The key players on the lenders’ side remain local banks and a small group of international banks that have traditionally been active in the Spanish market. However, the trend that commenced some years ago has consolidated and deals involving alternative funds, debt funds, direct lenders and other non-banking lenders have continued to increase over the past year. The price remains marginally higher, although alternative lenders are gradually offering competitive pricing that, in many cases, is comparable to banks’ prices.
On the other hand, agreements offered by alternative financiers tend to be covenant-lite, offering fewer restrictions and more flexibility to borrowers – filling the gaps left by banks after the 2008 financial crisis (eg, financing the acquisition of land for real estate development, providing bridge facilities or financing opportunities resulting from the COVID-19 pandemic). It appears that direct lending is here to stay and the traditional banking system is evolving to accommodate and compete with this new actor.
On the borrowers’ side, acquisition financing is normally structured through a newly incorporated SPV, or bidco, that borrows money from the lenders (without recourse to its shareholders). The SPV’s shareholders may be corporates or private equity funds, depending on the nature of the target company or asset. However, the principles under which acquisition financing is structured remain the same regardless of the identity of the ultimate sponsor.
Once the initial uncertainty caused by the COVID-19 health crisis lessened, acquisition financing recovered its level of activity along with M&A deals, which were reactivated or initiated.
Lenders took a more conservative approach when analysing transactions but, ultimately, financings were closed. In terms of documentation, depending on the deal, the authors have noticed that some covenants (especially those focused on cash management) were tightened in order to ensure debt service. They have also seen an increase in the use of grace periods, deferring the first instalment of the underlying loan for 18 or 24 months, seeking to avoid a payment default during the period of uncertainty resulting from the COVID-19 pandemic, granting clean-up periods and strengthening the security interests.
While administrative approvals are not required for financing transactions, a screening mechanism was nevertheless put in place at the beginning of the pandemic whereby acquisitions of Spanish companies operating in specific critical sectors by foreign investors (mainly non-EU/European Free Trade Association, although restrictions may, in some cases, even apply to any non-Spanish investor) required prior authorisation from the Council of Ministers. This has indirectly affected the timing of M&A deals and, consequently, the financing transactions. But again, under the new normal, acquisition finance has proven to be resilient.
Finally, it is worth mentioning that the Spanish government activated in March 2020, and subsequently extended, the insolvency moratorium (ie, Spanish debtors have been temporarily exempted from the legal obligation to file for insolvency within a maximum of two months as from the date they became insolvent) until 31 December 2021. It remains uncertain whether this measure will allow companies to restructure their debt or find liquidity by the deadline or whether it will provoke an avalanche of insolvency petitions during the first months of 2022.
Acquisition finance transactions in Spain are similar to those in other Continental European countries, although some particularities of Spanish law tailor the structure of the transaction and the finance documents differently. They are structured through the lending of funds to an SPV for the purposes of partially financing the acquisition price of the share capital or assets of a target company (“Target”). Acquisition finance may also be used to refinance the Target’s existing debt by on-lending or contributing the funds to the Target or by the Target assuming a refinancing facility or tranche. The acquisition facility is then repaid, either simultaneously with the acquisition or regularly with the cash flows generated by the Target based on a business plan, which are subsequently upstreamed to the SPV through dividend payments, a share capital reduction, premium (or other reserves) distributions, loans and/or management fees, or through a debt push-down of the acquisition debt to the Target through a merger with the SPV (in all cases subject to financial assistance restrictions and conflict-of-interest restrictions, which are key for structuring an acquisition finance transaction in Spain).
The use of Spanish law to govern acquisition finance documentation has become the rule; only massive transactions led by large private equity firms and syndicated internationally (especially throughout European lenders) are subject to the law of England and Wales.
In any event, acquisition finance transactions governed by the law of England and Wales, when the borrower or the Target is a Spanish entity, require significant input from Spanish lawyers in many critical areas, such as corporate law (eg, financial-assistance rules, corporate benefit), insolvency regulations, security packages and access to expedited enforcement procedures in Spanish courts. In addition, the current legal situation following Brexit and in which EU member states do not directly recognise the judgments of UK courts (since the UK is not a member state and has not yet reached an agreement with the EU on mutual recognition) necessitates a full assessment on whether the law of England and Wales is advisable in this situation or whether it is preferable to opt for Spanish law when the borrower or its main activity or assets are located in Spain.
