Spain: Can equity be crammed down?

Author: | Published: 9 Dec 2014
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Cuatrecasas Gonçalves Pereira

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Ignacio Buil Aldana José Luis Lucena
Spanish debt is in the spotlight, and it will continue to be for a while – no market player questions this. However, one preoccupation remains: can equity be crammed-down under Spanish insolvency law?

Unfortunately, the answer for the moment is no. Existing regulations do not provide lenders with tools to forcefully cram down the equity in those cases where the latter has no interest. In fact, Spanish debt-for-equity swaps need the consent of shareholders at all times.

However, recent amendments to the Spanish Insolvency Act aim to facilitate debt-for-equity swaps and, in some instances, provide creditors with some leverage in negotiations with shareholders.

The amendments provide a new insolvency liability regime for shareholders and administrators who 'unreasonably' withhold their consent to debt-for-equity swaps. Note that debt-for-equity swaps are deemed 'reasonable' if supported by a report from an independent expert and recognise a pre-emptive right in favour of the shareholders when the securities acquired by the creditors due to the proposed capitalisation are subsequently transferred.

In the context of statutory refinancing agreements, the amendments reduce the majority required to approve a share capital increase by the general shareholders' meeting to a simple majority.

According to the amendments, creditors that equitise credits under statutory refinancing agreements are not considered specially related parties and will not be classified as subordinated creditors in an eventual insolvency scenario.

Further, the amendments allow hold-outs to choose between equitisation or write-offs in an amount equivalent to the par value of the shares.

We believe that even if these measures are positive, they are still insufficient. In this regard, it is regrettable that the Spanish legislator has not taken a firm step towards aligning the shareholders' rights within a refinancing proceeding to their real economic rights. It's understood that a direct mechanism should be set out under the law in order to cram down the equity in those instances where they do not have an economic interest and instead are underwater (applying the same rationale as the one applied to secured creditors as per the terms of the reform). Therefore, debt-for-equity swaps and the position of shareholders in restructurings will likely be a key area of interest and discussion in the coming months.

Ignacio Buil Aldana and José Luis Lucena