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Spain: Debt-for-equity swaps in distressed situations

Ignacio Buil AldanaMarcos Perales Mellado

The measures introduced by the 2014 reform of the Spanish Insolvency Act represent a step forward for debt-for-equity swaps. The reform aims to give operationally viable but financially constrained companies a flexible and attractive debt capitalisation regime, while also respecting the creditor's legitimate expectations.

From 2014, creditors-turned-shareholders do not expressly qualify as:

  • persons that are specially related to the debtor. This means that their claims are not subordinated and creditors retain their right to vote on a composition agreement or a Spanish scheme of arrangement; and,
  • shadow directors of the debtor (and therefore subordinated), unless there is evidence to the contrary.

The reform provides creditors with incentives by reducing the legal majority required for shareholders' approval to a simple majority. Additionally, unreasonable rejection of the debt capitalisation by the debtor's shareholders or directors, which frustrates the achievement of a refinancing agreement or a scheme of arrangement, results in the insolvency being classified as a so-called guilty insolvency, unless there is evidence to the contrary. Such a classification may trigger directors' or even shareholders' personal liability for the company's debts. Importantly, the 2014 reform also amended the Spanish corporate income tax so that, in certain circumstances, debt capitalisations are now regarded as tax neutral for the debtor.

There have also been amendments to the Spanish regime on takeover bids. Although creditors are legally exempt from submitting a takeover bid when acquiring control following a debt capitalisation, traditionally this exemption has been subject to approval from Spain's securities regulator (the National Securities Market Commission, often abbreviated as CNMV). This is no longer required for a Spanish scheme of arrangement that receives a favourable opinion from an independent expert. This means that the Spanish insolvency judge can directly apply the takeover bid exemption without any intervention from the CNMV. This exemption may also apply in cases where the debt capitalisation does not take place immediately but is deferred (for example, convertible bonds triggered after a restructuring).

There is no doubt that these tools mitigate some of the obstacles in the Spanish legislation, making debt-for-equity transactions an increasingly attractive way for creditors and potentially viable debtors to achieve sustainable debt structures and avoid insolvency.

Ignacio Buil Aldana andMarcos Perales Mellado

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