Financing and Restructuring July 2017 Cases and transactions Dual financing to build waste management center FLUIDRA: Issuance of promissory notes on MARF Agile process to sell production unit in insolvency proceedings Legislation New rules on prospectuses Regulation coming into force on insolvency proceedings and forms Case law Indirect shareholding and subordination of credit Pledging of VAT credits resistant to insolvency proceedings Concept of group in insolvency proceedings Individual legal standing in syndicated loans Insolvency categorization of loans secured with pledge of credit rights and current accounts Doctrine by the Directorate General of Registries and Notarial Affairs (“DGRN”) Powers granted abroad: notarial judgment of sufficiency implies judgment of equivalence Other documents of interest Capital Markets Union Action Plan (EC) Activities scheduled by the CNMV, Spain’s stock-market authority, for 2017 Our articles Spain: Tech project finance Banking Regulation 2017. Spain Securitisation 2017: Spain Project Finance 2017: Spain Lending and Secured Finance 2017: Spain Newsletter Financing and Restructuring 2 Cases and transactions Dual financing to build waste management center Cuatrecasas advised Ekondakin Energía y Medioambiente, S.A. on a €191 million dual financing arrangement to build the main treatment and recycling plant for domestic waste and electricity production in Zubieta in the Spanish province of Guipúzcoa. This is a new type of financing arrangement for greenfield infrastructure projects under a mixed model that combines the issuance of bonds and a loan. For the bond issuance, a fixed-income program was registered with Spain’s MARF for € 80 million. Ekondakin Energía y Medioambiente, S.A. is to issue successive monthly offerings corresponding to the milestone payments indicated in project forecasts, which indicate that construction will be finished by late 2019. Once the project is operating, the bonds are to be redeemed by reducing the face value until 2041. The 3.662% coupon rate is to be paid monthly in the first three years and half-yearly until redemption. Natixis, Rivage, AG Insurance, Kommunal Kredit, CIC, Siemens Bank and KDB have taken part in the financing. BBVA has been designated the common agent for investors and lenders, assuming the duties of security agent, account bank, and payment agent for the bond program. Ekondakin Energía y Medioambiente, S.A. was created to complete the Stage 1 Environmental Complex in Guipúzcoa, which is located in the industrial zone of Arzabaleta (Zubieta), in the province of Guipúzcoa. Signed in April 2017 by a local waste-related consortium and the issuer, the project establishes a system of payments based on availability and tons processed during the project’s operational stage. FLUIDRA: Issuance of promissory notes on MARF Cuatrecasas advised Fluidra on its first issuance of promissory notes on Spain’s MARF. Banca March S.A. is MARF’s designated registered consultant. In addition, Banco de Sabadell S.A. is the payment agent under the program, and Banca March S.A. and Banco de Sabadell S.A. act as collaborating banks. The program, with a maximum outstanding balance of €50 million, and in force until June 29, 2018, is meant to diversify Fluidra’s sources of financing to provide greater flexibility to finance the group’s working capital. The new promissory-note program will allow the company to issue these short-term instruments over the course of a year from the registration of the program. This is the seventeenth promissory-note program registered on MARF. The outstanding balance of this market surpassed €1 billion in June 2017 for the first time since it was created in 2013. Fluidra is the controlling company in a group of companies whose main activities involve manufacturing and marketing specific products, accessories and machinery for pools, irrigation, and treatment and purification of waste water in the residential, commercial and public areas. Agile process to sell production unit in insolvency proceedings The companies of Grupo Abantia, advised by Cuatrecasas, filed for voluntary insolvency proceedings in February 2016, including a liquidation plan and a binding offer from the commercial-law company Dominion, to acquire production units for the purpose Newsletter Financing and Restructuring 3 of being considered among the special cases for abbreviated proceedings established in article 191 ter of the Insolvency Act. The offering party financed the business of the insolvent parties via a factoring line of credit on the condition the production units were directly placed in its ownership (without formal insolvency proceedings among potential bidders, due to the risk of the activity being halted). It was also indicated that the production unit could not be sold at the offered price. Based on a favorable report on the insolvency proceedings, a commercial court approved the liquidation plan submitted by the insolvent parties and authorized the sale of the production units to Dominion through two court orders. This led the financial institutions and Spain’s AEAT tax authority to file an appeal on the grounds that the principles of transparency, publicity and concurrence in the awarding were violated. They claimed the price offered was very low in comparison to the value of the acquired production units. The Provincial Court of Barcelona issued a court order on June 16, 2017, rejecting the request for appeal and confirming the validity of the orders issued by the corresponding