* Quarterly dividend not paid on Tuesday
* Sustainability of future payments in question
By Robert Smith
LONDON, Dec 17 (IFR) - Abengoa Yield's later-than-expected payment of its quarterly dividend has rattled some investors and put under scrutiny the sustainability of the company's distributions to shareholders.
Yieldcos allow energy 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.
However, the start of restructuring talks with creditors by Abengoa - the US-listed yieldco's largest shareholder - to stave off a full-blown insolvency has raised questions about the independence of Abengoa Yield from its Spanish namesake.
This is particularly due to the existence of cross-default clauses on the yieldco's project finance debt.
The turmoil at Abengoa, which could lead to Spain's largest bankruptcy on record, has led some investors to question whether Abengoa Yield would pay an already agreed dividend this week.
"If I was a director, I wouldn't sign off on the dividend now," said an equity investor at a hedge fund on Tuesday.
"The only reason to pay it would be to not decimate the share price, but I don't see how their lenders would let around US$40m leave the business."
The US-listed yieldco's board of directors signed off on a US$0.43-a-share third-quarter dividend on November 5, which it said it expected to pay "on or about December 15" and which will total around US$43m.
Market sources said that the dividend was not actually paid on Tuesday December 15, however. A source with knowledge of the matter said it has not been cancelled and will be paid shortly.
But while this particular dividend payment appears safe, the energy company's ability to keep returning large amounts of cash to shareholders in future may not be, given that the company could need to conserve funds due to its substantial corporate debt.
Abengoa Yield increased its existing US$125m credit facility by a further US$290m in July to fund new acquisitions, having already raised a US$255m 7% 2019 bond in November 2014.
The company originally intended to refinance the increased credit facility with another high-yield bond, but the 2019 note is now yielding nearly 11% in the secondary market.
"It's clear that, right now, issuing a high-yield bond is not a possibility," said then-CEO Javier Garoz on a November 6 investor call.
A credit analyst at an asset manager said that the firm's lenders must be getting "very nervous".
"The market has figured out by now that their dividend isn't sustainable. I think at this point, investors would appreciate if they actually paid down some debt instead of paying it all out to shareholders," he added.
To service this debt, Abengoa Yield relies on cash distributions from its projects. Five of these projects have cross-default clauses in the event of an Abengoa bankruptcy, however, meaning lenders could halt cash moving up to their parent company if waivers are not agreed.
In the event of an Abengoa default, the US Department of Energy can also restrict cash distributions from its Solana and Mojave solar projects.
These two projects alone account for more than a quarter of Abengoa Yield's expected cashflows available for distribution next year.
Citigroup equity analyst Sophie Karp wrote in September that dividend yields in the yieldco sector implied "significant dividend cuts across the board", and lowered her forecast for Abengoa Yield's dividend specifically.
"We see healthy cash balances but we estimate that the majority of this cash is restricted and trapped on the subsidiaries level and not readily available for corporate use," her report said.
Abengoa Yield's stock is down more than 37% this year, at US$17.03, as concerns around the financial health of Abengoa escalated, and a reduction in the dividend could cause it to crash.
On the November 6 investor call, Garoz reaffirmed its US$1.6 dividend a share guidance for 2015, stepping up to US$2.10-$2.15 for 2016. But Garoz stepped down at the end of November, to be replaced by Santiago Seage.
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 after returning to Abengoa Yield.
Continued high dividends from the yieldco would provide vital funds to cash-strapped Abengoa. The Spanish firm holds a 43% stake in the yieldco, according to an SEC filing on Tuesday, after handing over 5.8m shares to holders of a convertible bond.
Abengoa urgently needs 100m to pay salaries and keep operating, which it is negotiating with its creditors for. (Reporting by Robert Smith, Editing by Helene Durand)