Overview of restructuring and insolvency activityi Liquidity and state of the financial markets
Most of the measures implemented by the Spanish government to provide financial support to Spanish companies and individuals have been maintained during 2021 and will be available at least until June 2022. For example, the availability of loans backed by Instituto de Crédito Oficial (ICO) and Compañía Española de Seguros de Crédito a la Exportación (CESCE) provided to Spanish companies and self-employed individuals whose activity was affected by the covid-19 pandemic has been extended until 1 June 2022. Also, by means of several decisions of the Council of Ministers and following the authorisation issued by the European Commission, the Spanish government extended the term for Spanish companies to request public financing from the €10 billion recapitalisation fund managed by Sociedad Estatal de Participaciones Industriales (SEPI) (available to Spanish companies that are considered strategic) and the €1 billion recapitalisation fund managed by Compañía Española de Financiación del Desarrollo (COFIDES) (available to Spanish small and medium-sized enterprises (SMEs)) until 30 June 2022.
In addition, the moratorium enacted by the Spanish government to protect and financially assist debtors during the covid-19 crisis, which was aimed at avoiding insolvency proceedings (the insolvency moratorium), was extended until 30 June 2022 by Royal Decree-Law 27/2021, of 23 November 2021. Similarly, by means of the decision of the Council of Ministers dated 30 November 2021, the term to request the refinancing of ICO- and CESCE-backed loans under the Code of Good Practice, which was approved by means of Royal Decree-Law 5/2021, has been extended until 1 June 2022 to request tenor extensions and conversion of loans into profit participating loans and until 1 June 2023 to request debt write-offs.
Finally, in its meeting of 29 March 2022, the Spanish Council of Ministers approved Royal Decree-Law 6/2022 to implement urgent measures in the framework of the National Plan to respond to the economic and social impact of the war in Ukraine. A wide variety of measures and extensive regulations were implemented to provide financial support and to mitigate liquidity pressures resulting from the increase in the price of energy and other raw materials.ii Impact of specific regional or global events
The need to extend most of the financial measures relating to covid-19 described above until, at least, June 2022 reflects that the Spanish economy had not yet recovered to pre-pandemic levels in Q4 2021 and Q1 2022. Indeed, most Spanish companies are dependent on public financial assistance (mostly ICO- and CESCE-backed loans), which initial tenor would need to be compulsorily extended up to eight or 10 years without the need to demonstrate that borrowers' annual turnover has fallen by more than 30 per cent in 2020 compared with 2019, following the most recent amendment of the Code of Good Practice approved by means of Royal Decree-Law 6/2022.
With the elimination of such a requirement, the potential beneficiaries of the measures of the Code of Good Practice would increase substantially, and therefore the amount of principal instalments that Spanish companies will need to start paying will be reduced accordingly. But we cannot forget that the compulsory extension of the grace periods initially granted up to 24 months has not been included under the measures approved by Royal Decree-Law 6/2022 (other than for companies doing business under the agricultural, livestock, fishing and road transportation sectors).
Although Spanish companies will need to start repaying the principal amount of the ICO- and CESCE-backed loans, the high levels of inflation seen at the end of Q1 2022 in Spain, which started during Q3 and Q4 2021 but were very much increased by the effects of the war in Ukraine starting in February 2022, are having a significant impact on commercial margins and liquidity available for many Spanish companies. Indeed, the most recent financial projections published by the Bank of Spain2 reflect that the Spanish gross domestic product (GDP) will increase during 2022 by an average of 4.5 per cent (which is 0.9 per cent less than what was foreseen by the Bank of Spain in December 2021 and is miles away from the 7 per cent increase foreseen by the Spanish government for 2022) and that the average rate of inflation will reach 7.5 per cent during 2022.
The Bank of Spain has even reduced its GDP expectations for 2023 to 2.9 per cent and has warned in its latest Financial Stability Report (dated April 2022) that the number of Spanish companies under financial pressure would certainly increase if an increase of the production costs associated with high energy prices and a general increase of the interest rates is added to the current financial scenario.3
Simultaneously, the concentration of the Spanish banking system together with the low flexibility of Spanish banks in the restructuring process and the low levels of public financing granted so far by the rescue funds managed by SEPI and COFIDES should provide an opportunity for alternative lenders to increase their presence in the Spanish market to take a significant role in the financial restructuring that will come once the economy is stabilised and financial projections are more accurate.iii Market trends in restructurings
After several years in which the number of insolvency proceedings stabilised, covid-19 brought huge uncertainty about its impact for Spanish companies, in particular for SMEs, entrepreneurs and professionals.
It was expected that covid-19 would dramatically increase the number of insolvency fillings during 2020–2021. However, the measures enacted by the Spanish government to protect and financially assist debtors during the crisis were aimed, among other purposes, at avoiding insolvency proceedings by means of the suspension of the debtor's duty to file insolvency and of the creditors' rights for petition (recently extended to 30 June 2022).
As stated above, the withdrawal of public aid by the Spanish government and the European Central Bank, together with the high inflation levels and the foreseen increase of official interest rates, will likely increase the need of Spanish companies to be refinanced.