court of instance. It stated that the evaluation of the transparency and efficiency of the sale process of the production units must be performed by the corresponding court of instance, based on the evaluation in the insolvency report and relating this to principles of agility of abbreviated legal proceedings and maintaining the activity, taking into account the insolvent party’s economic circumstances. This means it is not mandatory for the creditors to participate in the process. Also, the report on insolvency proceedings indicated the critical situation of the companies in arrears and the fairness of Dominion’s offer (the only offer received), which also offered financial instruments to deal with the insolvent parties’ working capital. With this resolution, the Provincial Court of Barcelona clarified the process for selling the production units under article 191 ter of the Insolvency Act, when, along with the insolvency filing, a liquidation plan and a binding offer to acquire one or more of the production units are submitted. The Provincial Court of Barcelona’s interpretation leads to the possibility of much faster processes for selling production units when the debtor’s economic circumstances create this need, to maintain corporate activity and jobs. Legislation New rules on prospectuses On July 3, 2017, Regulation (EU) 2017/1129, of June 14 was published in the Official Journal of the EU. This legislation increases flexibility for regulating prospectuses to promote financing through capital markets and reduces the high degree of bank usage in the EU’s economy. Regulation coming into force on insolvency proceedings and forms On June 26, 2017, Regulation (EU) 2015/848 came into force regulating insolvency proceedings starting from that date. The regulation substitutes Regulation 1346/2000 and adds highly relevant new features: Broadens the scope of application to include “hybrid” or pre-insolvency proceedings. Defines the center of main interests (COMI) and strengthens legal control over territorial range, to prevent the use of fictitious or artificial locations. Strengthens the role of the main proceedings in relation to potential secondary proceedings that may be taken against the same debtor. Newsletter Financing and Restructuring 4 Adds rules on information and the public nature of insolvency proceedings in the EU. Includes a new chapter specifically dealing with insolvency proceedings for groups of companies. Regulation EU 2017/1105 has been passed to implement the legislation, approving the following forms, to ensure Regulation (EU) 2015/848 is applied under uniform conditions: Reporting form to inform known foreign creditors that insolvency proceedings have started (article 54.3 of Regulation (EU) 2015/848). Form for foreign creditors to submit credits (article 55.1 of Regulation (EU) 2015/848). Form for insolvency administrators to submit objections to the group’s coordination procedures (article 64.2 of Regulation (EU) 2015/848). Form for submitting electronically individual requests for information through the European Portal of e-Justicia (article 27.4 of Regulation (EU) 2015/848). Our Newsletter Restructuring July 2015 summarizes Regulation (EU) 2015/848. Case law Indirect shareholding and subordination of credit In CR Aeropuertos, S.L.’s insolvency proceedings, a credit institution challenged the list of debtors prepared by insolvency administrators, due to all of its credits (totaling €170 million) being subordinated because it was considered a person especially related to the insolvent party and, as a result, the collateral on part of its credit was cancelled. Both claims were rejected. In judgment 392/2917, of June 21, 2017 (ECLI: ES:TS:2017:2513), the Supreme Court also rejected the appeal for reversal and confirmed the subordination of the credit institution’s credit. This judgment looked at the interpretation in article 93.2.1 of the Insolvency Act of a person especially related to the insolvent legal entity, and particularly whether, with the preceding restatement of the provision, the creditor’s indirectly held stake in the capital of the insolvent company is also the cause of the subordination of the credit, or whether the subordination is applicable only when the stake is held directly. Under article 93.2.1, shareholders with stakes of at least 10% of the share capital of the insolvent party when the credit is created are to be considered especially related persons. Subsequently, with Royal Decree-Law 11/2014, the words “directly or indirectly” were inserted, as a result of which, today’s Insolvency Act considers the holders of at least 10% of an unlisted company to be especially related persons, whether the stake is held directly or indirectly. The Supreme Court concludes in its judgment that the reform including this insertion (“directly or indirectly”) does not modify the preceding legal status but clarifies the meaning of the law, thus dispelling doubts as to whether the stake in the insolvent company’s equity should be considered direct or whether it can also be considered indirect, through another company controlled by the creditor. As a result of this, the subordination of the credits of the creditor’s credit institution is confirmed, because when the institution created the credit, it directly held 6% of the share capital of the insolvent party and indirectly held a 30% stake through a wholly owned company. We also consider Madrid Provincial Court ruling 201/2017 of April 21, 2017, mentioned below. In this ruling, the Madrid