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Rating Action:

Moody's places Abengoa's B2 ratings on review for downgrade

07 Aug 2015

Frankfurt am Main, August 07, 2015 -- Moody's Investors Service has today placed on review for downgrade the B2 corporate family rating (CFR) and B2-PD probability of default rating (PDR) of Abengoa S.A. (Abengoa). In addition, Moody's has placed on review for downgrade the B2 ratings on the group's senior unsecured debt instruments.

RATINGS RATIONALE

Moody's has placed Abengoa's B2 ratings on review for downgrade due to high financial leverage ratios reported for the first half of 2015 well above Moody's expectations for the B2 rating, higher than expected capex spending with significant negative impact on expected free cash flows, and the weakening of the company's liquidity situation. In this respect, we note the company's plan to raise €650 million of equity and sell €500 million of assets, which would contribute to recover more adequate leverage ratios and liquidity position. At the same time, we note that the company's deleveraging plan is subject to execution risks and that Abengoa may be facing challenges to its business model in the financing of its projects. A failure to execute the announced plan in a timely manner would likely result in a downgrade of the company's credit rating.

On July 31st, Abengoa updated its targets for the fiscal year 2015, halving its corporate free cash flow expectations (including equity recycling) to €600-800 million for 2015 and increasing its leverage expectations by 0.5-0.8x. In terms of net corporate leverage, the company expects a level of 3.8x-4.0x (including non-recourse debt in progress, NRDP). The difference mainly relates to the net contribution from equity invested in concessions (after recycling), which the company now expects to come in at €275 -- 425 million, compared to the previous expectation of €1.05 billion. The difference is mainly explained by higher than expected capex spending in form of equity into projects in Brazil.

The review process will focus on the company's free cash flow generation capacity, including the impact of financing commitments into existing projects, and, more generally, on its financial policy and liquidity management. The review will assess the company's deleveraging plans and its capacity to meet its declared targets of profitable growth and debt reduction.

Abengoa's B2 ratings, currently weakly positioned, are primarily constrained by high leverage ratios, both at the corporate level (e.g., gross corporate debt/EBITDA of 7.7x for 12-months to June 2015, including non-recourse debt in process) as well as at the consolidated level (e.g., net consolidated debt/EBITDA of 10.5x for 12-months to December 2014, expected to be at the same level at the end of June 2015, including Moody's adjustments), both above our expectations for the B2 credit rating.

In terms of net consolidated leverage, we note that the reduction of the stake in Abengoa Yield PLC (Abengoa Yield, Ba3 stable) to currently 49.05%, leading to a de-consolidation of approximately €5 billion of project debt, will have a positive impact on reported leverage. As we noted in our comment on 20 July 2015, Moody's adjusted ratios will follow the accounting treatment, but we will additionally assess the leverage by taking into consideration Abengoa Yield as if it was proportionally consolidated.

The review process will also focus on Abengoa's liquidity situation, which has weakened. Abengoa's liquidity as of 30 June were €3.1 billion, of which only €831 million was immediately available. The remainder was linked to the company's confirming lines (€1.4 billion), sitting on escrow accounts (€240 million) or in Abengoa's business (€500 million). Abengoa's liquidity needs are high, to accommodate working capital fluctuations throughout the year (minus €420 million on a corporate and minus €135 million on a consolidated level in the first half of 2015), and finance debt repayments and capex. Furthermore, we note that Abengoa's revolving credit facility of €700m was fully drawn at the end of June. Our liquidity assessment, however, also takes into consideration alternative liquidity sources, such as remaining concession assets and Abengoa's 49.05% shareholding in Abengoa Yield (approximately €600 million market value, excluding shares related to the $279 million convertible bond issued in February 2015 and the shares pledged for the $190 million margin loan).

On August 03rd, Abengoa announced a plan to raise its equity capital by €650 million and sell €500 million of assets. €600 million of proceeds from the capital increase will be used for corporate debt reduction. The company expects to obtain proceeds by the end of 1Q2016, at the latest. At the same time, we note that there are execution risks, given the significant size of the capital increase, which amounts to more than half of the company's current market capitalisation of €1.1 billion (as of August 04, 2015).

Apart from the high leverage ratios, the B2 ratings are also constrained by (1) the group's very high complexity and the extensive use of financial instruments, such as confirming lines or factoring, which are not reflected in reported corporate leverage; (2) still modest track record of positive free cash flow generation at the corporate level; (3) constant refinancing needs requiring continued access to capital markets; (4) the technical challenges the E&C segment faces to complete advanced installations on time and on budget; and (5) the company's need for continued regulatory support or stability with regards to solar energy generation or power transmission activities in all markets.

These challenges are partially offset by (1) Abengoa's substantial scale, with revenues of EUR7.2 billion in 2014 coupled with good business and geographical diversification; (2) the group's order backlog of EUR8.8 billion as of June 2015 covering more than one year of sales; (3) potential sources of cash from a substantial asset base of concessions in operation with a relatively high intrinsic value; and (4) Abengoa's good track record of project execution.

WHAT COULD CHANGE THE RATING UP/DOWN

Prior to the rating review process, Moody's said that negative pressure could be exerted on Abengoa's ratings if the company fails to reduce its leverage both on a corporate and consolidated basis to, for example, a Moody's-adjusted net consolidated debt/EBITDA ratio of around 8.0x (10.5x at the end of 2014 and expected to be at similar levels at the end of June 2015, including debt related to Abengoa Yield ) or a gross corporate debt/EBITDA ratio of below 7.0x in the next 12-18 months (7.7x per June 2015, including non-recourse debt in process).

In the event that Abengoa fails to achieve these metrics, we will take into account the company's liquidity position, its ability to generate sustainably positive FCF at the corporate level, the quality of Abengoa's investments, its financial strategy and the maturity of its concession portfolio. The ratings could also be downgraded if Abengoa fails to maintain non-recourse debt in process exposure at a manageable level.

Prior to the review process, Moody's also said that Abengoa's ratings might be upgraded if the company further improves the transparency of the information on its structure, financing instruments and liquidity situation. An upgrade would also require building a further track record of successful concession asset rotation through Abengoa Yield, leading to sustainable positive FCF at the corporate level and deleveraging, both at the corporate and consolidated level, for instance with a Moody's-adjusted net consolidated debt/EBITDA ratio moving comfortably below 7.0x. In addition, upward rating pressure would require the maintenance of a solid liquidity profile.

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Construction Industry published in November 2014. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

Headquartered in Seville, Spain, Abengoa S.A. is a vertically integrated environment and energy group whose activities range from engineering & construction (E&C), utility-type operation (via concessions) of thermal-solar energy plants, electricity transmission networks and water treatment plants to industrial production of biofuels. Abengoa generated EUR7.2 billion of revenues in 2014. Abengoa is partly owned but fully controlled by representatives of the founding families, through Inversion Corporativa IC and Finarpisa (directly and indirectly), which effectively hold around 56% of the total combined voting power of Abengoa's Class A shares and Class B shares outstanding. Abengoa's shares are listed in Spain as well as in the form of ADRs on NASDAQ. Abengoa had a market capitalisation of around EUR1.1 billion as of 04 August 2015.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Matthias Heck
Vice President - Senior Analyst
Corporate Finance Group
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Matthias Hellstern
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Releasing Office:
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's places Abengoa's B2 ratings on review for downgrade
No Related Data.
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