Abengoa Yield Plc Financial Perspective - Case Study Example

ABENGOA YIELD PLC

Introduction

Abengoa Yield Plc is one of the prominent players in the utility sector and the power generation industry. The company currently has multinational portfolio in following three sub-sectors:

The company was formed by Abengoa SA, which is a Spanish conglomerate and ABY completed its IPO in 2014 at a price of $29/ share (Sontakke, a). Among the yield companies formed then, ABY’s portfolio is one of the most diversified as shown below:

(Sontakke, a)

With the current revenue of the 790.88m, the company is facing the net loss of -209.01M (Financial Times). The underlying report is aimed at developing a review of the company and its related affairs.

Section One; Financial Perspective

Financial markets are driven by a large number of factors. Growth in the financial markets, as well as corporate finance, resulted in increasing role of different institutions and regulatory authorizes. The major objective of the regulatory authorities and other institutions is to provide the standardized working process while safeguarding the investors’ money. This section provides a review of the role of the rating agencies and impact of agency theory and divergence in the priorities among stakeholders.

Role of Rating Agencies

The credit rating agencies play a defining role in the modern financial market. Before commenting on the role of credit rating agencies, it is critical to define the rating itself. Rating is aimed at providing scale to the probability of default or losses on the part of the company or issuer (Langohr, and Langohr, 7). These ratings play a significant role in shaping the stakeholders decision. For instance, the investors plan their buying and selling decisions bsed on the credit scores. On the other hand, regulators use rating as a benchmark for directing the business conduct such as investments, etc. (Langohr, and Langohr, ix).

The importance of the role of credit rating agency appears as the agencies adhere to certain principles while giving a rating to the company. The rating action is sovereign and autonomous without being influenced by any of the stakeholders. Furthermore, the ratings provided by the company are objective and ensure the confidentiality is maintained for the company’s non-public information. Ratings from agencies are also expected to the result of the transparent review of the company’s performance. All these collectively result in convergence of the information related to the company that is prevailing in the market ((Langohr, and Langohr, x).

The credit rating agencies are considered so powerful that they are assumed to have the power of even destroying a company by downgrading the rating of its bonds. However, the recent financial crises have raised questions and concerns over this presumed power. For their role in the recent global financial crises, rating agencies are criticized on two folds. First, they did not effectively implement the rating methods that in turn failed to determine the potential of loss among complexly engineered financial instruments. Secondly, once the bubble started to blow up, the rating agencies frequently downgraded the instruments that had already somewhat lost the investors’ confidence. Hence, resultantly the market crashed (Jäkel, 2).

For the company in question, the credit rating of the parent or the family company was B2 CFR (Corporate Family Rating). It was not changed to upgrade or downgrade position as it was anticipated that step will be able to reduce the company debt position and will improve the cash position (Global Credit Research, a). As the company slipped off the threshold for rating and exceeded the debt, the rating was also downgraded from B1 from Ba3 with the negative outlook (Global Credit Research, b). Similarly, the share price for the Abengoa SA (ABGB) plunged as a result of declining credit rating (Fiakas) while the company in question failed to reap an attractive rating due to limited track record as a yield company (Street Insider). Conclusively, the role of credit rating agency is significant in driving the current investors’ sentiments.

Conflict of Interest

The primary aim of every business is to drive the shareholders value. With growing awareness as well as information, the objective is more broadened for increasing the value for the shareholder. The shareholders are the principals in the business whereas the management, or the board of directors is agents. The relationship between the two is entitled to an agency relationship. Any conflict between the two is called the agency conflict and resulting cost is called the agency cost (Parrino, Kidwell, and Bates, 16).

The agency conflicts can arise in any business on any matter. For instance, investors hire best managers for the bottom line results which in turn has a potential of becoming the source of cost to the business. On the other hand, management for the maximization the shareholders’ value can often go to an edge where societal benefits are compromised for the sake of company’s values. Such aggressive pursuit for value can also become the source of the conflict of interest. Furthermore, the member of the board of directors of the company can also serve as a director in another company that may be a subsidiary, parent or sister concern and can result in the conflict of interest.

Parrino, Kidwell, and Bates, (16) in the book has referred the dimensions that need to be considered for the aligning the stakeholders’ interest in a unified direction. These dimensions include, though not limited to, management and directors’ compensation and labor market, acquisitions, and mergers market, and the regulatory authorities. An effective alignment on these aspects, consecutively, plays an effectual role in reducing the chances of the conflict of interest. For instance, the recently appointed managing directors of ABY was initially serving as the parent company and after resigning from the position in the parent company, he was appointed in the company under evaluations. This measure will ensure the no influence from the parent company on the ABY (Global Wire).