Provincial Court drew the opposite conclusion, reasoning that the subsequent modification of the law cannot be used as an interpretative criterion, because the exceptions regulated by the Insolvency Act relating to privileges and subordination must be interpreted restrictively. Newsletter Financing and Restructuring 5 Pledging of VAT credits resistant to insolvency proceedings The Supreme Court, in judgment 2370/2017 of June 13, 2017 (ECLI: ES:TS:2017:2370), specified the application of its jurisprudence regarding the resistance to insolvency proceedings of the pledging of future credit rights on VAT returns, in relation to a case in which the self-assessment of VAT resulting from the intended return (collateral item) had resulted in inspections and verifications performed by Spain’s AEAT income-tax authority, which initially rejected the return, and to a resolution by Spain’s TEAR regional economicadministrative court, in which the right to the VAT return was acknowledged and quantified. As a case in point, the Supreme Court reiterated its jurisprudence in relation to the resistance to the insolvency proceedings of the pledging of future credit rights, particularly to the pledging of credits consisting of VAT returns: Regarding the pledging of future credits, the Supreme Court confirms that credits secured with the pledging of future credits not existing at the time of the declaration of insolvency but resulting from legal relations existing before the filing must be considered resistant to insolvency proceedings and that these credits be given the status of credits with special privilege, even though the pledged credit was created after the declaration of insolvency. Regarding the pledging of future credits consisting of VAT returns, the Supreme Court understands that the revenues that may be agreed with Spain’s AEAT income-tax authority may only be considered to result from a legal relation that existed before the declaration of insolvency in cases where the taxable event of the tax takes place before the declaration of insolvency. The Supreme Court states that the pledge in question is not affected by insolvency proceedings and rejects the challenging of the insolvency qualification of the credit secured by the pledge as a privileged credit. The High Court considers that the VAT corresponded to a fiscal year that had ended before the declaration of insolvency, although Spain’s TEAR regional economicadministrative court would reach a resolution relating to the initiative of returning the VAT after the declaration of insolvency. Concept of group in insolvency proceedings Supreme Court judgment 190/2017, of March 15, 2017 (ECLI: ES:TS:2017:1479), focuses on the insolvent business group, concluding that what is relevant is the existence of control, and that this control can also be exercised by an individual. The provincial courts had dealt with this matter applying different criteria and some had changed their criteria over time. In this case, the insolvent company and the creditor are subject to the control of an individual with the shareholding required to make any decision in both (individual indirectly holds 65% and 79% of insolvent company and creditor, respectively); also, both companies have the same director and their executives have cross-powers to act on behalf of each other. The court decided that the insolvent company and the creditor are part of the same group for insolvency purposes, as they are subject to the control of an individual, and thus the creditor's claim is subordinated as it is a person who is especially related to the insolvent company. The Supreme Court's reasoning is summarized as follows: The concept of group given in the Insolvency Act is defined by control (article 42.1 of the Spanish Commercial Code). If there is control, Newsletter Financing and Restructuring 6 there is a group for purposes of the Insolvency Act. The reference in the sixth additional provision of the Insolvency Act to article 42.1 of the Spanish Commercial Code relates to the criterion that determines the concept of group: the existence of actual or potential, direct or indirect, control. This definition excludes horizontal groups and groups by management unit. However, the party exercising control does not need to be a trade company. Section 1 of article 41.2 of the Spanish Commercial Code is only relevant for purposes of accounting consolidation (who is obliged to file consolidated accounts). The second part of the regulation is relevant in relation to the reference in the sixth additional provision of the Insolvency Act: the existence or nonexistence of control. Thus, if there is control under article 42.1 of the Spanish Commercial Code, it does not matter whether a company, a foundation, or an individual is at the top. In this case, the insolvent company and the creditor are subject to the control of an individual exercising control as defined under article 42.1 of the Spanish Commercial Code (availability of the majority of the voting rights of the sole shareholders of the insolvent company and the creditor company). Individual legal standing in syndicated loans Provincial Court of Madrid judgment 197/2017 of April 21, 2017 (ECLI: ES:APM:2017:6167), settles the appeal filed by the creditors against the first instance court’s refusal to recognize their individual standing to file the action for contractual fulfilment of two syndicated loan agreements. The court found that the standing was exclusively attributed to the agent entity as stipulated in