Guarantees and securityGuarantees
Outline how guarantees among companies in a group typically operate in a high-yield deal in your jurisdiction. Are there limitations on guarantees?
It is customary that in high-yield structures the parent company and certain subsidiaries guarantee jointly and severally the obligations of the issuer under the bonds on the issue date. Additionally, the parent company shall cause any subsidiary considered as a restricted subsidiary after the issue date to become a guarantor.
Under Spanish law, unlike in other EU jurisdictions, there is no specific obligation for companies to justify that they are acting for the company’s benefit when granting a guarantee or security, although it is advisable to do so according to the characteristics of a specific transaction or to uphold the effectiveness of the security or guarantee if the grantor becomes insolvent.
The Spanish law prohibiting financial assistance generally prevents both public and private limited liability companies from advancing funds, granting loans, supplying guarantees or providing any sort of financial assistance aimed at allowing a third party to acquire a company’s own shares; or the units or shares of its parent company, in the case of public limited liability companies, or the units or shares of any company belonging to its corporate group, in the case of private limited liability companies. There are two limited exceptions for public limited liability companies: ordinary operations carried out by banks and credit entities, and financing for employees. In addition, and taking into consideration that pursuant to Spanish Law the Spanish private limited liability companies cannot issue notes in excess to twice their own resources, unless the issue is secured by a mortgage, a pledge of securities, a public guarantee or a joint guarantee from a credit institution, it cannot be disregarded that this restriction also applies to any guarantees provided by the Spanish limited liability companies in respect of notes. There is no consistent opinion among scholars and practitioners yet, nor any case law regarding the interpretation of the Spanish law in this regard.
The guarantee is normally regulated under the indenture and subject to New York law. The indenture is sometimes notarised in Spain to have access to a more expeditious enforcement process against the assets of a Spanish guarantor if the guarantee is to be enforced directly in Spain.
Furthermore, in those cases where it is necessary to execute a public deed of issuance and the issue is guaranteed, the relevant guarantor must also appear before the notary public when the deed of the issue is granted.Collateral package
What is the typical collateral package for high-yield debt securities in your jurisdiction?
The typical security package for secured high-yield bond issues involves pledges over the shares of the issuer, the parent company and certain of its subsidiaries, as well as over material assets, such as bank accounts, receivables and insurance policies.
Other securities, such as non-possessory pledges over movable assets or real estate mortgages, are less common, mainly because of associated registration fees and stamp duty.
Generally, a security interest can only secure one main obligation and its ancillary obligations. If two different main obligations need to be secured, two different guarantees must be created. Spanish law does not provide for a ‘universal guarantee’ over all the debtor’s assets, although there are exceptions – for instance, mortgages; nor does it provide for the creation of a floating or adjustable lien or encumbrance.
Guarantees or security documents subject to Spanish law must be granted before a notary public to benefit from an executive proceeding in Spain.Limitations
Are there any limitations on security that can be granted to secure high-yield securities in your jurisdiction? Are there any limitations on types of assets that can be pledged as collateral? Are there any limitations on which entities can provide security?
Any type of security in Spain can secure high-yield bonds if the relevant formalities for each type of security are met.
Real estate assets can only be secured by a mortgage, which covers:
- the plot of land and the buildings built on it;
- the proceeds from the insurance policies insuring the property; and
- the improvement works carried out on the property and natural accretions.
Mortgage agreements must be drafted in Spanish and executed before a notary public in a deed of record. The law requires the mortgage deed to be filed and registered at the relevant land registry.
Pledges over shares and credit rights (such as bank accounts, receivables and insurance policies) are the most common type of security.
Under Spanish law, receivables can be attached to three different types of security interests:
- possessory pledges;
- non-possessory pledges; and
- subject to certain limitations, financial collaterals.
Perfection of possessory pledges requires that the pledgor transfer the possession of the receivable to the pledgee or to a third party (as appointed by the pledgor and pledgee (eg, a security agent)). Spanish law is unclear on how this transfer of possession should be made in connection with a receivable, as in general Spanish security interest rules only foresee the transfer of tangible assets. In practice, it is generally accepted that notarisation of the pledge, plus giving notice to the obligor, is sufficient to perfect a possessory pledge. When the parties prefer not to give notice for commercial (eg, confidential or reputational) reasons, alternative means of transferring the possession of the receivable may be available.
Non-possessory pledges must be registered with the relevant movable assets registry. Non-possessory pledges are signed before a Spanish notary public and are notarised in the form of a public document.
Non-possessory pledges are also granted over movable assets that cannot be the object of a chattel mortgage because their specific identity cannot be registered; or of a possessory pledge, given the legal or financial impossibility of transfer to the creditor or to a third party.
Subject to several legal requirements, certain types of receivables could also be attached to financial collateral pursuant to Royal Decree Law 5/2005, which provides that financial collateral must be in written form and no additional formality is required to perfect financial collateral. Royal Decree Law 5/2005 also provides that the delivery by a pledgor to the pledgee of a list of receivables in writing is sufficient to consider the receivables transferred to the pledgee.