Conflict of interest is a debate of the yield company. The investors hold to view the parent company to retain its major shareholding and stake in the yield company for controlled future success. However, the yield companies are more inclined to have independent governance without the influence of the parent company (Environmental Finance, a).

Section Two

The new model of yield companies has proved to be an attractive source of business for the energy players. Therefore, it makes it mandatory assessing the performance of the company from the financial perspectives as it provides the bottom lines results that are to be presented to the investors.

Financial Assessment

The revenue of ABY has increased significantly since the IPO and rose from 210.9$ in millions in 2013 to362.7$ in millions and 790.9$ in millions in 2014 and 2015 respectively (Abengoa Yield plc, 9). The massive growth in the company’s performance is the result of acquisitions made in the year 2015. The acquisitions made in the renewable segment of energy increased the production to three times as compared to the production capacity in 2014. The projects that are outperforming include Mojave and Solana (Hefron). With the above-reported rise in revenue, the bottom line results of the company have declined with the most notable contribution from finance expense. Furthermore, the additional financial expense was incurred for the impairment of preferred equity in ACBH (Abengoa Yield plc a, 136). However, company still has cash for making to investors in form of dividend and for debt servicing.

The company’s total assets increased with the considerable pace since IPO. The rise in the asset has resulted in the rise in the long term and short term debt. The debt of the company was through zero in 2013; it rose to 376.2$ in millions and 661.3$ in millions in 2014 and 205 respectively (Abengoa Yield plc a,10).

Like other yield companies, the business strategy of the ABY is ensuring the generation of the cash flows with stability from the portfolio of a diversified set of assets. With the continuing busies stability, ABY also intends providing the dividends in the form of cash to its shareholders (Abengoa Yield plc, a 48). Despite the declining net income, the business strategy of the company appears to be fulfilling with cash flows of 514.7$ in millions as compared to the 97.5$ in millions in the 2012 (Abengoa Yield plc,a,11).

Capitalization

At the time of the initial public offering, the Abengoa raised $720.6 million with the sale of 24.9 million shares at a price of $29/ share. The rise in the capitalization was also contributed by the upsurge in the prices in comparison to the initially expected prices between $25 and$27 per share (Reuters). The success of the capitalization has managed to the win the objective of launching the yield company by Abengoa SA. One main driver of the launching the yield company was to raise funds from equity that is less costly than debt (Sontakke,b).

As a matter of fact that company managed reaping attractive price at the time of IPO; however, the one year analysis for the capitalization showed unlikely results. Contrary to the price at the time of IPO that rose to $29, the price fell to the $13.11 in 52 weeks since launch. Analyst and investors consider the low market capitalization as an indicator of the elasticity of the stock price under consideration (Macro Axis). Another reason that resulted in fall in the prices is the rising risk that the new and existing investors are facing due to the massively rising debt levels. The investors’ are though attracted for investment in the company as a result of diversified portfolio; however, on the other hand, investors are reluctant to invest as their investment will be then be used to satisfy debt holders, in case of default. Consequently, investors will be left with nothing.

Assessing the performance of the company, analysts have set the target price approximately $20. The referred average is based on the consensus of the analysts who presented the estimated price to stand at the minimum price of $13.00 and the maximum of the price to stand at $32.00 (Hefron). As a matter of correction in prices has taken place, the equity of the company has also risen from 1,287.2($ in millions) in 2013 to 1,839.6($ in millions) in 2014 and 2,023.5($ in millions) in 2015 (Abengoa Yield plc, a, 10).

Leverage

The debt for the company is assessed as ratio of consolidated debt to the earnings before interest, tax, depreciation, and amortization (EBITDA). In contrast to the initial value of the 3x ratio, currently, the debt to EBITDA ratio of ABY has risen to seven times that also impacted its rating (Global Credit Research, b). Moreover, the impact of debt is much higher than actually showing. Abengao conduct the reclassification of the $600 (as non recource). Resultantly company failed in maintaining the investors’ confidence on the company despite considerable assurance by the company (Linsell).Last, but not the least, such measures can cause the investors to consider the manipulation in financials for maintaining and retaining the investors’ confidence.

The financial exposure of the company is the result of the project as well as resource finance. The annual report states that most of the debt that a company has acquired is project specific. The project based is further categorized into debt at fixed rate or swaps that are hedged. The company also has resources debt in two forms. First, ABY issued notes 2019 notes as well as have a credit facility for the business (Abengoa Yield plc, a,124).

Noteworthy is the fact that the company’s debt rate is much higher when compared to the dividend yield. The yield on the dividend is 3.17% whereas average rate for debt is 6% to 8% (Sontakke,b). Therefore, it is important that the company reduces its debt that is not only affecting its return to investors but also the credit rating.

