Spain: Regulators rejig restructuring regime

Under recent proposals, Spanish companies will be able to extend maturities on bank loans, negotiate haircuts, arrange debt-for-equity swaps and reduce the majority needed for creditor agreements to be approved. The new regime represents a watershed for the Spanish restructuring market.

Deputy prime minister Soraya Saenz de Santamaria, speaking to reporters in Madrid after a weekly cabinet meeting, confirmed the decree had been passed, adding: “It’s so that the bankruptcy laws don’t place obstacles in the way of refinancing companies that are perfectly viable despite their debts.”

As a result of the new rules, the Bank of Spain could let lenders classify some refinanced debt as performing, in turn helping Spanish banks with their capital ratios ahead of European financial health tests.

65,000 small and mid-sized companies are at risk of disappearing in the first half of the year as they fail to keep up with debt payments, according to Spanish economist association Refor. 10,000 companies and individuals filed for bankruptcy last year.

Under the previous rules companies have struggled to emerge from a bankruptcy situation. They will also include tax breaks making debt-for-equity swaps tax neutral.

“In some respects, it marks the end to the traditional insolvency regime in Spain,” says Joaquín Sales, a finance partner at King & Wood Mallesons SJ Berwin’s Madrid office. “From now on, insolvency proceedings supervised by a court will be limited to unviable businesses only. For a business that is salvageable, proceedings will be conducted completely out of court, if those bringing about the restructuring can prove the requisite majority of creditors have assented to it.

“That requisite majority will be in the 60-85 percent range, depending on what effects – stays, haircuts, conversion into equity – are to be extended to dissenting creditors. Previously, unanimity was required to bring about a restructuring,” Sales adds.

The new legislation, it should be noted, has not yet taken effect. The Spanish Parliament will debate the proposals over the next two months, during which  there should be no major changes other than technical improvements made. The general direction of the legislation is clear, Sales says, but questions remain over some aspects.

Implications for private debt funds 

The changes have major implications for distressed debt investors.

Some funds active in the market have pursued hold-up strategies, for example. Opportunistically, such funds will build a small position in a company’s debt through heavily discounted purchases, and because of the requirement for unanimity previously, they are able to prevent a restructuring. The company or other creditors would then be forced to buy out that investor, typically at par, yielding a substantial return for that fund. That sort of play is now very difficult, sources suggest, because the position required to block a restructuring is now very large.

Loan-to-own strategies are now easier, however, because creditors can impose the conversion of debt to equity. At a certain threshold, it will be possible to impose that process, subject to an independent expert appointed by the Spanish commercial registry agreeing that the proposal is reasonable. If shareholders vote against a conversion that has been deemed reasonable, they could be made personally liable for some of the outstanding creditor claims. “Shareholders face either being wiped out or diluted on the one hand, or becoming liable for creditor claims on the other,” Sales says.

The changes have been warmly received for the most part, save by opportunistic credit-focused hedge funds for whom blocking strategies will now become too expensive to pursue.

“It’s a much more flexible regime, more in line with the UK’s scheme of arrangement, for example. It is a very important move, because it opens up possibilities that weren’t there before for a company in distress,” Sales concludes.

While questions remain – over enforcement of some provisions, for example – the moves suggest restructuring companies in distress will become much easier. Expect an uptick in activity by special situations and distressed debt funds in Spain as a result.