Abengoa agrees draft rescue in race to avoid insolvency

* Creditors to lend up to 1.8 bln euros under draft plan

* Existing creditors would get 35 percent of company

* Existing shareholders' stake would be cut to 5 percent (Adds details, background)

By Sonya Dowsett

MADRID, March 10 (Reuters) - Debt-laden engineer Abengoa said on Thursday it had agreed a draft rescue plan with creditors to cut debt and inject fresh cash, in the latest attempt to avoid what could be Spain's biggest bankruptcy.

Loss-making Abengoa, which started out 70 years ago as an engineering business in Seville and expanded into clean energy by taking on huge debts, entered pre-insolvency proceedings last year when lenders refused to extend credit lines.

Under the proposal, creditors would lend up to 1.8 billion euros ($2 bln) to the company over a period of five years, giving them the right to 55 percent of the restructured company, Abengoa said in a statement.

Simultaneously, around 70 percent of existing debt would be swapped for equity, giving those creditors the right to 35 percent of the company, Abengoa said. Creditors who advanced an additional 800 million euros in financial guarantees to develop projects would get 5 percent of the restructured company.

A source close to the creditor talks told Reuters on Wednesday that the majority of the loan would come from bondholders with the remaining put up by banks.

However, several hurdles still need to be negotiated in the company's race to avoid bankruptcy, the source said, as the draft deal still needs to receive the backing of creditors holding at least three quarters of Abengoa's debt.

The deal has been backed by creditors representing about 40 percent of the debt, the source said, and convincing the additional 35 percent needed to push it through may prove difficult before a March 28 insolvency deadline.

Existing shareholders, including majority stakeholder and founding family member Felipe Benjumea, would dilute their shareholding to 5 percent of the restructured company under the proposal, Abengoa said.

However, this could be another difficult point to negotiate in less than three weeks, as while Benjumea has agreed in principle to cut his stake to 5 percent as part of the restructuring, sources close to the company said nothing had been signed and he could still change his mind. ($1 = 0.9119 euros) (Editing by Tomas Cobos and Susan Fenton)