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The giant Spanish international engineering and construction company, Fomento de Construcciones y Contratas (FCC) has just announced it has now closed a deal with its banking syndicate on the refinancing of US6.2 billion (Euros 4.5 billion) of its parent company consolidated debt.
This is a milestone achievement in the strategic recovery plan that the company put in place a year ago; to refocus the business, to cut out non-performing businesses, to partially recapitalize the balance sheet and to reduce debt.
At the time Esther Alcocer Koplowitz, daughter of controlling shareholder Esther Maria Koplowitz became Chairman of the company and Juan Béjar Ochoa was appointed both as Executive Vice-Chairman and as Chief Executive Officer.
Since then some progress ahs been made and the new debt package confirms the confidence the company’s bankers now have; in the reorganization of the company itself, in the effectiveness of its management and in the improving outlook for its engineering businesses, both within Spain and around the world.
Accordingly FCC has today announced the refinancing, in a single package, of US $6.3 billion (Euros 4.5 billion) of its consolidated debt, or about three quarters of the company’s total net debt – and just about all that has full and secured recourse to the parent company’s assets.
It is a quite clever refinancing too, one that allows for the benefit of progress in the subsequent continued restoration of its businesses to financial health to reflect to the advantage of both sides around the table.
First, there is a new, replacement, secured commercial loan tranche of about US$4.3 billion (about Euros 3.1 billion). The maturity is 4 to 6 years, but with only US$ 207 million (Euros 150 million) to be repaid after 24 months, and just US$ 241 million (Euros 175 million) after 36 months, and with the entire remaining balance as a bullet payment on maturity. On this loan the interest rate is reasonable as well, at Euribor (i.e. Libor for the Euro) plus a variable spread that rises with time – +3% in year 1, +3.5% in year 2, and +4% in years 3 and 4.
Second, there is a second, smaller, new replacement facility of US$1.9 billion (about Euros 1.4 billion) collateralized in the same way as the first loan. However this loan is also convertible into common shares of the company, but with several unusual features.
The first is that interest is not paid but is accrued; the second is the conversion formula calls for conversion at market price without any discount. Then, the third feature, which is basically to compensate for the lack of a discount on conversion, the accruing interest rate on the second loan itself is very high, namely Euribor (again) plus a variable spread that rises with time: +11% in year 1, +13% in year 2, +15% in year 3, and +16% in year 4.
However if the company chooses to prepay any of this second loan, which it is entitled to do, the accrued interest rate on the repaid portion will be reduced to 6% of the amount repaid in the year in which that occurs. If the company should indeed prepay all of this convertible loan, the first loan then extends its maturity from 4 years to 6 as well.
Finally under the terms of the refinancing agreement, in the event of a share capital increase at FCC itself, the proceeds from that transaction may be used to redeem the second tranche of debt using a Dutch auction format, enabling the company to potentially buyback at a discount and create value for the company’s shareholders.
The are other terms and conditions but these seem to be the primary ones, and which give the company enough time to restore its health moving forward. Given that the alternative was likely some form of more unpleasant restructuring, the banks are making a very wise choice.
The shares have not moved much since the announcement, as it has basically been something expected for some time and the company continues to have a market capitalization of US$ 2.9 billion (Euros 2.1 billion).
About FCC
The Spanish international engineering, construction, water and environmental services group Fomento Construcciones Y Contratas is publicly listed on the Spanish Stock Exchange, and is controlled by billionaire Esther Maria Koplowitz, the daughter of its founder Earnest Koplowitz.
With deep recession in Spain and in international engineering and construction markets in recent years, for a time FCC lost a great deal of money. Last March, Esther Koplowitz’s eldest daughter Esther Alcocer Koplowitz was appointed as the new Chairman of the company, and Juan Béjar Ochoa was appointed both as Executive Vice-Chairman and as Chief Executive Officer. It has been their job to design and execute both a new long term strategic plan together and, as well, to deliver current operating performance with short term cost reductions and major asset divestitures as well.
A number of new contracts announced recently have been distinct stepss in the right direction for FCC therefore, as it continues to implement a radical restructuring of the heavily indebted company and to focus on its core strengths, with major announced international subway construction projects very much being amongst them.
With this comprehensive banking refinancing package the final piece of the puzzle has now been put in place. Now it has breathing space to try to make its way securely and profitably out of trouble again and to create additional value – for shareholders, creditors and employees alike.
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