The Spanish market is used to Loan Market Association (LMA)-based finance documents, especially when the facility agreement is drafted in English (regardless of whether the facility is governed by Spanish law or the law of England and Wales). Despite the LMA launching a Spanish-language translation, Spanish law-governed multicurrency term and revolving facility agreement for Investment Grade, it is only used sporadically.
Having said that, there are more transactions that do not follow the LMA form of documents but rather the form of the lenders’ counsel, which is relatively similar for most Spanish law firms. However, many of the customary features of Spanish acquisition financing documentation replicate – or are influenced or based on – LMA standards because the banking industry demands it. In addition, despite not being used for a particular transaction, when there exists a deadlock on a specific point in a negotiation, it is quite common to invoke the LMA as the standard in order to find common ground and reach a compromise.
Loan agreements in Spain are drafted in Spanish or English, with equal frequency. This is due to the increasing tendency to draft in English, either because non-Spanish financing entities form part of the syndicate or due to the borrower’s sponsor being a non-Spanish entity or fund.
However, drafting an agreement in English that is governed by Spanish law and subject to Spanish courts (or subject to the law of England and Wales and the courts of the same but containing special enforcement provisions under Spanish courts if there are Spanish obligors under the loan) also has its downsides. It requires obtaining a Spanish translation (preferably a sworn translation in order to avoid being challenged in court by the counterparty) for the purposes of initiating litigation in Spanish courts.
Ancillary agreements, such as the security package, are occasionally drafted in double-column (Spanish and English) format so that the agreement signed by the parties already contains the Spanish text approved by the parties in the event that proceedings are initiated before Spanish courts (or are simply drafted and executed in Spanish, which is the most common approach since Spanish drafting is mandatory for mortgages and pledges without displacement where registration is required, as explained below).
In the Spanish market, all legal opinions were traditionally given by the lenders’ counsel. However, market practice is changing and it is now quite common for the lenders’ counsel to prepare an opinion solely on the legality, validity, enforceability and binding nature of the finance documents, while the borrower’s counsel is required to give an opinion on the capacity, authority, incorporation and non-insolvency of the borrower.
Ultimately, this represents a more balanced distribution of responsibility whereby the lenders’ counsel is required to issue an opinion in connection with the finance documents for which it usually holds the pen while the borrower’s counsel is in charge of all company-related matters.
Senior facilities generally consist of a variety of lending mechanisms (eg, term loans, revolving loans, ancillary facilities, letters of credit, guarantees) that may be utilised by the bidco to finance the acquisition of the Target and/or by the Target itself or its subsidiaries to repay existing debt or finance working capital needs of the Target’s group, depending on the Target’s business.
Each of the facilities has different terms for utilisation, margin, maturity, interest rate, fees, etc. Syndication is also common, although borrowers normally restrict access to lenders who are not subject to withholding tax (ie, qualifying lenders).
Among senior facilities, lenders often provide a facility for the working capital needs of the Target or its group companies. Alternatively, ancillary facilities permitted under senior facility agreements are provided by syndicate members on a bilateral basis with the Target or local subsidiaries to support their own local business. These working capital facilities (for example, performance bonds or on-demand bank guarantees required by law in connection with tender offer financing) are usually provided by banks. Direct lending in the Spanish market does not (yet) have the capacity to provide these facilities.
Senior-term facilities granted to the Target would be structurally senior to those granted to the bidco given that they are closer to the source of the cash flows. Nevertheless, the senior facility agreement and the intercreditor agreement usually correct this structural subordination by requiring that the facility agent distribute the proceeds pro rata among the senior lenders.
The authors are finding again mezzanine facilities in the Spanish markets. Initial mezzanine lenders are usually banks that also participate in the senior syndicate, although the authors are starting to see alternative lenders participating in such instruments. Mezzanine facilities are a portion of senior acquisition facilities and consist of term loans to be utilised for the purpose of acquiring the Target. As mezzanine facilities are junior debt to the senior facilities, they are structured as bullet repayments, have longer maturity dates and, if secured, are on a junior-ranking basis. Prepayment events are aligned with those of the senior debt but mezzanine loans are only paid after the discharge of the senior facility. However, in other respects, the mezzanine facility mirrors the senior facility.
