OREANDA-NEWS. September 28, 2015. Fitch Ratings has affirmed Spanish engineering and construction group Abengoa, S.A.'s Issuer Default Rating (IDR) and senior unsecured debt rating at 'B'. The Recovery Rating has been affirmed at 'RR4'. Simultaneously, Fitch has affirmed Abengoa Finance, S.A.U's and Abengoa Greenfield, S.A.U.'s senior unsecured ratings at 'B'/'RR4'. The Outlook on the Long-term IDR is Stable.

The rating reflects the announcement on 24 September that Abengoa has procured an underwritten EUR650m capital increase together with an improved corporate governance and targeted leverage reduction. This followed the company's cut in its FY15 corporate free cash flow guidance from EUR1.4bn to EUR0.6bn to 0.8bn and the sharp decline and extreme volatility in Abengoa's shares and bond prices. This raised questions about Abengoa's ability to raise funds from the equity, bond and bank markets. Fitch believes that this uncertainty could have adversely affected its cash flow sensitive engineering and construction (E&C) activities through its working capital.

The EUR650m equity increase will support the group's near-term liquidity needs, although key risks remain in areas such as the group's working capital evolution and ability to sell assets to raise disposal proceeds to reduce leverage. In the medium term, the potential negative impact on the E&C business of announced reduced future capex for new projects remains a risk.

KEY RATING DRIVERS
Underwritten Capital Increase
Abengoa announced a EUR650m rights issue on 3 August and said on 24 September that this capital increase will be fully underwritten. This follows months of extreme volatility for Abengoa's bonds and equity. The capital increase is underwritten by three large banks and one institutional investor as well as the main shareholder. The proceeds will have a positive impact on the group's liquidity and leverage but will also give Abengoa more time to execute its disposal programme.

Targeted Financial Improvement
Abengoa has limited its dividends and capex until it achieves either a 'BB-' rating or reduce its leverage to 3.5x.. Leverage is defined as gross corporate debt including the non-recourse debt in process to corporate EBITDA. Abengoa will suspend its dividend and limit additional equity capex (parent equity to its non-recourse concessions) to EUR50m on top of the already committed capex totalling almost EUR1bn until its target is met. A new investment committee formed by a majority of independent directors will oversee the group's investments and dividends. Although there is no defined timeline to achieve this financial improvement, Fitch notes the incentives to achieve this as soon as possible.

Improved Corporate Governance
Inversion Corporativa (IC), the investment vehicle of the Benjumea family, has committed to reduce its influence in the company. Its voting rights will be limited to 40%, which will be reflected in the board composition as it will nominate five independent directors of a reduced 13 board members (the previous structure included 16 members with six board members nominated by IC and two members of the family within the executives). Felipe Benjumea will be honorary chairman instead of executive chairman. Dividend limitations and the creation of an investment committee are also positive from a corporate governance perspective.

Asset Disposals
Abengoa intends to raise EUR1.2bn through asset disposals until the end of 2016, which implies EUR700m of newly announced disposals. Most of the new proceeds are expected to come from the available part of its stake in Abengoa Yield and EUR300m from various other assets. The capital increase will give Abengoa some time to execute those disposals as previous months saw some pressure on Abengoa Yield's share price and in geographies where Abengoa hold some of its assets. While Abengoa will keep the existing right of first offer framework (ROFO), Fitch notes it intends to reduce its influence in Abengoa Yield - the company that has, to date, bought several of its assets.

Potential Impact on E&C
Existing equity capex commitments, spanning 2H15 to 2017, totalling around EUR1.1bn, are expected to take place as overseen by the new investment committee. Abengoa currently has a significant stake in most of the large projects that make up its backlog which supports its E&C business. Fitch will be meeting management in the near future to understand how the constraint on equity funding new projects may reduce its E&C backlog and, given the company's cash flow benefit from E&C's natural negative working capital position, what effect a prospectively smaller E&C business would have on the group's cash flow.

Increased Capex
Changes in funding conditions in Latam and especially in Brazil led Abengoa to increase its equity injection in various projects, mainly Brazilian transmission lines. While Abengoa confirmed that all related non-recourse debt in process was refinanced through non-recourse debt, Abengoa had to inject equity to replace tranches of debt the projects could not procure. This indicates that the past concessions' mix of less equity and more debt has changed.

Leverage Still High
Fitch views positively the announced ambitious target to reduce debt especially as Abengoa's gross leverage (adjusted for the Greenfield bond) remained above 6x at 1H15 (and above 7x when including all the non-recourse debt in process). Abengoa slightly increased its gross debt following the seasonal working capital outflow at 1H15 (EUR420m).

Decreasing Abengoa Yield Shares
The share price of Abengoa Yield came under a lot of pressure over the last few weeks. Abengoa disclosed that it entered into a USD200m margin loan, using a 14% stake in Abengoa Yield as collateral, and intends to use part of its available remaining stake as an alternative source of liquidity.

Operating Stability
Abengoa published corporate EBITDA of EUR463m at 1H15 (EUR416m in 1H14) and, more importantly, maintained its EBITDA guidance for FY15 at EUR930m even though its biofuel business proved to be volatile. Abengoa's backlog increased to EUR8.8bn, which represents 22 months of turnover.

Working Capital
Abengoa still expects a reversal of the 1H15 working capital outflow in 2H15 (EUR400m cash inflow at the corporate level). However, Fitch notes that 2H14 did not bring the expected working capital benefit due to market turmoil in November 2014. Fitch will monitor the effect of the current market volatility on Abengoa's working capital cycle.

RATING SENSITIVITIES
Positive: Future developments that could lead to positive rating action include:
-Fitch-adjusted recourse net leverage below 4.0x (or 5.0x on a gross adjusted basis) and recourse EBITDA net interest cover above 2.0x (FY14: 1.8x) on a sustained basis.
-Significant cash reduction linked to confirming lines without a negative impact on Abengoa's working capital position.
-Ability to generate meaningful positive Fitch-defined FCF at the recourse level without working capital inflows.
- Reduction in recourse gross debt and use of favourable working capital instruments to fund the business model.
- Improved track record in financial disclosure.

Negative: Future developments that could lead to a downgrade include:
-Fitch-adjusted recourse net leverage above 5.0x (or 6.0x on a gross adjusted basis) and recourse EBITDA net interest cover below 1.5x.
-A significant decrease in Abengoa's E&C order book and/or inability to manage working capital resulting in material cash outflows.
-Negative recourse working capital (payables higher than receivables) higher than the amount of recourse cash and equivalents.
- An increase in recourse capex as a result of equity injections leading to negative FCF.

LIQUIDITY
Abengoa disclosed EUR3.1bn of corporate liquidity and EUR0.8bn of cash immediately available at 1H15 - adjusted for cash linked to suppliers. The EUR650m capital increase increases this liquidity profile further and also announced a new EUR165m working capital line.