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Spain: Privileged creditors take heed

Iñigo de Luisa
We previously wrote about Royal Decree-law 4/2014 of March 7 (RDL 4/2014), which introduced important changes at preinsolvency stages and improved the restructuring tools and schemes in Spain. This piece of law is already effective, but is at the Parliament for final enactment and is subject to additional minor amendments. Now, Royal Decree-law 11/2014 of September 5 (RDL 11/2014), amends once again our insolvency regime both at composition and liquidation phases in order to foster financial restructuring of viable companies.

RDL 11/2014, among other key issues, extends to composition agreements some of the key measures introduced by RDL 4/2014 for restructuring schemes at preinsolvency stages. As a result, both general and special privileged creditors (including public entities) could now be specifically affected by composition plans, even in the portion covered by the value of the collateral.

Privileged creditors will now hold a privileged claim up to the amount of the value of the related security; the excess is considered to be a deficiency claim, to be classified according to its nature. For instance, the valuation of a mortgage security would be 90% of the fair reasonable value of the underlying asset. For real estate property, it would be the appraisal value as determined by an approved and homologated entity. Such value cannot exceed either the value of the privileged credit nor the maximum mortgage liability. Updated appraisal reports could be admitted later if there is a significant alteration in value during the process.

We anticipate high controversy regarding the valuations of security despite the intervention of independent third party experts. The secured liability amount will no longer be a reference for purposes of recoveries of creditors, since now the value of the security and its underlying asset will be critical to determine the privileged claim amount. More importantly, this would also be taken into account in the liquidation phase.

The majority regime recently introduced for homologation schemes in RDL 4/2014 is extended to the composition plan, with some changes. First, for the first time in our insolvency law, four voting classes of creditors are introduced (labour, public, financial and others such as commercial). The composition agreement must be approved by creditors of the same class. Second, majority thresholds for approval vary depending on the scope and measures of the plan: (i) 60% for write-offs not exceeding 50%, stays not exceeding five years and debt into profit participating loans (PPLs) up to five years; (ii) 75% for write-offs exceeding 50%, stays between five and 10 years, debt into PPL swaps during the same period, and others. Finally, in syndicated loans, it will be deemed that all creditors support the plan when at least 75% of liabilities affected vote in favour, or any lower threshold as agreed in the syndicated loan agreement.

Other relevant changes introduced by RDL 11/2014 refer to: (i) the ability of creditors who purchased the credits after the declaration of concurso to vote on the composition plan, even when these are not financial entities subject to supervision, since now only subordinated creditors are excluded to vote; and (ii) the extension of equitable subordination to those creditors that hold indirect stake positions at the debtor (10% in general and five percent if a listed company) at the time the credit was granted.

Iñigo de Luisa

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