Although not essential to Spanish structures, mezzanine facilities may also be structurally subordinated to senior facilities. Structural subordination may be achieved by creating a holding company, either in Spain or abroad (Luxembourg has recently been the preferred location), that owns 100% of the bidco and receives the mezzanine financing to subsequently transfer the funds to the bidco through intercompany loans.
Bridge facilities have been used when the acquisition price must be paid and the Target’s debt refinanced before a complex structure can be set up. Bridge facilities are also common in tender-offer acquisition finance structures. Stepping up the interest rate of bridge facilities or their short maturity will normally generate an incentive for the borrower to refinance.
Bridge facilities are common in M&A in which the competitive phase is short and signing and closing are simultaneous (or involve a very short lapse of time).
It is uncommon to find an acquisition financed through the issuance of bonds, including high-yield bonds. As bonds are normally listed (and due to their issuance and funding mechanics), they are not a suitable instrument to finance an acquisition. M&A usually require a certain-funds commitment as at the signing date and for the period until the closing date. Those commitments and the agility required at closing to fund the payment of the purchase price make them less attractive for purchasers. However, it is not uncommon for bonds, particularly high-yield bonds, to be used to refinance an acquisition facility (normally structured in the form of a bridge facility).
Unlike bonds issued on the open market, private placements are not exceedingly rare, although private placement is still uncommon for acquisition finance. It is typical of investors who, as a result of internal policies or regulations, are obliged to invest in bonds or notes rather than loans (the concept of a loan note is alien to the Spanish market) and they are usually required to be listed (several European stock exchanges are being used for such purposes due to the flexibility and lack of bureaucracy).
Bonds in general, whether private placements or otherwise, usually offer a long-term bullet repayment scheme that, on one hand, is particularly attractive from the borrower’s financial perspective and, on the other hand, allows those investors to differentiate from banks that require repayment calendars for long-term senior financing.
Asset-based financing is typically used in specific sectors such as aviation, logistics, shipping and real estate. In the context of M&A, this type of financing is used depending on the object of the acquisition, in particular when the asset or the business is directly acquired, rather than the company owning it. One of the main advantages of acquiring the asset rather than the business is avoiding the financial assistance restriction, which is explained in detail in 5.5 Financial Assistance, but transaction taxes or costs and security-related taxes may be higher. Asset-based acquisition financing is typically secured by the relevant asset, by means of a mortgage if the asset is a real estate property, plane or ship (the type of mortgage varies depending on the asset) or through a pledge if the asset is composed of credit rights arising from agreements (eg, sales of non-performing loan portfolios). As regards the type of security, please refer to 5. Security.
In general, the rights of lenders in a syndicate are mutually independent. Thus, each bank has a separate claim against the borrower that would, in principle and unless otherwise stated in the relevant finance documents, allow each lender to individually take any action to protect its rights. As this is a risk for the transaction, the facility agreement and especially the intercreditor agreement seek to limit lenders’ freedom of action and ensure that most decisions or actions taken by the lenders are appropriately co-ordinated.
Unlike in LMA practice, it has been market standard in Spain for lenders to have the individual right to terminate and accelerate their participation in the facility upon (i) the occurrence of an event of default that is not cured and (ii) the majority of lenders failing to accelerate the facility during an agreed term (usually one month). A lender accelerating its participation would be entitled to seek seizure of the borrower’s assets and enforce the personal guarantees, but not the security interests (which, in all cases, requires the consent of a majority of lenders). Requiring a majority of lenders’ consent to enforce personal guarantees is increasingly popular (especially if guarantees are granted by subsidiaries of the borrower), thus leaving the recourse of the individual lender exclusively vis-à-vis the borrower. In addition, such termination rights can also be subject to stricter rules established in the intercreditor agreements.
This individual right to terminate and accelerate traditionally applied in respect of all events of default; however, of late it has been limited to major events of default, such as payment default, breach of financial covenants and insolvency-related events (although the acceleration of the loan based solely on insolvency is restricted by the Spanish Insolvency Law). In addition, specific Spanish lenders have recently come to consider that including this individual termination right in the loan may backfire, especially in syndicates with a significant number of lenders and of varying natures. Thus, the same lenders that traditionally defended that right are now pushing to remove it in pursuit of the corresponding LMA standard and they are winning the battle.