Credit Rating

Despite the fact of positive performance by the company, the credit rating for Abengoa Yield Company from Moody was downgraded. ABY strong performance came under the impact of the challenging market conditions. The declining ability to raise the debt from the external sources complimented by short term maturities that were high in proportion led to the lowering of credit rating for the ABY (Street Insider). Later, Moody’s recently announced the negative outlook for various perspectives as highlighted below (Global Credit Research, b):

Aspect

New Rating

Old Rating

CFR (Corporate Family Rating)

B1

Ba3

DefaultProbability

B1-PD

Ba3-PD

Senior unsecured rating

B2 

B1

Speculative Grade Liquidity

SGL-4

SGL-3

Interestingly, the negative outlook of the company resulting from assets that were shifted by Abengoa SA to the subsidiary and rating of the parent company at the time of IPO was also B3. Despite this rating of non-creditworthy investment, investors responded to the ABY IPO positively.

The insolvency of the parent company who is also a shareholder of 47.1% of stake in the company is one of the major incidence, whose impact ABY cannot escape. In case the Abengoa conducts the reorganization of assets, there are probabilities that assets will be pulled back to the parent company. Resultantly, the Abengoa Yield Company can come under the distress. The exceeding leverage to seven times of EBITDA has led to the default probability. Limited cash with the parent company ($43 million) and total credit facility of $415 million constraints by the company’s limited access to debt and equity is another reason for the decline in the rating (Global Credit Research, b).

Owing to the reduction of the share of the parent company Abengoa SA to 42%, Moody’s states that recent development regarding the insolvency of the ABY’s parent company Abengoa SA, there will be no impact on the rating of ABY. Hence, from the analysis, it is interpreted that rating of the company was though downgraded due to the potential distress. However, measures were taken by the ABY to reduce negative impact from the parent company’s situation are also healthy signs (Eckhouse, a).

Corporate structure

According to the report from E&Y explaining the structure of the yield company, the report states that the corporate structure aims to drive the business in a way in which the assets can generate consistent cash flows for a period. As a matter of fact, the yield companies incur significant operating losses. However, as a result of operating losses, the company gains tax credits for a notable period in the future. This in turn also saves the investors from being taxed, unless the investors’ share is reached to the taxable slab. Providing such benefits that are complemented with the diversified portfolio has made ABY an attractive investment option for the investors.

Another factor that differentiates the corporate governance of a yield company from other similar financial instruments and entities is that it is recognized as a corporation in the USA. This status provides business with an opportunity to have an attractive customer not only in the USA but also from the different parts of the world. Also, it enables investors who are tax-exempt and are restricted to other similar investment vehicles such as MLP (E&Y, 3).

The corporate structure of yield companies is driven by the leading share from the parent company. In sequence, it provides the parent company with a prominent say and influence in the company. Abengoa Yield Co also has its structure where a significant shareholding rest with the parent company Abengoa SA. Specifically, Abengaoa SA luached the ABY for meeting its finacial funding sources as it was facing heat of credit crunch in Europe and was in search for the source of finance. Furthermore, Abengoa SA is still facing financial crises, it is looking for selling the company’s all or part of the ownership stake in the ABY. Abengoa has an economic interest in the ABY is also taking measures for increasing its independence from the parent company. With the diversified assets base, it is expected for the yield company to find investors that can effectively contribute to the growth of the yield company (Eckhouse, b).

Priority ranking

Yield Companies are high on leverage and less on the equity side. Different types of debt and equity determine the priority for the investors who then happen to be creditors and equity investors. The ranking of debt and equity investors is usually presented in form of an invert triangle as shown below:

(Glancy, 5)

Similar to the above structure, ABY has a set of different types of debt such as project-based debt as well as the banks credit facility and the investment from the equity investors. The diversified portfolio of ABY in term of investment in projects, as well as the geographic, convinced the debtors to make investment whereas the equity investors are also driven by leverage attraction that increases their return. (Glancy, 5).

The debtors have priority ranking and would be compensated for the investment in the company in case of default as typical practice. There priority ranking for debt holders has resulted in the rising challenge and risk for the equity investors. The debt to equity ratio of the company was 3.3 times in 2014 that increased to 4.2x in 2015. It implies that in case of default, every unit for equity holders’ investment will have to pay debt by four times. Consequently, equity investors are left vulnerable

Considering implications of these factors and current incident of distress in the parent and major shareholding company, ABY has attempted to request a waiver from creditors in the five major projects in place (Global Credit Research, b). The parent company has though retained the right of the first offer (ROFO) with it that will require business (ABY) to offer the assets for sale to the parent company in priority to offering to other stakeholders. Hence, equity shareholder also has priority ranking in operating and economic decisions

Section Three: Other relevant issues to Abengoa Yield Co

Globalization and trading in different jurisdictions

With massive opportunities and benefits that are brought forward as a result of globalization, there are certain challenges as well that are effective. Business operating in the global market can though capitalize on the opportunities present in the global market; they are also subject to the wider range of complications as a result of operating in the multiple countries. Broadly, these challenges emerge from political, technological, legal, environmental, and even social aspects.

