New options for investment due to recent legal development
Motorway´s insolvency in Spain
Nine motorway companies that were financed by local and international banks during the mid-2000s entered into Insolvency proceedings. Recently two of these motorways: Aeropistas M-12 (Madrid-Barajas airport) and Madrid Levante (AP-36 Ocaña-La Roda), begun the final “liquidation” phase of the Insolvency proceedings.
The liquidation phase triggers the concession’s contract termination and the legal obligation from the Spanish Estate (the “Government”) to pay the price of the infrastructure (also called the “RPA”).
Spain has recently introduced new legal developments that predict what will happen when the project companies are wound up. Two types of opportunities for two different types of investors may be opened in the following months:
- Investors interested in distressed debt; they may be able to buy the bank debt at a high discount rate or;
- Investors interested in acquiring infrastructure assets: they may be able purchase Infrastructure assets within an organized auction process and at a reduced price.
"KPA" Key aspects
- The causes of the distressed situation of these projects are the following: (i) traffic plunged during the recession; (ii) two lane free national roads are running alongside them, (iii) construction cost overruns due to expropriation costs.
- Until October 22nd, 2015 the project companies legally benefitted from a sort of financial endorsement from the Government called “Pecuniary Responsibility of the Administration” or “RPA”, in case of early termination of the PPP Contract.
- Early termination of the concession contracts and thus the obligation to pay RPA, occurs if the project companies enter into “liquidation stage”, becoming the final stage within the insolvency proceedings.
- RPA captured compensation for investments made, execution of construction works, acquisition of assets needed for the operation of the concession and loss of profits. A recent modification of the law has changed the formula to calculate the RPA. The Spanish Government has not completed its plan to nationalize the Motorways, and in turn it has implemented a substantial amendment of the law regulating the RPA in force on 22 October 2015
- Motorways companies which are currently into insolvency proceedings
Nine motorway companies that were financed by local and international banks are currently subject to insolvency proceedings: M-12 (Barajas airport), ring road motorways around Madrid: Henarsa (R-2), Accesos de Madrid (R-3 and R-5), Autopista Madrid-Sur (R-4), Madrid-Levante (AP-36, Ocaña-La Roda) and other motorways: AUCOSTA (Cartagena-Vera), CEASA, AP-41 (Madrid-Toledo), CIRALSA (Alicante’s ring road, AP-7) and AUSUR (Alicante-Cartagena).
Among those companies, only Autopista Madrid Levante Concesionaria Española This was in February 24, 2015, Auto 24 de febrero de 2015, Juzgado de lo Mercantil Nº2, Procedimiento 644/2012. (AP-36) and Aeropistas S.L. have entered into the final liquidation stage.
- The creation of the nationalized motorway company has not materialized
Considering that the Government was legally obliged to pay the RPA during 2013 and 2014, the Spanish Ministry of Development (Ministerio de Fomento) worked in a plan by using a nationalized company called SEITTSA, through which the government intended to manage the bankrupt motorways, the SEITTSA plan. This solution mirrored a similar situation that occurred in 1984 when some motorways were about to become insolvent. At the time the Government nationalized the motorways and created the Empresa Nacional de Autopistas (ENA). The Government acquired the project paying 1 euro and later, in 2003, it was sold for 600 million euro. The debt owed to the banks by the bankrupt company was paid without the need of any recourse from the Government. However the Government has not completed the SEITTSA Plan as the main banks involved did not endorse it and since the AP-36 insolvency proceedings have inevitably led to the opening of the liquidation phase of the latter and the early termination of the PPP contract, and thus, the triggering of the RPA payment, preventing the SEITTSA Plan to happen.
- New legal and case law developments
The non-creation of a nationalized motorway company has led to the current situation whereby through amending the Public Procurement Law and through some new case law trends, the RPA has been drastically reduced. Thus, it is likely that new opportunities to purchase the failed projects arise within the next months, either on a discount debt basis, or at a reduced price consideration.
a) Reduced value of the RPA
According to the Public Procurement Law, the Government shall pay the RPA when the distressed Concessionaire enters into the final liquidation proceedings. Thus, this amount is currently payable for Aeropistas M-12 (Barajas airport) and AP-36 (or about to be payable, when the receivers file before the court the liquidation plan).
