New Law 6/2011 amends the Spanish regulations on hybrid instruments for credit institutions. The new law follows the EU Capital Requirements Directive (2009/111/EC) which, adopted against the backdrop of the global financial crisis, aims to adjust the failings in the prudential regulation of credit institutions by establishing new conditions for acceptance of hybrid capital instruments as own funds.

The Spanish hybrid instruments are 'participaciones preferentes' and are similar to preferred shares, although they were not legally shares of the issuers. Participaciones preferentes were first regulated in Spain in 2003.

Law 6/2011 sets out the main modifications to participaciones preferentes (to be implemented by secondary legislation) in order to make them eligible as own funds of the credit institution or of a resident subsidiary in Spain or in another EU member state (not classed as a tax haven):

  • Regarding the payment of remuneration:
    • the board of directors of the credit institution, whether the issuer or its parent, may cancel its payment, for an unlimited period and with no accumulative effect, at its discretion and whenever it may deem necessary;
    • such payment must be cancelled if the issuer, its parent or the group fails to meet the minimum capital requirements established by law; and
    • the Bank of Spain may also demand cancellation of the payment of remuneration, in light of the financial and solvency position of the issuing credit institution or its parent, consolidable group or sub-group.
  • Cancellation of payment of remuneration, whether agreed by the issuer or required by the Bank of Spain, shall not be deemed as a default for the purpose of determining the insolvency of the debtor or cessation in payment of its obligations, pursuant to the provisions of the Insolvency Law.
  • Without prejudice to the above, payment of remuneration may be replaced, as provided in the terms and conditions of the issue, by delivery of ordinary shares, equity units or capital contributions of the issuing credit institution or its parent.
  • The terms and conditions of the participaciones preferentes must envisage a mechanism to ensure that holders of these instruments participate in the absorption of any current or future losses, and that there is no impact on possible recapitalisations. Thus, if an issuer, its parent or its group records a significant accounting loss or a substantial decline in its capital requirement ratios, the terms and conditions should provide for either:
    • a conversion into ordinary shares, equity units or capital contributions of the issuing credit institution or its parent; or
    • a reduction in nominal value of the participaciones preferentes. The specific triggers and conditions will be implemented by secondary legislation.
  • Law 6/2011 maintains the current general threshold whereby participaciones preferentes may represent up to 30% of core capital, although it provides that the Bank of Spain may modify this percentage (up to 35%).

Other characteristics of the participaciones preferentes which have not changed are its perpetual term (although anticipated amortisation may be agreed with authorisation from the Bank of Spain), its listing on a regulated market and the non-existence of pre-emption for further issues.

Many participaciones preferentes have already been issued ahead of transposition of the directive into Spanish law in order to avoid the risk of new issues having to be made to replace them for such shares to be eligible as own funds.

Law 6/2011 establishes a transitional regime which states that participaciones preferentes issued before the entry into force of the law and that do not meet the requirements established herein for instruments of this kind may continue to be deemed eligible as own funds of credit institutions and their groups, subject to any limits set in the implementing regulations.

For further information on this topic please contact Javier Ybáñez or Gonzalo García-Fuertes at Garrigues Abogados by telephone (+34 91 514 52 00), fax (+34 91 399 24 08) or email ([email protected] or [email protected]).