Alberto Núñez-Lagos Burguera and Álvaro Font Trancho analyse recent developments in the Spanish restructuring and insolvency market, identifying key specialities of the legislation that should be considered before conducting business in Spain.
1. What trends, in terms of activity levels, affected industries or investor focus, have you seen in the restructuring and insolvency market in your jurisdiction over the last 12 months?
Nowadays in Spain, restructuring and insolvency affect not only to real estate companies but also to companies of almost all business sectors. Although real estate companies have sharply been those that have been faced with frequent critical cash-flow shortages, companies from all sectors – such as technological, automotive, steel, engineering or renewable energy companies – have actually dealt with debt restructuring or, in the worst cases, insolvency.
2. What is the market view on prospects for the coming year?
A glance at the Spanish legal system shows that until 2009 pre-insolvency mechanisms were not a priority, since none of them were regulated. Nevertheless, since then several amendments to the Spanish Insolvency Act (“SIA”) have, firstly, opened the door to the pre-insolvency tools already used in the neighbouring countries (such as “safe harbour” or cram-down mechanisms). Secondly, the amendments boosted and enhanced those mechanisms to become even more effective than those regulated in other jurisdictions (e.g., UK scheme of arrangement). This is due to the removal of certain obstacles and rigidities identified in practice (e.g., the voting power of secured creditors is calculated based on the value of their security which makes, for instance, it very difficult for secured mezzanine lenders to have hold-out strategies).
As a consequence of the current pre-insolvency tools, which have provided a strong response to how to structure efficient out-of-court restructuring mechanisms to avoid insolvency, tendency in debt restructuring is clearly shifting:
(i) from vastly using of in-court mechanisms – for instance, composition agreements (convenio de acreedores) – to the implementation of out-of-court tools – for instance, refinancing agreements (acuerdos de refinanciación), Spanish schemes (acuerdos de refinanciación homologables) or out-of-court payment agreements (acuerdos extrajudiciales de pagos) – seeking to prevent insolvency proceedings; and
(ii) from going abroad – mainly to the United Kingdom – for out-of-court restructuring purposes to staying in Spain as the most effective way of debt restructuring.
In addition to the abovementioned pre-insolvency mechanisms, based on our experience it is expected that other types of acts are also used as restructuring tools. For example, disposal of assets, capital increases and a combination of both as well as consolidation of distressed assets purchased by opportunistic investors in solvent vehicles.
3. What are the key tools available in your jurisdiction to achieve a corporate restructuring – are they primarily formal, court-driven processes, or are informal out-of-court restructurings possible? Do you feel that the tools you have available are effective in terms of providing speedy, fair and predictable outcomes?
As anticipated in question 2 above, the SIA provides both formal and court-driven processes, as well as out-of-court restructurings. All processes were explained in detail in our Spain chapter of the ICLG to: Corporate Recovery & Insolvency 2015. Therefore, they will be briefly mentioned below and we refer to such a chapter for a broad analysis of each of them.
Regarding in-court restructuring mechanisms are the followings:
The main consequences of the sale of the debtor’s business – or any business unit as a going concern – are that:
(i) the acquiror of the business unit subrogates in all the agreements, licences, and administrative authorisations related to the debtor’s business or professional activity the acquiror wishes to subrogate into (i.e., the acquiror may choose in which debtor’s agreements, licences and administrative authorisations they will subrogate) and without the consent (by operation of law) of the counterparty under those agreements, licences and administrative authorisations being requested; and
(ii) the acquiror of the business unit – provided that it is not deemed a specially-related person to the insolvent debtor – is exempted from assuming the debts linked to the business unit transferred (regardless of their classification as insolvency claims or post-insolvency claims) incurred by the debtor prior to the sale of the debtor’s business, or any business unit, except that the acquiror expressly assumes such subrogation or any regulation provides otherwise (e.g., social security claims related to the business).
Conversely, out-of-court restructuring tools are briefly the following:
Regarding the second question (i.e., effectiveness of the available tools), we consider that both the referred out-of-court mechanism and the restructuring tool with less court involvement (i.e., pre-packaged sales) provide predictable outcomes, and this is one of the reasons, together with the advantages over other restructuring tools of other neighbour countries, why these mechanisms are being increasingly implemented rather than insolvency proceedings.