Intercreditor agreements in Spain are similar to those in other jurisdictions, although certain features established in the Spanish Insolvency Law must be taken into account (eg, debtors are usually not party to them to avoid any risk of claw-back if a Spanish debtor is a party to it).
Spanish-law intercreditor agreements require tighter co-operation between creditors to accelerate and enforce security and personal guarantees since parallel debt is not recognised under Spanish law and the agent is rarely empowered by the creditors to enforce on their behalf (which, in the end, requires a co-ordinated enforcement strategy from all or a majority of creditors), as explained in 5.7 General Principles of Enforcement.
Intercreditor agreement importance (and complexity) increases when creditors of disparate natures are party to it. As such, when the acquisition is financed through a combination of bank financing and bonds (which usually have longer maturity periods), the negotiation of intercreditor issues levels up. Ultimately it is a matter of the ranking commercially agreed – pari passu or bank financing being senior to the bond (or vice versa) – and whether the majorities combine both types of creditors or they are calculated separately.
In the Spanish market, hedging liabilities are usually pari passu to all senior liabilities and therefore treated as senior liabilities for all purposes. It is nevertheless common to find that hedging termination rights are limited to major events of default (non-payment, insolvency, etc) or to prior acceleration of the senior facility.
Hedging facilities are usually documented under separate master agreements, attaching schedules that include specific provisions to ensure that the master agreement coincides with the main terms of the financing agreement (eg, representations and warranties, covenants, events of default). Two types of master agreements are used in Spain: the International Swaps and Derivatives Association (ISDA) master agreement and the Spanish law-governed Contrato Marco de Operaciones Financieras, or CMOF, which was updated in 2020 by the Spanish Private Banks Association as the local master agreement preferred by local banks.
The following security interests can be created under Spanish law.
Pledges are created over movable assets and possession of the collateral must be transferred to the pledgee. Standard pledges include:
Pledges over the shares of the Target and shareholder loans granted to the Target or bidco are the fundamental security taken in acquisition finance transactions, unless it is a real estate deal, in which the key security will be the real estate mortgage.
Real Estate Mortgages
Real estate mortgages are created over any real estate property. Real estate mortgages generate significant costs and taxes, including stamp duty (discussed below), notarial fees and land registry fees. The total amount secured by the mortgage is used as the calculation base for these costs.
Spanish law establishes the possibility of creating a floating mortgage, which is a security interest created over a specific real estate asset to secure an indefinite number of liabilities up to a maximum cap, which provides an important advantage in multiple-debt transactions. Floating mortgages can only be granted in favour of financial institutions and public authorities (and in the latter case, exclusively to guarantee tax or social security receivables). The floating mortgage deed must include a description of the actual or potential secured liabilities, the maximum mortgage liability (which will cover all obligations without allocating mortgage liability to each), the term of the mortgage and the method of calculating the final secured amount and payable balance.
Floating mortgages are not advisable for facility agreements where the syndicate of secured lenders may be comprised, at any time, of non-banking institutions since they will not be legally entitled to benefit from the floating mortgage.
Chattel Mortgages and Pledges without Displacement
Chattel mortgages can only be created over business premises, cars, trains and other motor vehicles, planes, machinery and equipment, and intellectual and industrial property. There is a specific type of mortgage for ships (naval mortgage).
Pledges without displacement can only be created over harvests from agricultural plots, livestock on plots, harvesting machinery, raw materials or merchandise in warehouses, and credit rights held by the beneficiaries of administrative contracts, licences, awards or subsidies, provided that this is permitted by law or the corresponding granting title, and over receivables (including future receivables) not represented by securities and not qualifying as financial instruments.
These security interests are seldom used in Spain (except for the naval mortgage in ship financing).
Financial Collateral Arrangements
Financial guarantees are governed by Royal Decree-Law 5/2005, which implements in Spain Directive 2002/47/EC of the European Parliament and the Council of 6 June 2002 on financial collateral arrangements.