In practice, it is customary to perform the same perfection requirements required for possessory pledges when creating financial collateral (ie, notarial document and notice to the obligor).
For the pledge to be enforceable against third parties (also in the event of the pledgor’s insolvency), a notarised agreement or, as the case may be, a deed must be created, as these public documents verify the date and terms and conditions of the pledge. Thus, a pledge created under a law other than Spanish law will be valid; although, to enforce the pledge in Spain, it will be necessary to execute a document equivalent to a Spanish notarised agreement or deed, as a document that only legalises the grantor signature will not be sufficient. Only if a security qualifies as financial collateral arrangement in accordance with the requirements set out under Royal Decree Law 5/2005, the relevant security can be enforced by means of direct appropriation.
When Law 5/2015 came into force, the prior limitations on which entities could provide security or guarantee bonds were removed. Subject to the above-mentioned limitations, Spanish private limited liability companies may now issue and guarantee bonds and other securities that create or recognise debt, except for convertible instruments. Previously, only public limited liability companies could issue debt or guarantee bonds. In addition, the general issue limit preventing public limited liability companies and limited partnerships by shares issuing notes in excess of their own funds has been removed.Collateral structure
Describe the typical collateral structure in your jurisdiction. For example, is it common to see crossing lien deals between high-yield debt securities and bank agreements?
Spanish law is based, inter alia, on the principle of integrity, by virtue of which a security interest can secure only one main obligation and its ancillary obligations, such as interest and costs. Except for floating mortgages, where the law expressly contemplates it, there are uncertainties as to the possibility of using a single pledge to secure different obligations with different creditors and different terms.
In many Spanish high-yield notes deals, a senior facility agreement is also entered into. The same collateral will typically secure both the senior facility and the secured notes in pari passu ranking.
There are various alternatives to achieve pari passu ranking, such as:
- a single pledge securing the senior facilities agreement and the secured notes;
- various pledges, each over a percentage of the collateral to secure each obligation;
- multiple concurrent pledges with the same ranking, each securing 100 per cent of the obligations arising from the senior facilities agreement and the secured notes; or
- subsequent ranking pledges.
Each alternative has its advantages and disadvantages to be analysed case by case. Regardless of the option chosen, it is customary to enter into an intercreditor agreement to regulate the majorities required for enforcing the security and the sharing provisions for the proceeds of enforcement of each pledge.Legal expenses
Who typically bears the costs of legal expenses related to security interests?
The issuer normally pays all legal expenses, such as notarial costs, registration fees and stamp duty, if any, arising from the granting of the security, which are paid with the proceeds of the issue.Security interests
How are security interests recorded? Is there a public register?
The only security interests that need to be recorded are mortgages and non-possessory pledges.
In the case of real estate mortgages, they must be filed and registered at the relevant land registry, while chattel mortgages or non-possessory pledges over movable assets are subject to registration with the chattel registry. Failure to do so will render these security interests void and not binding against third parties.
How are security interests typically enforced in the high-yield context?
Security interests are normally granted in favour of the security agent on behalf of the secured creditors, which will, in the event of default, enforce the security interest on their behalf. However, Spanish law expressly recognises neither the concept of security agent nor the concept of trustee, and the security agency or security trustee structure may not be recognised by Spanish courts. Therefore, where an entity acts as security agent of the actual beneficiaries of the security interest or a guarantee (ie, the creditors of the secured obligations), it must be duly empowered at the time it acts as security agent.
If a default takes place resulting in the acceleration of notes, the security agent may, as instructed by the trustee and on behalf of the secured creditors, choose any of the proceedings available under Spanish law to enforce the security.
In the case of a pledge over shares, these proceedings would include a declaratory court judgment, enforcement proceedings under the Code of Civil Procedure or the extrajudicial procedure in article 1872 of the Civil Code and in the Notaries Act of 28 May 1862; or, if applicable, the procedure established in Royal Decree Law 5/2005 of 11 March on urgent reforms to promote productivity and improve government contracting.
Depending on the nature of the collateral (eg, pledge over bank accounts or receivables), the security agent could, instead of initiating the above-mentioned proceedings, enforce the pledge by means of setting off the balances of the bank accounts or the amounts owed by the debtors against the amounts due and payable under the secured obligations, with the sole requirement of prior notification to the pledgor.
In an insolvency, credits whose collateral consists of specific property or rights (eg, mortgage or pledges) are considered privileged credits with special privilege. Privileged credits are generally paid first. Once privileged credits have been paid, the rest of the assets are divided among the ordinary creditors in proportion to the amount of their debt. Once the ordinary credits have been paid, the remaining assets, if any, are used for paying subordinated credits.
One of the effects of the declaration of insolvency is that acts or transactions involving the attachment of the debtor’s property required for the continuity of its professional or business activity, including mortgages and pledges, are suspended or cannot be executed until:
- the plan of reorganisation is approved;
- liquidation starts; or
- one year has elapsed from the date of declaration of insolvency.
Clawback can apply to any act or transaction performed within the two years before the debtor’s declaration of insolvency that is deemed to damage the debtor’s estate. Fraud is not required under Spanish insolvency law for the avoidance of transactions.