As reported above that ABY was one of the most diverse yield company’s established then; therefore, the globalization adds to its complications as well. The assets of the company are located in many parts of the world including the United States and Mexico in the Northern part of America, South America (Brazil, Peru, Chile, and Uruguay on the Southern side of American, and Spain to note in Europe Abengoa Yield plc, b, 13). Resultanly, the company avails the opportunity to conduct the acquisition in the different parts of the world based on the opportunity set forth. For instance, in 3Q2015, the company reported following acquisitions:

Time

Location

Amount

November and December 2014

Uruguay

$312 million

February 2015

Spain

$94 million

May 2015

Spain and South Africa

$682 million

June, September 2015

Spain

$359 million

Abengoa, the parent company’s revenue share from different parts of the world is depicted as follows:

(BMI Research Company)

Many of the projects ofAbengoa (the parent company) are now under the management of the Abengoa's yield Co. Impacts of the globalization are evident on the projects. For example, Spain has recently revised its renewable policy. Government pawed the power sectors deficit by fixing the electricity prices at massively low levels. The resulting implications of measures have negatively affected the performance of the energy companies operating in Spain. The impact of the change in the prices can be seen as a result of a decline in the revenue from Spain in the above image (BMI Research Company).

Sustainability is the most widely considered imperative in the businesses in the modern world. Companies’ are taking measures for improving on sustainable conduct not only in the best interest of the environment but also for the shareholders’ values. In the similar vein, Abengoa Yield Co has taken measures and within two years of going public, the company has managed to acquire a position on the NASDAQ Clean Edge Green Energy Index (Burger).

Another source of impact for the firms that are operating in different parts of the world arrives from the exchange rate. The global market existence has led the company to benefit from the multiple currencies. For instance, the company has a debt of the maturities to 2043 in USA Dollars and project debts with maturities to 2030. Both debt components are subject to rates that guaranteed (Abengoa Yield plc. c, 50). Last but not the least, it is critical to determine that it is the international exposure that resulted in the surge in demand for shares by 17 times of the supply (Environmental Finance. b). By the token of above implications, it can be seen that globalization has an influenced not only the parent company but has also produced a positive as well as negative impact on the company.

Market conditions and financial crisis: transaction timing of the IPO

Market condition and investors’ sentiments play a significantly important role in shaping the company’s IPO decision. Research reveal thought underwriters and other institutional players play a significantly important role in defining the prices for IPO; it is an investors sentiments that play determines the prices in pre-market and the market situation after IPO (Jiang and Gao, 65).

Before commenting on the IPO of ABY, it is crucial to shed light on the condition of the parent company at the time of the IPO. Abengao SA was seriously hit by the financial crunch in Europe then. Consequently, the company’s liquid sources of fund were unable to meet the liquidity needs of the business. Hence, the company rendered strategically some of the its assets and launched the subsidiary company.

The Abengoa Yield Co’s listing on the New York Stock Exchange, the demand increased by 17 times of the supply of the share. The share prices surged from the anticipated range of $25-$27 and reached to the $29. Among the defining reasons that resulted in the high demand for the ABY share as compared to the peer competitors and another yield company was the international exposure that the company had in comparison to the regionally focused attention of peers (Environmental Finance, b).

As a matter of fact and as revealed by reports, the timing for IPO then was not optimal as declared in various reports. For example, IPO by Bright Source Energy in 2012 was backed off by $182.5 million and the reason cited for the measures was market condition being adverse. Among different reasons that contribute to the unhealthy market conditions for IPO then were high on concentrated solar power (CSP). As a result of limited exposure the investors’ response to the yield, company IPO was limited. On the other hand, Abengoa Yield Co had a balance portfolio as compared to almost all other yield companies launched then (Deign).

The initial years for the yield companies were highly rewarded, and the investors considered these stocks darling of the market. Companies those delayed the launched of the yield company were punished by investors and were then treated. However, the yield companies are now falling. Hence, it can be safely stated that response from the investors to IPO for Abengoa Yield Co at a time when the market as less responsive is the reflection that attractive and well defined business portfolio continue to have an appetite for investors even in the situations where investors are less responsive.

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