Abengoa exchangeable bond to test market access

* Spanish firm raising debt for first time since sell-off

* Exchangeable bond another step towards yieldco sell-down

* Company denies bond linked to EIG JV

By Robert Smith

LONDON, Feb 26 (IFR) - Abengoa is gearing up to issue a US$300m exchangeable bond, which will be the firm's first attempt to tap the public debt markets since the steep sell-off in its bonds late last year.

The bonds exchange into Abengoa Yield, a yieldco which farms off its operating assets into a US-listed entity that is run for dividends. Earlier this year, Abengoa sold down its stake from 64% to 51% in the yieldco. It has stated that it intends to reduce its stake further, to around 40%.

The new deal will be another step towards deconsolidating the yieldco from Abengoa's balance sheet, which will remove billions of dollars in non-recourse liabilities from the Spanish company's accounts.

The Spanish engineering and clean energy focused attention on its Byzantine accounts in November after it reclassified a Green bond, with a corporate guarantee, as non-recourse debt.

Investors were initially spooked, which caused the company's share price to tumble 66% over two days and its 500m 5.5% 2021 bond to spike to double-digit yields. ID:nL6N0T446X]

But both bonds and equity have recovered from their lows, as Abengoa has taken a number of steps including selling down part of its stake in Abengoa Yield and setting up a joint-venture with infrastructure investor EIG Global Energy Partners.

The 2021 bond plummeted by more than thirty points over two days to a cash price low of 62 on November 11, according to Tradeweb. The bond has now regained most of its lost ground, however, and is now bid at 94.5.

Citigroup and Bank of America Merrill Lynch are global coordinators on the two-year exchangeable bond, with HSBC and Morgan Stanley as joint bookrunners.

WHY NOW?

This new attempt to tap the market has surprised some high-yield bond investors, who attending a meeting in London on February 11 and 12, as the company's management recently told them that they were not looking to raise new debt imminently.

A spokesperson for the Spanish firm explained the company's rationale.

"We did not need to issue this exchangeable bond in the same way that we usually issue bonds in order to refinance our upcoming maturities," the spokesperson said.

"We just saw an opportunity to monetise our shareholding in Abengoa Yield at a premium and also remove the overhang that was created on its shares after communicating that Abengoa intended to reduce its share of Abengoa Yield to approximately 40%."

While the company has said the deal is not a refinancing exercise, the new deal will effectively plug a gap left by a convertible bond that investors recently put back to Abengoa.

Abengoa had a 250m 4.5% February 2017 convertible bond, which became puttable in February. Market concerns over repayment of this bond were so strong in November that it was bid at a yield-to-put of 54% at one point, according to an equity trader.

Holders of the convert took the first available opportunity to make Abengoa to repay the bond, making use of the put option in February.

The market has been rife with speculation that the exchangeable is tied to its recently announced venture with EIG.

EIG and Abengoa are forming a new company called Abengoa Projects Warehouse 1, which will acquire a portfolio of selected Abengoa's projects under construction. EIG will hold 55% of the equity with Abengoa holding a minority 45% stake.

The deal is due to close by the end of March, so the timing of the convertible bond has led some to theorise that it is a condition of the joint venture. The bond is due to settle three weeks before the final closing date for the agreement with EIG.

"People have suggested that EIG would have asked Abengoa to prove market access as a condition precedent before signing off on this Warehouse deal," said an investor.

"It makes sense given all the concerns in November and the long tie up nature of this deal that you need to make sure that your co-investor is solvent and has no credit issues."

A spokesperson for Abengoa has denied the speculation, which have been far reaching, even appearing in comments by some equity analysts.

"This issuance has nothing to do with the EIG transaction and no demands of that sort have been made," the spokesperson added.

(Reporting by Robert Smith, editing by Alex Chambers and Helene Durand)