On Closer Inspection, Debt of Bankrupt Spanish Construction Firm Grows Four-Fold

by Don Quijones, Wolf Street:

What happens if cases like this prove to be the rule rather than the exception?

Spain appears to have a brand-new Abengoa — the imploded energy giant whose fabulous accounting tricks pushed creditors into a black hole — on its hands: Isolux was until recently a fairly large privately owned infrastructure company with operations spanning the globe.

When the group declared bankruptcy last July, its cash flow in Spain was barely enough to cover a month’s operating costs. The group had a a total workforce of 3,884 and 119 infrastructure projects under development of which 39 were still operational and the remaining 90 had been halted.

The company tried to reduce its debt addiction through agreements with investment funds but they fell through. It also made two attempts to go public, in Brazil and Spain. Both failed.

The bankruptcy proceedings affected seven subsidiaries. At the time, the company stated that it owed €405 million to suppliers, that its total financial debt — including those companies not included under the Spanish Insolvency Act filing — was €1.3 billion, of which €557 million was associated with project financing, and that the total deficit on the group’s balance sheet was about €800 million.

Turns out, according to the bankruptcy receivers, the shortfall is actually €3.8 billion — four-and-a-half times the company’s original estimate — and the group’s total debt, at €5.7 billion, is over €4 billion more than the amount stated by the company 10 months ago.

This amount does not include the group’s dual or contingent liabilities. The receiver’s report concludes that the current situation will probably culminate in the liquidation of the entire group.

How did all this come to pass? According to the receiver’s report, the collapse of the real estate bubble in Spain and the drastic reduction in public work tenders during the crisis led Isolux to massively expand its international operations, as many large Spanish companies did in the aftermath of the housing bubble collapse.

The one problem with this plan was that Spain’s public tender model for large infrastructure projects — in which bidding companies habitually underestimate total costs when submitting bids and then ask (and are invariably given) more money later — is not endorsed in many other counties, as Spanish-led consortiums discovered in places as far flung as Panama and Saudi Arabia, where Isolux was, until recently, leading a consortium to build two of Mecca’s metro lines.

Inevitably, many of the international projects failed to provide the sort of margins that companies like Isolux were traditionally accustomed to. This, together with the high financing needed for the development of concessions, led the group to take on unwieldy levels of debt.

Like Abengoa, Isolux also bet heavily on the renewable energy sector, which was given an infusion of taxpayer-funded subsidies by Spain’s previous government. Companies, both Spanish and foreign, stormed into the sector and thousands of consumers outfitted their homes with government-subsidized sonar panels.

That all came to a grinding halt with the Rajoy government’s blanket withdrawal of subsidies and imposition of the so-called Sun Tax — a tax levied on consumers who generate their own electricity. According to the Rajoy administration, such a policy was necessary in order to plug a €26 billion accumulated tariff deficit — the gap between energy production costs and what end consumers pay for power.

The companies and consumers affected by the abrupt change of policy had an entirely different interpretation: the government’s real motive was to coddle and protect Spain’s energy oligopolies – Gas Natural, Endesa (now owned by Italy’s energy giant Enel), Red Electrica de España, Union Fenosa, Iberdrola and Repsol – from the threat posed by homeowners generating their own power. The chairman of Isolux subscribed to this version of events, accusing the government of ” giving into the traditional electricity companies’ lobby.”

Now, what’s left of Isolux will be auctioned off to recompense its more than 2,000 creditors. At the front of the line will be the group’s lenders. The banks with the biggest exposure are Santander (€640 million), Caixabank (€350 million),  and Bankia (€335 million) with a 28% stake in the company. Those figures are based on the original estimate of the group’s debt, but that debt has since grown four-fold and it’s still not clear who is exactly owed what.

What is becoming clear is that more and more highly leveraged companies, in particular in high-cost sectors such as construction and infrastructure, are concealing the true extent of their debt exposure. It’s only when these companies collapse under the unbearable weight of that debt that a true picture of their financial health begins to emerge.

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