4. In terms of intercreditor dynamics, where does the balance of power lie as between shareholders and creditors, and as between senior lenders and junior/mezzanine lenders? In particular, how do valuation disputes between different stakeholders tend to play out?
Based on our experience, the typical scenario in Spanish restructurings is that specially-privileged creditors (usually banks or hedge funds) dilute current shareholders and get the control of the company for the purposes of selling their stake in the company once it becomes viable again. However, the truth is that in some cases debtor’s shareholders eventually get profit from the insolvency proceedings at the expense of the creditors.
Regarding disputes between stakeholders, as a result of the last amendments of the SIA in relation to the Security Value (as defined below), it is clear that senior lenders actually do not permit any hold out position from mezzanine creditors, even if they are secured creditors to the extent that the security package is correctly structured and their security is legally subordinated to the senior lenders’ security.
The reason is that for restructuring with cram-down purposes (regardless either out-of-court or in-court mechanisms), the security held by any creditor is valuated with regard to the value of the collateral and other existing securities granted over the collateral, what it is known as the “Security Value” (valor de la garantía). Therefore, in any of these restructuring alternatives, Security Value – which may not be below zero or exceed the amount of the secured claim – will be equal to 9/10 of the collateral’s fair value minus claims with prior ranking over the collateral. In the event that one creditor holds two or more security interests over several assets, its Security Value will be equal to the aggregate result applying the formula over each asset. Likewise, if a creditor holds security jointly with other creditors, its individual Security Value will be equal to its percentage of participation in the total Secured Value, in accordance with the rules governing the joint security regime.
In out-of-court restructurings with cram-down effects (i.e., Spanish Scheme), the amount of a claim not exceeding the Security Value will be a “covered amount”. Therefore, an enhanced majority will be required to extend the effects of the refinancing agreement to such “covered amount”, while the amount exceeding the Security Value will be considered a “non-covered amount”, and so, the effects of the agreement will be imposed on that “non-covered amount” as if it was an unsecured claim.
The same logic applies to in-court restructurings, but considering that such covered amount will be the “special privileged claim”, while the “non-covered amount” will be treated, according to its characteristics, as an unsecured claim (e.g., ordinary or subordinated claim). Hence, the “special privileged” status will be only conferred on the proportion of secured claim covered by the Security Value. This is relevant to ascertain which majorities will be required for the purpose of becoming bound by the measures included in a Composition Agreement proposal which may eventually be approved.
5. Have there been any changes in the capital structures of companies based in your jurisdiction over recent years caused by the retreat of banks from loan origination? In particular, have you found that capital structures now increasingly comprise debt governed by different laws (such as New York law governed high yield bonds)? If so, how do you expect these changes to impact on restructurings in the future?
Until the 2007-08 financial crisis, Spanish enterprises sought financing almost exclusively from banks. However, constrained bank lending, which has occurred in the last years, has opened the door to other types of lenders (e.g., hedge funds and private investors), which have engaged in direct lending mechanisms.
Concerning those direct lending mechanism used by Spanish companies, it must be highlighted that they vary depending on the size of the company. While biggest companies have been capable to increasingly finance through the issuance of bonds (including high yield bonds subject to New York law and convertible bonds subject to Spanish law – as a result of the new pre-insolvency tools explained in question 3 above), SME have met a new travelling companion: international funds, which have seen in Spanish companies an opportunity to obtain high profitability margins or, in the worst case scenario, to take control over companies with competitive advantages. The mechanisms preferred by these kinds of funds are both equity and debt.
6. Is there significant activity on the part of distressed debt funds in your jurisdiction? How successful have they been in entering the market, and how much has market practice (or law) evolved in response? If funds have not successfully entered the market, can you identify reasons why?
Absolutely. Restructuring of the financial system in Spain has created a host of opportunities for those interested in investing in Spain; above all, in relation to debt and real estate assets.
