This content is from: Local Insights


The Spanish government has recently approved a package of measures introducing important changes in the financial field.

Firstly, it establishes specific regulations for participating loans, defined as those in which the return to lenders is related to the evolution of the borrower's activity, on a basis freely agreed by the parties (ie net profit, business volume, total net worth, etc), with the possibility of a minimum return, specified by a fixed interest rate. The loans are structured as subordinated debt -- that is, the position assumed by the lender in the order of priority of creditors is immediately below that held by ordinary creditors -- and counts as equity, this being the main change.

With respect to the possibility of the borrower effecting an early repayment of the loans, the law allowing the parties to agree on a penalty for this case, it is only permitted if the said repayment is accompanied by an increase in shareholders' net worth for the same amount provided it does not stem from the revaluation of assets. As no minimum maturity has been established for a loan to qualify as a participating loan, it seems that, whatever the period, the loan will count as the borrower's equity, which is somewhat surprising.

Even though certain rules, mainly applicable to industrial reconversion at the beginning of the 1980s and to financial institutions, already recognized this type of loan, a general regulation that could be applied to companies was missing. This notwithstanding, this type of agreement could be entered into on the basis of the parties' free will, although the principal amount lent did not count as part of the equity, as is now the case.

The new rules also clarify the fiscal treatment of accrued interest, whether fixed or floating, deductible from the borrower's corporate tax.

Secondly, in relation to undertakings for collective investment, the investment of part of their assets -- those not subject to coefficient -- is allowed, for the first time, in unlisted securities. Likewise, with some exceptions, the use of derivatives or other techniques to effect proper risk hedging is allowed. Both measures are pending regulatory clarification, and it is difficult at present to accurately determine their final scope.

This notwithstanding, the intention seems, on the one hand, to make Spanish internal regulations more flexible to offset the comparative advantages enjoyed by some EU countries which were a determining factor in the creation there of UCITs promoted by Spanish institutions. Subsequent regulatory developments should allow UCITs to guarantee their profitability internally, to use currency and interest hedge instruments, to invest in OTC options and futures, and so on.

On the other hand, the freedom to invest in unlisted shares entails the recognition, in our opinion, of an economic reality, and will allow UCITs to input the capital of companies in new technology sectors not listed on the Exchange. This represents, firstly, an improvement in the funding of such companies that will also be beneficial as regards solvency, liquidity and trustworthiness in that they will be able to avail themselves of UCITs' support. Secondly, it means that these institutions' assets will be used for the development of small and medium-sized Spanish companies, which are an essential part of Spain's productive economy.

In short, and unless subsequent regulatory developments are exceedingly restrictive, the above rules represent a major liberalization of funding sources for companies in general, and of the activity of UCITs in particular, which, in our opinion, will redound to the financial market's advantage.

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