Financial guarantees are those that secure the fulfilment of principal financial obligations. Although the meaning of this expression has been debated among scholars, the most common interpretation is that obligations pursuant to nearly any financing document can be secured by these financial guarantees. Financial collateral can consist of cash, securities and other financial instruments or over credit rights held against financial entities (eg, derivatives). Thus, it may include shares issued by public limited liability companies (sociedades anónimas) – although this is disputed by some scholars in connection with non-listed shares since they are not technically securities – and credit rights arising from the balances in bank accounts or deposits (cash).
This type of security interest (i) may benefit from separate enforcement if the debtor becomes insolvent (ie, not being subject to the insolvency proceedings) and, (ii) as regards pledges over shares, they may be enforced through a private sale (not at a public auction, as is the general rule under Spanish law) conducted by the depository of the shares or through the pledgee’s direct appropriation of the shares, breaching the general Spanish law principle under which any form of enforcement of a security agreement that permits the holder of the security interest to directly and immediately acquire the secured asset is not allowed.
The only two requirements that must be met for a lender to be entitled to enforce through appropriation of the collateral are that (i) the parties to the financial collateral arrangement have agreed in the agreement to permit that enforcement mechanism and (ii) the enforcement is made at fair market value (which, in the case of listed shares, is easy to determine by reference to the listed price of the shares during the agreed period of time, although, in the case of non-listed companies, that usually requires developing valuation rules based on an independent expert’s determination of the collateral’s market value).
Ordinary pledges as well as financial collateral arrangements are normally executed through a public document (either a public deed or notarial policy) before a Spanish notary public.
Real estate mortgages must be executed through a public deed before a Spanish notary public and registered with the land registry where the asset is located.
The chattel mortgage must be executed through a public deed before a notary public and registered with the Movable Assets Registry.
Pledges without displacement must be executed in a public document (either a public deed or notarial policy) before a notary public and registered with the Movable Assets Registry. However, they are normally executed through notarial policy (póliza notarial) in order to avoid stamp duty (which is only triggered if the pledge is granted through a public deed). A notarial policy is, however, restricted by law to banks and savings banks; hence, not every entity acting as pledgee (ie, alternative lenders) may use this public instrument.
As briefly outlined above, ordinary pledges do not require registration with a public registry; however, if the pledged asset is a credit right vis-à-vis a third party or the share capital of a company, it is customary to notify the creation of the pledge to that third party (so as to ensure that the lender may require from that third party direct payment upon enforcement) or to the relevant company or the depositary of shares (so that the relevant book reflects the existence of the pledge over the shares pledged).
Real estate mortgages, chattel mortgages and pledges without displacement do require registration to be perfected, as outlined above. Registration is an easy process: the notarised security document is filed with the corresponding registry (together with, if applicable, the document evidencing the payment of the stamp duty) and then the registrar has, as a general rule, 15 business days to examine the document and accept or reject the registration. Registration may only be rejected based on formal defects and those defects are, as a general rule, capable of being cured through granting a deed of rectification. The registrar notifies its resolution to the notary who attested the relevant security agreement. It is generally accepted to introduce an event of default if the security is not registered within three or four months.
Spanish law allows upstream or cross-stream security or guarantees (indistinctly speaking between them). However, in acquisition finance, the main restriction on upstream security results from the financial assistance rule explained below. The other limitation to be analysed is the corporate benefit of providing upstream security (especially when the entity providing the security or guarantee has minority shareholders in its share capital).
The granting of such upstream or cross-stream guarantees may breach the fiduciary duty that directors and controlling shareholders have vis-à-vis the company, which must be analysed on a case-by-case basis. Minority shareholders’ rights should not be prejudiced by upstream or cross-stream guarantees for the benefit of the parent of the group. Spanish banks are normally reluctant to accept any language that limits the scope of the guarantees or security interests due to corporate-benefit issues. The key issue is whether the general good of the group is an acceptable basis for concluding that there exists a corporate benefit; unfortunately, no regulation or case law clearly answers this question. Nevertheless, it is reasonable to conclude that a transaction that is in the interest of the group may also be construed to be in the interest of the company providing assistance in so far as, over a period of time, the resources and support from the rest of the group can also benefit the company providing the assistance (eg, through intercompany loans or by receiving guarantees to secure its own obligations). As a practical rule, directors are less likely to face liability when a company has a single shareholder or is controlled by a limited number of shareholders and they all agree to the provision of assistance.