However the RPA payment mechanism has suffered substantial discounts due to legal amendments and case law trends and now it materializes through an auction procedure explained in section b) below. The following points address the reduction of the RPA value:
- Discounts in the RPA due to expropriation payments which were paid by the government.
Cost overruns of some of these PPP motorway companies were due to increased costs of expropriation. The initial business plan forecasted a cost to acquire the land, qualified as “rural” instead of “urban”, that later was proved to be inaccurate. Most of the expropriated owners claimed that their plots were underpaid and the courts confirmed the right to receive a higher compensation for the expropriation. The claims were also filed against the Government as subsidiarily liable. Some of these payments have been paid by the government on behalf of the project company, but these costs need to be refunded by the latter. Royal Decree Law 1/2014 declared that the payments made by the Government for expropriation costs on behalf of the project company will reduce automatically the total amount of the RPA to be paid from the Government to the project company. In short, these costs will be discounted from the RPA amount.
- Rank of the pledge over the RPA.
At the time these project companies were financed, the RPA was pledged as a future credit right. The banks trusted that the payment of the RPA would guarantee the amount lent and that these securities would work if the project companies failed.
Although at the time financings were entered into, it was commonly thought by the industry that the pledge would remain always privileged. Case law has confirmed that when the pledged credit arises after the insolvency declaration, then the creditors’ position is not privileged.
Thus, the payment of RPA may not be used to repay the whole outstanding bank debt. It is likely that a good share of the RPA will be used to pay first other better ranked debts and expropriation costs before it can pay the outstanding bank debt.
- Calculation of the amount of the RPA.
The calculation of the amount of the RPA in insolvency proceedings situations has changed after the amendment of the Public Procurement Law which entered into force on October 22, 2015. In this sense a new section 271 ter has been introduced in the Public Procurement Law.
Up to October 22, 2015, the RPA investment compensation captured the execution of construction works, the acquisition of assets needed for the operation of the concession and loss of profits on the remaining time of the contract. According to the new amendment, an initial value of the RPA is calculated using the estimated future cash flows during the remaining concession period. This amount will be updated with a discount interest rate of the 10 year Government bond plus 3%. This formula can be amended in the future by a designated Governmental office newly created called the “Oficina Nacional de Evaluación”.
However this amount will not be the price of the RPA, but the Opening Price in an auction to find a new Contractor. The auction procedure is explained in the following section.
b) Auction of the Concession Agreement.
According to the new article 271 bis of the Public Procurement Law that entered into force on October 22, 2015, the Government shall award the contract to a new contractor. The first price of the auction will be the amount calculated according to the formula described in the abovementioned paragraph. If this auction is not successful a second auction will be organized, but the opening price shall be 50% of the price of the first auction. The project will be free from any bank debt. The awardee shall pay the purchase price within 2 months after the end of the auction. This payment will be used by the Government to pay the RPA.
Options for an investor within the framework of the new legal regime:
New opportunities for investments are opened in the next few months regarding the motorways infrastructures. The investment may be channelled as follows.
- Distressed debt purchase: RPA payment has suffered a dramatic reduction, thus the debt of the banks financing these infrastructures should be offered at a high discount. It is likely that the debt of the companies which are not yet in liquidation may have a better prospect than the debt of companies in liquidation. The list of the banks currently holding the debt in each process can be obtained from the insolvency proceedings public sources.
- Purchase of the infrastructure at a substantial discount: Once the company has entered into liquidation (as is the case for the roads Madrid- Airport and AP 36) the infrastructure will be offered in auction with a high discount and free from any pending debt. For the time being only those two companies have begun their liquidation phase, but it is likely that the others will soon follow the same path.
Enquiries may be done before the receivers and the Government as to when this auction is to be organized.