An early morning coffee, in casual mode, I caught up with Pepe Baltá Aymar in Barcelona’s (Spain) summer. This was two years after he submitted an innocuous high school term paper that revealed the early signs of Abengoa’s financial difficulties. As an amateur accounting sleuth, Baltá conducted basic financial analysis on the reported accounts of Abengoa and flagged a number of concerns. At the time, little attention was paid to the teenage financial sleuth’s forewarning of tough times ahead for Abengoa. This was a full year before what became Spain’s largest financial collapse in recent memory. 

In my new book – Energy Investments: An adaptive approach to profiting from uncertainties – I highlighted Baltá’s work with these observations: Abengoa’s auditors and professional investors were beaten to the draw by a seventeen years old high school student at Col.legi Viaró in Barcelona, Spain, Pepe Balta Aymar. In his term paper, he made these observations: “I have some accounting knowledge”, he said. “Abengoa’s accounts did not add up. There was a lot of debt and few active assets compared to fixed ones. The big surprise was that negative profits (or losses) were being converted into positives. I didn’t understand how they could do it”, London’s Guardian reported in 2015, among others. When Abengoa finally filed for bankruptcy in the United States, Spain’s Industry Minister then, Jose Manuel Soria, estimated that contrary to the $10,170 mln in reported debt, Abengoa may owe as much as $28,250 mln.

Flawed strategy, financial squeeze

In my book, I offered a perspective that attempted to connect strategy, business contexts, and the feasible financial outcomes under uncertain markets. Seen from this optic, the strategic transition may not prove as smooth as Abengoa’s previous managers may have assumed.

Abengoa started life as a successful engineering services company in Seville, Spain. They earned their money by billing customers in advance, or according to the progress of their work. Their cash flows are often characterised by copious inflows that are more than sufficient to cover their operating expenses.

Along the way, Abengoa’s previous management saw opportunities in integrating their capabilities to developing their own projects. The attraction apparently is the ability to recycle their copious cash pile into projects that earned good returns, benefit from government subsidies particularly for renewables, and offer a stable of projects for their engineering services. The “strategic fit”, at first glance, could not have been more compelling.  Investors bought into this story, and rewarded Abengoa with significant share price revaluation.

What became apparent early on is the radical transformation of Abengoa’s revenue, costs and cash flow profiles. As a developer, Abengoa’s green field projects are voracious consumers of cash that could no longer be funded internally. Moving to debt financing, capital spending is funded by third party debt that grows significantly as Abengoa pushed for higher growth. While engineering services enjoy a cash bonanza, particularly from internal projects, higher borrowings, or capital recycling were among the ways to plug the growing cash deficits. This is where project-financing, often presented as non-recourse to Abengoa, played major roles in raising funding for their projects.

In examining the factors that led to the financial failure of Abengoa, I noted in my book: Curiously, the reported debt amount was about 36% of what they owed. Under project-financed projects, this is close to the 30% in equity that a sponsor normally contributes. Going back to Abengoa’s “business model”, the “perpetual money machine” failed to work – and a seventeen years old high school student spotted what the sophisticated financial professionals missed out completely, or chose to ignore, until too late.

At the height of Abengoa’s popularity among financial advisers and investors, one gets the uncanny feeling that the “experts” knew something that the ordinary mortals did not. In one of my visits to Spain, I quipped: Quite remarkably, a finance professor commented on my analysis that I gave to a leading fund manager in the City of London: “How could you be so sure Abengoa will be going down the drain?” That was two years before Abengoa’s financial collapse.   

What can we learn?

The sobering lessons that I took away from Abengoa’s financial failure is this: While thorough analysis requires access to financial data marked as “confidential”, insightful accounting forensics is feasible from publicly available disclosures. What are deemed as hidden in plain sight, could often be revealed from a basic understanding of how business works.  

Juan Miguel Borda, Baltá’s professor at Col.legi Viaró in Barcelona, Spain reflected on his student’s work on Abengoa: “With the most basic knowledge in finance, an analysis of Abengoa’s financial statements would show how precarious its finances were. There was a very high risk that Abengoa would end up the way they did”. Borda added: “Analysing the industry and how the business of Abengoa is evolving, with careful analysis of the basic parameters, one could arrive at a similar conclusion as Baltá did”.   

Borda cautioned, however, that there are companies with “similarly parlous finances that eventually managed to turnaround their financial fortunes and survived. They take risks to the limits, and at times load up on debt beyond the firm’s capacity to service the principal and interest repayments. Somehow, they managed to survive although they tended to underperform their peers in the long-run”.     

In commenting on Baltá’s work, Borda noted: “Pepe did a creditable and thorough analysis of Abengoa’s financial performance. He rightly highlighted the rapidly increasing risks of financial distress. However, it could not be a foregone conclusion as to where Abengoa would end up. There were serious financial issues but Abengoa could have reversed its declining fortunes”. What Borda faulted the press for, was their penchant to sensationalise the “unequivocal” prediction of Abengoa’s collapse that was attributed to Baltá’s work.

Whether Baltá’s analysis was luck or sound analysis, his work was one of the few that documented Abengoa’s rapidly deteriorating finances. Persisting in denials of impending financial collapse, Abengoa’s managers and their advisers continued to paint a promising future that diverged more and more from its reality. How much of that reality they were aware of may never be fully known. Trapped in their daily chores of growing bigger, could managers have lost the broader strategic imperatives that their aggressive growth aspirations may have clouded?

As of this writing, Abengoa is under massive restructuring characterised by asset sales and write-off of the previous shareholders’ equity. While the new management hoped to regain its footing, with part of Abengoa’s debt converted by lenders into equity, awaiting the dawn of a new era may prove far too optimistic for now.  

What’s next for Baltá?

In conversations with Baltá, I asked the teenage sleuth to tell the story behind his “discovery”. Baltá is the son of Jose Ignacio Baltá Errando and Nuria Aymar Paulo. The father is a wealth adviser in one of the leading Spanish banks. Out of interest for stock prices and portfolio investments, Pepe tried his hands on doing simple and basic analysis of a company that was held up as a Spanish winner in the global arena. What started out as a slum dunk conclusion, Baltá started getting results that did not conform to what textbook finance would have him expect. He consulted his high school instructor, Juan Miguel Borda, who readily confirmed the correctness of his approach. Encouraged by this early validation, he continued to deepen his analysis. Unbeknown to him, what he highlighted as a number of his concerns on Abengoa’s continued financial viability would later prove prophetic.

Baltá just completed his second year in medical school at the University of Barcelona. When I asked him this question: “Have you considered a career in banking or finance?” He replied: “I think I would be happier as a medical doctor”.  

On reflection, I thought to myself: “What a loss of a promising talent for banking and the finance profession”. But then, perhaps humanity is better served by the talents, commitment and potential of a fine young man ready to embark on a fruitful life in medicine.

Ricardo G. Barcelona lectures at leading business schools. He served in senior leadership roles at Royal Dutch Shell, Netherlands and London. As investment banker, he was top rated equity analyst and adviser whilst at SBC Warburg and ABN Amro/Rothschild.