Aim of the Reform
On March 8, 2014, Spain enacted urgent measures to govern refinancing and restructuring of corporate debt ("RDl 4/2014"), modifying several provisions of the Spanish Insolvency Act (the "Act"). The objective of the reform is to improve the legal framework that governs refinancing agreements to remove obstacles that have previously impeded the successful execution of restructuring and refinancing transactions.
Stay of Enforcement Actions in Pre-Insolvency Proceedings Under Act Article 5bis ("5bis").
The new amendments provide for a stay on the enforcement of security by secured creditors in relation to those assets that are necessary for the trading of the business of the debtor. The stay will apply until the earlier of: (i) the execution of a consensual refinancing agreement (an agreement for the rescheduling of the company's secured and unsecured debts) ("RA"); (ii) court approval of an RA (where a consensual deal has not been agreed out of court); (iii) the commencement of insolvency proceedings; or (iv) the expiration of four months following the commencement of a 5bis.
In addition, creditors will not be permitted to commence enforcement proceedings if at least 51 percent of the creditors (i) are in support of negotiations aimed at reaching an RA; and (ii) have entered into a standstill agreement.
There are two exceptions to the moratorium on enforcement proceedings outlined above:
- Secured creditors will still be entitled to initiate or continue enforcement proceedings where a 5bis is commenced. However, any new proceedings will immediately be stayed following commencement (the aim being to allow secured creditors to enforce their security where the debtor is subsequently placed into liquidation); and
- The moratorium will not apply to public debt (for example, tax liabilities).
Limitation of Moratorium on Enforcement by Secured Creditors Where the Relevant Collateral Is Shares in an SPV Holding Company.The stay on enforcement applies only to assets required for the continuity of the debtor's professional or business activities and so will not apply to shares in an SPV holding company (unless the enforcement would impair the debtor's ability to fulfill its obligations under a contractual relationship).
The carve-out for assets not required for the trading of the business could be helpful if it permits the enforcement of share pledge security. However, an RA that provides for the cram down of creditors at the operating company level (which includes secured creditors) may provide more limited scope for the secured lender to use its share pledge security to influence the outcome of an RA.
New Safe Harbor for Refinancing Agreements. Prior to its implementation, an RA no longer requires an independent expert's report in order to verify that the contents of the RA constitute a viable restructuring proposal. Instead, statutory auditors are just required to certify that the RA has been approved by the requisite majority of creditors (as set out below), in circumstances where an RA has been proposed out of court. In practice, the removal of the requirement to obtain an independent expert's report will reduce costs and hopefully speed up the process for implementing an RA.
The approval of an RA by three-fifths of creditors (in value) will ensure that the RA is protected from certain claw back provisions. However, the Act provides that even if 3/5th of creditors do not approve the RA, claw back will not apply to RAs that include the following or result in: (i) an increase in the debtor's assets-to-liabilities ratio; (ii) current assets equal to or exceeding current liabilities; (iii) the value of security granted to creditors does not exceed 90 percent of outstanding liabilities or the security-to-debt ratio that existed prior to the entry into the RA is not exceeded; and (iv) the applicable interest rate is not increased by more than one-third.
Fresh Money as Administration Expense. For a period of two years following the Act coming into force, new monies granted to a debtor pursuant to an RA will benefit from higher ranking in the event that insolvency is 100 percent as an administration expense (unless granted by an insider (as described below), where the full amount will be subordinated). This amendment should encourage the lending of new monies to Spanish corporates in distress as the previous risks associated with lending new monies arguably deterred lenders concerned about the risk of subsequent challenge or subordination in the event of insolvency.
"Insiders" of the Debtor (being connected persons). Creditors that hold equity in the debtor following a debt-for-equity swap under an RA will not be deemed to be: (i) insiders of the debtor for the purposes of the priority of their claims; or (ii) de facto directors (extinguishing the risk of being held liable for the company's debts on an insolvency). This amendment removes the risk for creditors who participate in a debt for equity swap from being subsequently held liable for the debts of the company in the event of insolvency, and it is a welcome amendment.
Cramming Down Equity Holders. While there are no express provisions allowing a cram-down of equity holders, equity holders who unreasonably reject a debt-for-equity swap under an RA may be held personally liable for the debtor's liabilities if it is later declared insolvent and liquidated. A debt-for-equity swap agreement may be proposed only by the debtor. Creditors may not propose a plan providing for a debt-for-equity swap. This amendments is intended to incentivize equity holders who seek to exercise holdout positions to the detriment of other stakeholders and potentially penalize them for doing so. Given the dynamics of many recent restructurings in Spain, it will be interesting to see how equity holders respond to the risk of sanctions going forward.
Approval of Refinancing Agreements (Changes to Act Fourth Additional Disposition).
- Threshold to approve RAs lowered: Approval of the RA requires 51 percent of creditors. However, an RA may bind dissenting creditors only if it obtains the approvals outlined below.
- Thresholds for syndicated loans: Approval of an RA requires the approval of at least 75 percent in value of the syndicate.
- Thresholds to bind unsecured creditors: An RA may bind dissenting unsecured creditors and secured creditors (to the extent that there is a shortfall in the value of their security). If an RA is supported by 60 percent in value of creditors, it may provide for: (i) rescheduling of payment terms for a period no longer than five years; and/or (ii) conversion of the debt into participative (subordinated) loans for the same term. If an RA is approved by 75 percent in value of creditors, it may provide for any of the following: (i) rescheduling of payment terms for a period no longer than 10 years; (ii) debt write off; (iii) a debt-for-equity swap; (iv) conversion of debt in participative (subordinated) loans for a term no longer than 10 years; or (v) assignment of goods or rights to creditors in settlement for all or part of the debt.
- Thresholds to bind secured creditors: To bind secured creditors, the required thresholds as set out above are increased to 65 percent (in value) and 80 percent (in value) respectively.
- Value of Security: The value of security will be calculated by deducting 90 percent of the fair market value of the collateral from the amount of the outstanding debts secured by the collateral. The value of the security may not be less than zero or higher than the value of the corresponding claim.
- Procedure to approve an RA: Once a petition as been issued at court for the approval of an RA, the court will automatically stay all enforcement proceedings against the debtor. The court must issue its decision as to whether or not to approve the RA within 15 business days. Dissenting creditors have a further 15 business days to challenge the RA.
- Alternative investors deemed to be financial creditors: For the purposes of court approval of an RA, creditors are deemed to be "financial creditors" even if they are not subject to financial market supervision. Therefore, alternative investors, such as hedge funds, will also be considered as "financial creditors." This clarification has removed much uncertainty in the market with regard to the treatment of hedge funds and the providers of alternative capital for the purposes of voting on an RA.
The above amendments should make it easier for debtors to propose (and obtain approval for) an RA. However, the ability to cram down secured creditors may not be well received by secured lenders seeking to enforce their security outside of an RA.
Exclusion of Takeover Bid Rules. A takeover bid is not necessary if a controlling stake acquired in a company is acquired by a creditor pursuant to a debt-for-equity swap under an RA that has been approved by the court as well as by an independent expert appointed by the Commercial Registry.