With regard to downstream guarantees, the corporate benefit should be easier to evidence, although a case-by-case analysis is also advisable.
Under Spanish law, companies are generally prohibited from providing financial assistance (ie, the Target and its group are not allowed to provide financial assistance or guarantees, or security guaranteeing the acquisition financing). Breaching this prohibition could entail both liability for directors and the nullity of the transaction by virtue of which the financial assistance was provided (which will imply that security and guarantees will be null and void).
Acquisition finance transactions have been structured to comply with the restrictions on financial assistance (other than creating separate debt tranches between the bidco and the Target) by implementing a debt push-down through a forward merger. As from 2009, however, a specific regulation applies to forward mergers, pursuant to which, if multiple companies merge and any has received financing within three years preceding the acquisition of a controlling stake in, or essential assets of, any of the companies that form part of the merger, specific protective measures apply. Among others, directors must issue a report justifying the merger and an independent expert must issue a report confirming that the transaction is reasonable and that there has been no financial assistance. This provision has been subject to significant debate, especially in relation to the scope and effects of the report issued by the independent expert. Since the expert is an accountant or auditor (not a lawyer), there is some consensus that the expert should analyse the economic aspects of the transaction (business reason and plan to repay the acquisition debt) rather than determining whether there is financial assistance from a legal standpoint.
Naturally, asset deals do not entail financial assistance risk.
Directors and shareholders have a duty to avoid conflicts of interest. Specifically, (i) directors are obliged to (a) refrain from participating in discussions and votes on agreements and decisions in which the director or any related persons may have a direct or indirect conflict of interest, and (b) adopt the necessary measures to avoid situations in which their own interests or the interests of any other third party may conflict with the company’s interests and their duties to the company; and (ii) a shareholder will not be entitled to exercise its voting rights at general shareholders’ meetings when the resolution to be passed is (a) to provide it with any type of financial assistance, including the provision of security interests or personal guarantees in its favour, and (b) to release it from its obligations deriving from the duty of loyalty as director.
On a separate note, Spanish law does not recognise the concept of a “security trustee” who is the beneficial holder of – and enforces the security package on behalf of – the lenders from time to time. Thus, legal title over a security interest must be held by the lender-of-record under the secured facility. Furthermore, any parallel debt governed by Spanish law is unlikely to be considered valid since, under Spanish law, contracts and obligations are only valid and enforceable if they are based on a valid and legitimate reason. In view of the above, lenders will need to provide a notarised and (in the case of foreign lenders) apostilled power of attorney in favour of the security agent to enable them to take the security or lead a co-ordinated enforcement process on behalf of all the lenders.
According to Spanish law, a secured party is neither entitled to appropriate the collateral encumbered by a pledge or a mortgage nor to dispose of the collateral as it deems fit. The appropriation of collateral by the creditor (pacto comisorio) is generally prohibited under Spanish law. Accordingly, a creditor must initiate the enforcement of the security interest and use as payment of the debt the proceeds obtained from the sale of the collateral at a public auction or through other proceedings aimed at ensuring that a fair value is obtained from the collateral’s sale. Depending on the case, these proceedings are monitored by a court or notary public. The sole exceptions to the prohibition of the pacto comisorio are financial collateral arrangements and pledges of credit rights.
In general, creditors are entitled to initiate three actions:
These procedures are aimed at selling the corresponding asset at a public auction and are either monitored by a court or by the notary public. Special enforcement procedures are contemplated in cases where RDL 5/2005 does not apply.
If the creditor benefits from a real estate mortgage, the creditor is entitled to choose between multiple alternative proceedings provided for in the Spanish Civil Procedure Law to judicially obtain satisfaction of a secured debt:
In addition, if established in the public deed of mortgage, the creditor is entitled to seek recourse in out-of-court notarial proceedings (procedimiento notarial extra-judicial).
After a debtor is declared insolvent by the corresponding Spanish court, the enforcement of security interests (eg, mortgages, pledges) affecting assets owned by the debtor and devoted to its professional or business activities (presumably most of the debtor’s assets) will be stayed, as a general rule (which has its exceptions) for a maximum of one year since the declaration of insolvency without initiation of liquidation proceedings. Enforcement proceedings of financial collateral arrangements should neither be affected nor stayed by the debtor’s declaration of insolvency.