During the first half of 2022, we expect refinancing processes to be conducted mainly at the initiative of debtors, as the option for creditors to file for insolvency and the insolvent debtor's obligation to file for insolvency have been postponed until 30 June 2022. During such time, we will see restructuring transactions subject to current pre-insolvency legislation (the Spanish Insolvency Act (SIA), as amended by Royal Decree-Law 1/2020, of 5 May 2020, approving the Compiled Insolvency Statute (TRLC)), with possible access to company recapitalisation funds managed by SEPI and COFIDES. During this stage, we will also see the first renegotiations of the financing guaranteed by ICO or secured by CESCE following terms and conditions of the Code of Good Practice.
The end of the insolvency moratorium is expected to coincide with the approval of the draft bill transposing in Spain Directive (EU) 1023/2019 on Preventive Restructuring (the Draft Bill and the Restructuring Directive, respectively). From its entry into force (expected in the second half of 2022), new opportunities will arise for debt restructuring to provide a more central role to creditors, who will be able to benefit from more flexible pre-insolvency instruments with a broader scope, including the possibility of cramming down not only all types of creditors (financial, commercial and even holders of public law credits, subject to certain requirements) but also debtors. In addition, the aim of the Draft Bill is to promote the purchase of business units by providing greater legal certainty with regard to its scope and effects, as further explained below (see Sections II and III).
Significant transactions, key developments and most active industries
The crisis in Spain has severely affected all sectors. However, construction companies, real estate developers, retailers, manufacturers and some financial institutions have suffered the most.i CATA and CNA Group: restructuring agreement and court homologation
Cata Electrodomésticos SL (CATA) is the parent company of an international group of companies called CNA Group, whose activity consists of the production and commercialisation of home appliances. Following the acquisition of the business units of renowned Spanish home appliances brands, which failed to perform as expected by the group and went bankrupt, on June 2018, the group reached a court-sanctioned refinancing agreement. From late 2019, the company had difficulties complying with its business and viability plan, which were aggravated by the impact of the covid-19 pandemic and eventually led the company and its creditors to seek third-party specialised investors to fund the company.
During the last quarter of 2021 and the beginning of 2022, Cuatrecasas advised the investor that decided to finance the company, as well as the company itself, in designing the restructuring scheme to better allow for the short- and medium-term viability of CATA and the CNA Group, while preserving the rights of the rest of the stakeholders (not all creditors formally adhered to the refinancing agreement). The international character of the group, as well as the amount of intragroup securities, turned the restructuring process into a highly complex transaction that required multi-jurisdictional legal assistance. Rules on the content and processing of restructuring plans included in the Restructuring Directive, which would soon be transposed in Spain, were also taken into consideration throughout the whole process.
In January 2022, CATA and one of its subsidiaries filed their request for homologation of a refinancing agreement, with the support of over 90 per cent of their financial indebtedness (both total and secured financial indebtedness), and requested the court to extend its effects to holdouts. The court homologated the refinancing agreement on 17 March 2022 and declared the cramdown of all its effects to holdouts. Interestingly, the court not only promoted the extension of those effects expressly foreseen in the Spanish Insolvency Law but also, in the interest of the restructuring, other ancillary effects not expressly allowed for by law, such as the novation of securities. Thanks to this broad interpretation of the Spanish Insolvency Law suggested by Cuatrecasas and upheld by the court, the CATA Group's viability will become a reality.ii COEMAC Group (formerly Uralita): business unit sale
Cuatrecasas advised the COEMAC Group, formerly Uralita (whose ultimate parent was the listed company Corporación Empresarial de Materiales de Construcción), on selling its last operating business, namely a piping production unit, present in over 40 countries, which was developed by its subsidiary, Iberian market leader ADEQUA WS, S.L.U. This transaction represented the culmination of the COEMAC Group's divestment process, which began a few years ago. A share deal was impossible due to the contingencies affecting the company that owned the business, so Cuatrecasas designed, implemented and, finally, executed the transaction's strategy and structure, promoting an asset deal within the ongoing insolvency proceedings.
This is a highly innovative deal in Spain because of many technical aspects. First, the production unit was transferred at an early stage of the insolvency proceedings (right after filing for bankruptcy), which (1) streamlines the process, in contrast with transfers made during the liquidation stage of the proceedings; and (2) increases legal certainty, given the applicable legal remedies. Second, the structure of the transferred production unit was also innovative because it comprised not only ADEQUA's assets but also its parent company's assets; this required extending the scope of the concept of 'production unit' while promoting a joint and coordinated administration of the insolvency proceedings. Finally, we draw attention to the quick progress of the insolvency proceedings. The sale was finalised in less than six months.
Several economic aspects are particularly noteworthy. The transaction was valued at €45 million (including the financial, commercial, payroll, tax and social security debt attached to the production unit, which the acquiring company took on). Also, an additional compensation scheme was designed in case the acquiring company wished to divest quickly. Regarding employment, the designed sale included several guarantees to maintain all jobs of approximately 300 employees who were transferred along with the production unit.