Distressed debt funds (including, among others, Cerberus, Blackstone, Lone Star, HIG, Goldman Sachs) have played – and are still playing– a relevant role in the acquisition of debt and assets, above all those formerly owned by financial entities and SAREB (also known as “Spain's Bad Bank” as it is the company jointly created by the Spanish government and most of the biggest Spanish banks and insurance companies to manage distress debt – secured by real estate assets – and real estate assets with the purpose of cleaning their balance sheets). Also the refinancing of assets and businesses has been carried out by these new players through subscription of new rights issues at distressed prices.
As a consequence of the foregoing, several acquisitions of: (i) distressed debt portfolio; (ii) assets portfolios (mainly real estate assets for commercial and house purposes); (iii) special assets (such as the headquarters of the main Spanish enterprises or other historical buildings formerly owned by Spanish government agencies); and (iv) rights issues at distressed price, have taken place in the last five years and are still taking place in Spain.
Furthermore, with the aim of managing both distressed debt and real estate assets, different foreign investment funds have acquired real estate subsidiaries from Spanish financial entities – in fact, all the biggest banks have sold theirs except BBVA and Banco Sabadell – as well as, in some cases, even their subsidiaries focused on loan recovery.
Finally, international investments funds have also chosen to acquire stakes in SOCIMI companies (similar to REITs), which have performed an increasingly active role in the acquisition of real estate assets throughout the last three years.
7. Are there any unusual features of your insolvency or restructuring law that an external investor should be aware of (such as equitable subordination, or substantive consolidation)?
Indeed. The SIA contains several specialties which should be known by any investor who is considering making business in Spain. In a nutshell, the following specialties should be highlighted:
(i) judicial or extrajudicial proceedings may not be initiated for the enforcement of assets or rights necessary for the continuation of the debtor’s professional or business activity;
(ii) proceedings already initiated will be stayed (in case of Out-of-Court Payment Agreements, no enforcement of unsecured claims may be initiated, regardless of whether the rights and assets are necessary for the continuation of the debtor’s professional or business activity or not); and
(iii) in the case of holders of financial liabilities, individual enforcements sought by them cannot be initiated (or, if they have already been initiated, will be stayed) with respect to any asset (regardless whether or not it is necessary) provided that it is justified that creditors holding a percentage no lower than 51 per cent of financial liabilities have supported the start of negotiations of a refinancing agreement, undertaking not to initiate enforcements in the meantime.
8. Are there any proposals for reform of the legal framework that governs insolvency and restructurings in your jurisdiction?
It must be noted that as from 2009 the SIA has been materially amended 13 times, so it is unlikely that further changes are introduced therein in the short and medium term, apart from:
(i) the new regulation regarding insolvency receivers (mainly tasks, appointment and remuneration), since Spanish government has already prepared a bill with the aim of introducing deep changes therein; and
(ii) a recast of the SIA which has been announced to take place in the next year.
9. If it was up to you, what changes would you make?
Despite having highlighted the advantages of the current Spanish pre-insolvency and insolvency mechanisms provided to foster debt restructuring, there is one point which still prevents several companies from restructuring its debts: the immunity of public creditors to become bound by out-of-court or in-court restructuring mechanisms. Therefore, we consider it would be necessary to amend the SIA in this regard, so public creditors would lose the yield or privilege they currently have and consequently they will be unable to adopt hold-out strategies and will be pushed to adopt an active role in a company’s refinancing.
As a matter of fact, even the IMF (Report SDN/15/04, March 2015) has focused on the necessity of introducing further amendments to the SIA so as to procure that public creditors become bound by means of refinancing agreements entered into by the debtor and the majority of the creditors. Notwithstanding this, the truth is that until now the Spanish government has been reluctant to such a measure which may have a short-term impact on public finances.
Furthermore, we consider the amendment of insolvency receiver regulations referred to in question 8 above very positive. In the last years, public opinion has put the insolvency receivers in the spotlight due to its wide power and huge fees, above all in relation to bankruptcy of big companies during the financial crisis. Since insolvency receivers’ role is crucial in almost all insolvency proceedings, in our view they should have an appropriate regulation to protect both them, insolvent debtors and creditors, in line with the bill proposed by the Spanish government. An alternative would even be to convert them into public servants, such as a Notary Public or Land Registrars, as to try to reduce any bias from their behaviour as much as possible.