

The Restructuring Agreement avoided the bankruptcy and has made possible the recovery of the financial situation, but ABENGOA still has to effectively apply the rest of the Restructuring Agreement measures, in order to get back to a competitive position in the engineering industry.

6. CONCLUSION

Throughout this project, I have been able to analyse what could have been the biggest bankruptcy in the Spanish history. I have also learnt the importance of constant transparency and the challenges big companies like ABENGOA can have.

The main problem started off with the bad management of Benjumea and his advisers. As well as the irregularities of Deloitte when they audited ABENGOA´s financial accounts.

In 2015, twelve days before ABENGOA made public their debt situation, Deloitte warned about the firm insolvency situation. If these irregularities had been informed and fixed beforehand, maybe the amount of debt that ABENGOA recorded in 2015 could of been minimized.

And from then onwards I have been able to see the difficulties ABENGOA had to recruit the investors needed to get them out of the bankruptcy committee.

When Benjumea and his advisors left the company, before the pre-creditors committee, nobody believed they could avoid this insolvency problem. But when Gonzalo Urquijo and a totally new team of investors took over, Abengoa managed to reduce the damage caused.

After making a complete financial analysis, it is important to underline that this process has just started, and until 2025 (as the Restructuring Plan states) we won´t be able to see a clear sheet of debt.

Through analysis of the Balance sheet we have observed the first effects of the Restructuring Agreement They have reduced ABENGOA´s debt by selling all the projects that have no future perspective.

The ratios did not show us as much as they would have done 10 years ago, mainly because without generating revenue in 2015 and 2016 and with the amount of debt ABENGOA carries, it´s difficult to analyse such an insolvent firm. Its key to highlight the improvement in the last year and the adequate action of centring their business in the Engineering and Construction industries.

Something else that caught my attention was how big ABENGOA had to be, to the point that the investors and banks were still interested in investing in a company with such amount of debt. This means the history of ABENGOA is very valuable. As it´s been able to surpass what many companies couldn´t even have dreamt of.

The Restructuring Agreement was the best response and has made ABENGOA present a positive EBITDA, revenues related to the restructuring and a reduction of costs. Even so, it is important that the high amount of debt and the value of the firm in the market start to improve in the next 10 years.

As the Viability Plan states, selling projects such as Atlantic yield and the I3T project in Mexico are the kind of decisions that will make ABENGOA succeed its new era.