In the authors' experience, it is common to discuss in the security agreements whether the mere occurrence of an event of default is sufficient grounds to initiate the enforcement or whether the loan agreement is required to be accelerated in order for the lenders to be entitled to enforce the security. There is no general rule but acceleration may be acceptable for security interests such as the pledge over shares or real estate mortgages over key assets; however, pledges over bank accounts or receivables should be enforceable upon the occurrence of a payment event of default since the type of pledged asset allows for a partial enforcement.
The bidco, the Target and each of its material subsidiaries will usually provide, to the extent permitted by Spanish law (specifically, the financial assistance prohibition and conflict-of-interest restrictions), a first-demand guarantee or other type of personal guarantee in respect of the fulfilment of the obligations assumed by the bidco and/or the Target under the financing documents.
A personal guarantee (fianza) may be created by an agreement between the creditor and the guarantor or by operation of law. In order to facilitate enforcement of a personal guarantee against a Spanish company, personal guarantees are usually documented in notarial deeds where the guaranteed amount is clearly described and stated or, at least, it can be clearly determined (by reference to the guaranteed obligation). In this regard, a liquidation clause (pacto de liquidación) that establishes a proceeding to calculate the outstanding debt is usually included, although a reference to the liquidation clause contained in the relevant financing documents is normally included in order to afford access to the secured party to brief enforcement proceedings. Otherwise, declaratory court proceedings should be initiated in order to determine the amount to be called thereunder, with the consequent delay in enforcement.
Under Spanish law, a guarantor cannot be obliged to pay to the beneficiary of the guarantee until all the assets of the debtor have been realised (beneficio de excusión). This benefit for the guarantor does not apply in the following cases:
Additionally, a guarantor may raise against the creditor all the exceptions and defences corresponding to the debtor and that are inherent to the debt.
The guarantee is an agreement that is ancillary to the main obligation. Therefore, under Spanish law, the extinction of the main obligation (ie, the obligations assumed by the borrowers under the senior, second lien and mezzanine facilities agreements) causes the automatic termination of the guarantee. Furthermore, the guarantee may be terminated due to any of the general causes of termination of contractual obligations, in which case the main obligation will survive. Also, under Spanish law, the guarantor cannot be liable for more than the main debtor is liable for.
Specific acts of a creditor release the guarantor from its duties. For instance, if the creditor extends the term of payment in favour of the debtor without the guarantor’s consent, the guarantee will be terminated pursuant to Article 1,851 of the Spanish Civil Code. Therefore, any amendments to the senior, second lien or mezzanine facilities agreements (including a refinancing thereof) normally entail a ratification of the guarantees by the relevant guarantors.
First-demand guarantees, which are not regulated by law, are abstract and independent from the main obligation, creating a primary liability for the guarantor. These guarantees are not affected by the particulars of the main obligation between the creditor and the debtor, and, therefore, are not subject to any beneficio de excusión. Lenders usually request that all personal guarantees created under the finance documents be first-demand guarantees.
See 5.4 Restrictions on Upstream Security, 5.5 Financial Assistance and 5.6 Other Restrictions.
Guarantee fees are not required under Spanish law. In any case, the guarantee should not be considered granted "for no consideration" if it is given in the interest of the group (eg, the resources and support from the borrower and the rest of the group also benefit the company providing the guarantee).
In the event that a Spanish company becomes insolvent (concurso de acreedores), its claims will be divided into separate categories. The last category to be paid (after unsecured claims are fully discharged) is subordinated claims. It is highly unlikely that subordinated claims will be paid within insolvency proceedings.
The list of subordinated claims is a numerus clausus pursuant to the Spanish Insolvency Law. One is equitable subordination, defined as any claim against the debtor held by legal or natural persons who qualify as “specially related” to the debtor. This category includes shareholders with a stake of 10% in the debtor (reduced to 5% if a listed company) when the claim arose. For example, a loan made by a shareholder holding, at the time when the loan was granted, 10% or more of the share capital of a non-listed company would be classified as a subordinated claim.
