Restructuring and insolvency proceedings in Spain after the reform
Seeking to avoid insolvency proceedings from being the only restructuring option available to companies, the Spanish government introduced reforms to help companies avoid formal insolvency proceedings and have as an option out-of-court restructuring or restructuring with less court involvement. The key instruments were Law 14/2013, which supports entrepreneurs and their internalization, and Royal Degree-Law (RDL 4/2014) adopting urgent measures on business debt refinancing and restructuring. These instruments were designed to improve pre-insolvency business reorganization mechanisms.
After the reform, a remarkable number of companies have started to refinance their debts and many will be willing to do so once the legal framework becomes more stable. One must keep in mind the pattern of insolvent companies’ production units being sold to industrial investors and foreign private equity firms in 2013 and in 2014 and that these types of transactions will continue in the future. However, companies facing financial difficulties will benefit from the new mechanisms.
The reform presents two different insolvency methods: in-court restructuring and out-of-court restructuring. With in-court restructuring (concurso and preconcurso), a company facing financial difficulties can negotiate a refinancing agreement or an advanced proposal for creditors’ arrangement. Alternatively, the proceedings end with the company’s liquidation. If the debtor notifies the commercial court about the negotiations with its creditors, the debtor will have four months of protection against insolvency proceedings.
An insolvency proceeding is launched by filing a petition for an insolvency order. Creditors should notify their claims within a month of the publication of the order. The court will appoint an insolvency manager who examines the acts of the insolvent debtor and issues a report. If the creditors make no opposition, the manager submits the final version of the report to the court. The court will then base its decision on the final report when deciding on the repayment schedule, viability plan, alternative repay proposals, etc. There is the possibility of liquidation as an alternative to a reorganization plan. If the liquidation is approved, all the debtor’s assets are sold off and claims are paid to the creditors, respecting the statutory order.
On the other hand, out-of-court restructuring is a procedure consisting of negotiating new terms and conditions for an existing debt. In this type of procedure, the debtor negotiates directly with its creditors. The process is quite demanding because of the negotiation procedure with the creditors, bankers, vendors etc. The Spanish legislation allows agreements on deferrals, haircuts, equity swaps, debt-for-profit participating loans, conversions, etc. The court must approve the agreement and 51 percent of the financial creditors must accept the agreement. Still, this is not enough to make the agreement binding on non-participating or dissenting creditors. To make the agreement binding on non-participating or dissenting creditors for up to a maximum of five years, a majority of 60 per cent of the financial creditors must accept the agreement. If a majority of 75 per cent of the financial creditors accept the agreement, deferrals can be made binding for up to 10 years and additional effects apart from deferrals, such as debt removal or equity swaps, may be extended to dissenting creditors.
The concrete results of RDL 4/2014
After the reform, major developments have been achieved in different fields. Concerning the out-of-court restructuring process, one can cite an example from the government-run company project to rescue Spanish motorways. The Spanish government is planning to rescue nine toll motorways that have entered into insolvency proceedings in order to avoid their liquidation by including their assets and debt in a government-run company. The government has offered the creditor financial institutions a 50 per cent write-off debt, which is about € 2.4 billion. The objective is to have a lower debt-servicing cost and better viability so that the EU authorities do not see the arrangement as state aid.
When it comes to in-court restructuring proceedings, for the very first time, in 2013, the Bank of Spain approved the acquisition of EVO by Us fund Apollo. Concerning the in-court restructuring process in real estate, Banco Santander’s headquarters’ (named Finance City), one of the largest real estate assets in Europe, was sold to Marme Inversiones, which leased it back to Banco Santander for a 40-year term. Marme paid for the acquisition partially by using financing to the tune of € 2 billion. In practice, Marne financed one part and two Dutch companies financed the other part. In March 2014, RDL 4/2014 set out a new criterion regarding the provisions banks on debt refinancing and restructuring must record. The system also became more flexible regarding the classification of the risk associated with refinanced claims. Risks can be classified as “normal” as long as the key elements affirm the probability of recovering the debt and there is a refinancing agreement that coincides with the viability plan.
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