By Jesús Aguado

MADRID (Reuters) - The Spanish government has rejected state aid for Abenewco1, a unit of Spanish engineering and energy group Abengoa, moving it closer to bankruptcy proceedings.

The company had requested a temporary state aid package worth 249 million euros ($263 million) to stay afloat while it evaluates a takeover bid from Los Angeles-based private equity fund TerraMar Capital LLC worth 200 million euros.

A source from Spain's state vehicle SEPI said that because the viability of the company and the repayment of the loan were not guaranteed, the firm was not subject to state aid.

On Tuesday, Abengoa said in an email to Reuters that it had "indeed received a response from SEPI (...) in the last few hours to ratify the conclusions of the first report issued."

In that report, SEPI considered that "certain criteria of eligibility of the request lacked sufficient accreditation" without providing financial details, Abengoa said last week.

A SEPI spokesperson declined to comment.

The Seville-based business has borrowed heavily over the last decade to fund an aggressive expansion into clean energy from its traditional infrastructure projects.

A proposed restructuring to tackle Abengoa's 6 billion euro debt mountain unravelled in February 2021 after the regional government of Andalusia withdrew an offer of 20 million euros in funding as part of a 250 million euro overall deal.

Shares in Abengoa have been suspended from trading since July 2020.

MAJOR BANKRUPTCY

In 2016, Abengoa avoided bankruptcy after striking a refinancing deal on debt worth 9 billion euros ($10 billion), which handed creditors control of the company.

The rejection of the state aid could now potentially make it one of the biggest bankruptcy proceedings in Spanish corporate history after real estate developer Martinsa-Fadesa in 2008.

On Monday, Abengoa Chairman Clemente Fernandez said it could start working on a plan B if the request for aid was rejected, filing bankruptcy proceedings for some business units to at least exercise some damage control and save some key units, newspaper Expansion reported.

In February 2021, Abengoa started voluntary bankruptcy proceedings after its creditors refused to extend a deadline for negotiating a restructuring agreement.

Subsidiary Abenewco1, which holds most of its parent company's assets and liabilities and employs most of the group's 13,500 workers, was not part of those insolvency proceedings.

($1 = 0.9458 euros)

(Reporting by Jesús Aguado; Additional reporting by Emma Pinedo; editing by)