the agreement, and that the entity had not filed the claim, even as a creditor. The Provincial Court interprets the loan stipulations regulating the joint nature of the creditors' rights and obligations and the exercising of judicial and out-of-court actions, concluding that it falls exclusively on the agent bank to file the applicable legal claim to enforce early maturity of the loan. The loan stipulations allow the creditors to enforce partial expiry of the agreement when the syndicate as a whole has agreed to the expiry of the agreement and the agent has not carried out this action by the deadline set out in the agreement and if, because there are grounds for early maturity, the majority of the syndicate does not decide to enforce early maturity of the entire claim. However, it denies the creditors the right to exercise the action as the agreement requires that it is jointly exercised with the agent bank, which was not the case. The court’s decision is also reinforced by the fact that the creditors did not limit themselves to requesting repayment of the amounts claimed in proportion to what corresponded to them, but requested repayment of the full debt, so the defense of their rights exceeded its limits. Insolvency categorization of loans secured with pledge of credit rights and current accounts Provincial Court of Madrid judgment 201/2017 of April 21, 2017, summarizes the Supreme Court’s and the Provincial Court’s jurisprudence regarding the Newsletter Financing and Restructuring 7 following matters, which have been controversial in recent years: Claim against non-debtor guarantor: the party that guarantees with its goods another's debt does not become a debtor. Thus, the claim against the non-debtor guarantor cannot be recognized in its insolvency proceedings. Credits resulting from the resolution of a concession contract (“RPA”) in concessionary companies' insolvency proceedings: the credits resulting from the resolution of a concession contract (“RPA”) cannot appear in the inventory of goods and rights until the winding-up stage starts or the concession agreement is terminated ahead of schedule. Then the concession is de-registered from the inventory and the RPA replaces it. Pledge of future credit rights resistant to insolvency proceedings: The pledge of future credits resists insolvency proceedings in cases in which the credits that are the object of the guarantee arise from agreements or legal relations that are entered or provided at the same time as the declaration of insolvency. Thus, as this requirement is met, the judgment recognizes a special privilege to the credits secured by the pledge of the credits rights derived from the resolution of a concession contract (“RPA”), from the shareholders’ support agreement, from the project agreements, and from the construction and operation insurance policies. Financial guarantees on bank accounts: the application of the special system stipulated in Royal Decree-law 5/2005 regarding the financial guarantees being resistant to insolvency proceedings requires that the beneficiary keeps the funds deposited in the pledged bank account under its control. Also, the guarantee cannot be extended to increase the balance of the accounts after the declaration of insolvency. Standing to challenge the list of debtors: the appearing parties and any party that has and can prove an interest that they believe to be damaged has standing to challenge the list of debtors. Subordination through stake indirectly held in insolvent company: the text of article 93.2.1 of the Insolvency Act, which applies to the facts, as it was in force at the time of the declaration of insolvency, did not consider the creditors’ indirect stake in the insolvent company as a case of claim subordination. The subsequent change in the regulation (which considers this scenario) cannot be used as a criterion for interpretation, as the exceptions regulated by the Insolvency Act relating to privileges and subordination must be interpreted restrictively. Doctrine by the Directorate General of Registries and Notarial Affairs (“DGRN”) Powers granted abroad: notarial judgement of sufficiency implies judgement of equivalence In our Finance and restructuring newsletter February 2017, we reported on the resolution of the Directorate General of Registries and Notarial Affairs of September 14, 2016 (BOE 5.10.16), regarding a case in which the purchase of real-estate was not registered as the sufficiency of the power of attorney granted by the buyers before a Liverpool notary was questioned. The Spanish notary judged the power to be sufficient, but the registrar questioned it. The Directorate General of Registries and Notarial Affairs then ruled in the registrar's favor, stating Newsletter Financing and Restructuring 8 that a "judgement of equivalence" of functions between the foreign public servant and the Spanish notary was required (the foreign notary performed equivalent functions to those of the Spanish notary in the authorization of the notarial document). This resolution by the Directorate General of Registries and Notarial Affairs caused some concern among legal operators. In this context, the publication of the resolution of April 17, 2017 (BOE 28.4.17) was positive. In a real-estate transaction, seller and buyer were represented by powers of attorney granted in England before English notaries. The Spanish notary specified the location of its granting, the authority issuing them, that they were drafted in a dual text in English and Spanish, and that