|Iñigo de Luisa||Ignacio Buil|
The new framework is mainly aimed at improving refinancing processes in Spain. It will introduce more flexibility and new tools to enhance the deleveraging of viable Spanish companies, and facilitate pre-petition restructuring deals while preventing debtors from filing for concurso which is generally value-destructive as in more than 90% of cases results in liquidation, with very low recovery for creditors.
Since this new regulation is already effective, it will be immediately applicable to ongoing and future refinancing processes. It is therefore critical to understand the new thresholds, the extended scope of the Spanish scheme and the effects over dissident creditors, either secured or unsecured.
The general majority level for approval is now 51% rather than 55% over the financial liabilities held by all creditors at the time of approval. In calculating this level, claims held by specially related parties and commercial claims will be excluded, even though the cramming down of its effects will be subject to heightened majorities. For majority purposes, decisions made by a majority of 75% (or less if provided in the facility agreement itself) of the debt held by lenders in syndicated loans will suffice, arguably including for the first time the concept of classes within Spanish restructurings. Dissenting creditors and specially related parties will be bound by the homologation, and non-financial creditors may adhere to it. Finally, instead of a report to be provided by an independent expert, an auditor will certificate that the majority requirement has been achieved.
The existing uncertainty as to whether certain investors could be crammed down under a Spanish scheme is now clarified. The Act expressly provides that creditors holding financial debt (subject or not to financial supervision) will be affected by the scheme. The scope of the refinancing agreement that can be crammed-down to creditors may include not only payment deferrals, but also debt write-offs and debt-to-equity swaps (capitalisation). The cramming-down will be subject to achieving certain majorities, which may vary depending on the effects to be crammed-down to dissenting creditors and the class of dissenting creditors.
The regime for the homologation of unsecured creditors requires: (i) the approval by creditors holding 60% of financial liabilities of payment deferrals up to five years and swapping of senior debt-to-subordinated profit participative loans (PPLs) up to five years; and (ii) the approval by creditors holding 75% of financial liabilities of payment deferrals between five to 10 years, debt write-offs (with no limitation on the literality of the Act), debt-for-equity swaps, conversions of senior debt into subordinated PPLs with maturity over five years, convertible obligations or payment-in-kind loans and debt for assets swaps.
For dissenting secured creditors, which were not affected under the previous regime, now the following rules apply: (i) for debt up to the value of the security, the same effects as described for unsecured credits apply, but only if accepted by 65% or 80% (calculated according to the proportion between the creditors with in rem guarantees adhering to the agreement and the total debt with in rem guarantees) depending on the effects to be crammed-down; and (ii) for the secured debt amount not covered by the security value (deficiency claims), the same effects as described for unsecured credits and same majority thresholds.
Individual enforcements over assets, which are deemed to be necessary for the debtor's activity, will be suspended during the period of negotiation, with creditors under a pre-insolvency process (section 5bis of the Act) up to four months.
Fresh money granted in connection with the Spanish scheme will be qualified 100% as administrative expenses (créditos contra la masa), instead of the previous 50% threshold. The debtor itself and all specially related persons may provide fresh money and enjoy this regime as long as it is not made through an increase of share capital. This measure is temporary, and will only be applicable during the two years following the entry into force of the Royal Decree Law (it will then only apply to 50% of the credit).
Tax exemptions and deferrals will be granted with the execution of the Spanish scheme in order to be neutral for the debtor, and there will be new accounting provisions so that refinancing agreements and capitalisation are neutral for supervised financial entities.
Significant amendments to the Spanish scheme rules have long been demanded from both debtors and creditors. The past framework did not work adequately and the English scheme often provided a more creditor-friendly refinancing process. However, now the new Spanish scheme provides many of the tools that have been praised of the English scheme. Time will tell if this reform will allow market players to offer restructurings which provide long term solutions to highly leveraged companies, enhancing recovery by creditors and securing the viability of operational sound companies.
Iñigo de Luisa and Ignacio Buil
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