Abengoa chaos leaves yieldco in fragile position

* Abengoa Yield's independence in spotlight

* Cross defaults raise concerns

* Asset sales scrutinised

By Robert Smith

LONDON, Nov 27 (IFR) - Abengoa's decision to seek creditor protection has raised concerns around how insulated its US-listed yieldco is from the unravelling finances of its Spanish parent.

The main problem for Abengoa Yield is that it has bought all of its assets from the troubled Spanish energy firm, which also manages the day-to-day running of its projects.

The existence of cross-default clauses on Abengoa Yield's project finance debt is particularly worrying, said investors.

Yieldcos allow companies to sell off operating assets into a publicly traded entity. The pitch to equity investors is that they are buying a stable dividend stock, which is not dependent on the fortunes of the parent company.

But SunEdison's decision to stop selling assets to its two yieldcos has highlighted their dependence on the financial health of the parent.

Abengoa Yield has made efforts to ring-fence itself from Abengoa, with its Spanish namesake selling down its majority stake to 47% this year.

"We want to reinforce our autonomy from Abengoa to become a completely independent company," said Abengoa Yield's then CEO Javier Garoz on an investor call earlier this month.

But on Wednesday Abengoa Yield announced that Garoz had stepped down and that Abengoa's CEO Santiago Seage would take over his role.

"Imagine how people who own Yield's equity and bonds must have felt when they saw that headline," said a credit analyst at a UK asset manager.

Seage was the yieldco's CEO when it listed in 2014 but departed to take over running parent company Abengoa earlier this year. He resigned as Abengoa CEO on Friday, however.

Abengoa Yield has also been without a CFO since early September, when Eduard Soler resigned with immediate effect.

One high-yield portfolio manager said he was "amazed" that Abengoa Yield's bonds have held up so well during the deteriorating situation.

The yieldco's US$255m 7% 2019 note is bid at 86.75 to yield 11.25%, according to Thomson Reuters data.

CROSS DEFAULTS

RBC equity analysts said this week that Abengoa filing for bankruptcy would trigger cross defaults on debt backing projects in the US, South Africa, Spain and Uruguay.

"Management has not yet begun preemptively working with lenders to receive waivers or craft contingency plans but expects to do so in the coming months, whether Abengoa needs to file or not," the analysts said in the note published on Monday.

In the event of an Abengoa default, the US Department of Energy can restrict cash distributions from its Solana and Mojave solar projects.

Abengoa Yield's North American projects are its most prized assets, contributing 45% of its revenues in the first nine months of 2015.

Abengoa has said it will sell down its stake in the yieldco to stump up cash. But it would need waivers from project finance lenders to sell down below 35%, which could be difficult to obtain given the recent uncertainty.

Abengoa also raised a US$130m margin loan last month from TCI Fund Management, a high-profile UK hedge fund run by Chris Hohn, who is best known for activist investment.

It posted a 14% stake in yield as collateral, which Hohn's fund could end up owning in a default scenario.

INTERCOMPANY TRANSACTIONS

Several investors also noted that Spanish insolvency law has a two-year "look-back" period, which could potentially examine all intercompany transactions between Abengoa and Abengoa Yield since its IPO in June 2014.

Abengoa has sold numerous assets to the yieldco during this time, most recently two Spanish solar plants in September. These assets were backed by a high-interest bridge loan from US hedge fund Elliott Management until earlier this year.

"How fair value was determined on these assets will come under scrutiny," said a second portfolio manager. "I think people will have serious questions around what Yield's projects are really worth."

The asset sales to Abengoa Yield had to gain approval from the company's independent directors, who consulted third-party reports to inform their judgement.

But several investors flagged concerns around the board's composition. Four out of the five independent directors are academics, with the youngest independent 68 years old.

Lead independent director Daniel Villalba, who became chairman this week, was also an independent director at Abengoa from 2005 to 2011.

A spokesperson for Abengoa and Abengoa Yield did not immediately respond to a request for comment.

(Reporting by Robert Smith, editing by Alex Chambers, Julian Baker)