they were certified, before the judgement of sufficiency was issued. The registrar refused to register the document, claiming that the fulfilment of the requirements of equivalence of the power granted abroad had not been proven. The Directorate General of Registries and Notarial Affairs found that, even though the judgements of sufficiency and of equivalence are different, the first one entails the second one, because, if the Spanish notary issues an express judgement that the foreign power of attorney shown is sufficient, "he or she must have established its equivalence under Spanish law." Also, this judgement of notarial equivalence "need not follow sacramental formulas." In this case, the Directorate General of Registries and Notarial Affairs upheld the appeal and revoked the registrar's classification after ascertaining that the deed specified the identification data for the powers of attorney, that they were drafted in a dual text in English and in Spanish, that they were certified, and that "it expressly contains a judgement of sufficiency so it must be regarded as falling under the responsibility of the notary who has judged it to be equivalent." As the formalities followed by the notary and approved by the Directorate General of Registries and Notarial Affairs correspond to those that had been used in practice before and after the Directorate General of Registries and Notarial Affairs’ resolution 14.9.16, it is expected that from now on resolution 17.4.17 will prevent any of the difficulties resulting from the previous one. Other documents of interest Capital Markets Union Action Plan (EC) On June 8, 2017, the European Commission published the interim review of the Capital Markets Union Action , the EU initiative whose goal is to increase and integrate to a greater extent the capital markets of the 28 EU Member States. The following actions are of interest: Third quarter 2017: o Promotes legislative proposal to modify the functioning of ESMA and other authorities, to strengthen supervision in the EU. o Promotes legislative proposal to improve proportionality in pledge of future credit rights prudential treatment for investment services companies. o Creates a code of conduct to simplify tax withholding procedures, particularly regarding reimbursement. Fourth quarter 2017: o Studies the single passport for FinTech activities. o Promotes legislative proposal specifying standards regarding conflicts of law Newsletter Financing and Restructuring 9 pertaining to opposition against third parties of transactions involving securities and credits. o Takes measures to develop a secondary market for non-performing loans (NPLs) and to assess the impact of a potential legislative proposal reinforcing the guaranteed creditors' ability to recover the value of their loans to companies. o Makes recommendation on private placements. o Issues communication on corporatebond markets. First quarter 2018: o Reviews prudential treatment of investment capital and the private placement debt in the Delegate Regulation Solvency II (2018). o Promotes legislative proposal pertaining to an EU framework for guaranteed bonds (first quarter 2018). o Evaluates impact of a legislative proposal facilitating the marketing and crossborder supervision of Bodies for Collective Investment in Transferable Securities and Alternative Investment Funds. Activities scheduled by the CNMV, Spain’s stock-market authority, for 2017 The CNMV has published its Activity Plans for 2017. The following are of interest: CNMV in English: The initiatives the CNMV is developing to attract foreign investment include promoting English as a language for communicating with the CNMV. It will establish English access points, and it will become possible to communicate with the CNMV’s services in English. It will also expand the content of the English website and create specific proposals to allow the use of English in most administrative procedures with the CNMV. Review issue guidelines (equity, fixed income, securitization and promissory notes), to update them and speed up the processing of these transactions. Simplify the procedures for equity placements aimed at institutional investors, to speed up these transactions. Our articles Click on the following link to article “Spain: Tech project finance”, FOLLIA, Manuel; GRIGORIAN, Levón. International Financial Law Review, IFLR June 2017 Click on the following link to article “Banking Regulation 2017. Spain”. MÍNGUEZ, Fernando; DE LUISA, Iñigo; MÍNGUEZ, Rafael. Global Legal Insights, May 2017 Securitisation 2017: Spain. The International Comparative Legal Guide, BROS DOMPER, Héctor; BALDRIS ESTEBAN, Elisenda. Global Legal Group, April 2017 Project Finance 2017: Spain. The International Comparative Legal Guide, Spain, BROS, Héctor; RIBO, Jaume. Global Legal Group, April 2017 Lending and Secured Finance 2017: Spain. The International Comparative Legal Guide, FOLLIA, Newsletter Financing and Restructuring 10 Manuel; LERIDA GARCIA, María. Global Legal Group, April 2017 For additional information, please contact your usual contact person at Cuatrecasas. ©2017 CUATRECASAS. All rights reserved. This document contains legal information produced by Cuatrecasas. This information does not constitute legal advice. Cuatrecasas owns the intellectual property rights to this document. The information in this document cannot be subject to reproduction in any form, distribution, assignment or any other type of use, in its entirety or in part, without the authorization of Cuatrecasas.