Other claims that fall within the “specially related” category are those held by formal (de jure) directors or shadow (de facto) directors and claims held by companies of the insolvent entity’s group.
There also exists a rebuttable presumption that any person who acquired a credit against the insolvent debtor from any of those related parties within a two-year period from the commencement of the insolvency proceedings is also considered a related party for insolvency law purposes.
If the debtor becomes insolvent, any act carried out or agreement entered into by the debtor within the two years preceding its declaration of insolvency can be clawed back by the court if the receiver can prove that the action or agreement was “detrimental to the insolvency estate”, even in the absence of fraudulent intent (if fraud exists, civil rescission may be exercised and the look-back period is increased to four years). As a general rule, the creditor will be entitled to exercise the claw-back action if the receiver does not seek rescission within two months following the date of the creditor’s written request to that end.
Although the Spanish Insolvency Law does not define “detrimental”, it is possible to conclude that, if the actions are justified (ie, the transaction was the most feasible alternative to preventing further deterioration to the insolvency estate), the transaction should not be considered detrimental to the insolvency estate and should not be subject to rescission.
Likewise, actions and transactions that adversely affect the par condicio creditorum may be considered detrimental (ie, actions, agreements or transactions that, while benefiting some creditors, reduce the likelihood of others being paid) even if the debtor’s assets are not reduced as a consequence of those actions. Whether an action, agreement or transaction is detrimental to the insolvency estate requires a case-by-case analysis.
The Spanish Insolvency Law provides some examples of detrimental actions, when it:
(i) is made for no consideration;
(ii) is a disposal for valuable consideration to a “specially related” party to the debtor;
(iii) includes the creation of new security interests to guarantee existing debt or new debt that substitutes any existing debt; or
(iv) constitutes a prepayment or any similar act of extinction of secured obligations before maturity.
The presumption under (i) cannot be rebutted and actions or transactions carried out for no consideration will be rescinded, except for business donations without consideration (liberalidades de uso) and payments or other acts of extinction of future obligations, unless secured by an in rem security, in which case the general presumption rule set out in (iv) above applies.
The remaining presumptions are rebuttable. Actions taken in the ordinary course of business under normal circumstances may not be rescinded; Spanish courts nevertheless construe this exception restrictively.
The granting of downstream, upstream and cross-stream security interests or personal guarantees could be subject to claw-back if the guarantor becomes insolvent within the two years following the delivery of the guarantee and the guarantee is considered “detrimental” to the guarantor. While downstream guarantees are likely to entail a benefit for the parent providing the guarantee (such as the expectation of dividend flows or increase in the value of the subsidiary), the position related to cross-stream and upstream guarantees is not as straightforward. Nevertheless, some recent court rulings, due to the existence of a group interest and on the basis of the effective consideration theory described above, have not deemed this type of guarantee a donation or action for no consideration, as consideration must be taken into account in the context of the group as a whole rather than as each of the companies of the group individually. However, this line of reasoning is not undisputed and risk-free, although it is an improvement and has cleared the path to defend personal guarantees based on the benefit for the whole group.
Finally, security and guarantees provided in the context of qualifying “refinancing agreements” (acuerdos de refinanciación) that achieve a minimum level of support from creditors and comply with specific requirements or are endorsed by the courts (homologación judicial) are protected against claw-back risk. The Spanish legal framework governing refinancing agreements has been used extensively over the past six years. A new consolidated text of the Insolvency Law entered into force in September 2020 (which included technical adjustments and recent case law) but a deeper reform of the Insolvency Law, and, in particular, of the pre-insolvency restructuring regime, is expected (with enthusiasm) from the transposition of the Directive (EU) 2019/1023 on preventative restructuring frameworks.
According to Spanish law, stamp duty (on notarial documents) is triggered when a public deed (escritura pública) or a notarial minutes (acta notarial) is granted with economically valuable content and is (i) eligible to be registered with a public registry (eg, the land registry or commercial registry) and (ii) not subject to transfer tax, capital duty or inheritance and gift tax.
The costs and taxes arising from the creation of in rem rights documented in a public deed or notarial minutes that require registration with a Spanish public registry (such as a real estate mortgage) could then be significant. Stamp duty (ranging from 0.10 to 3%, depending on the autonomous region), notarial fees and Land Registrar fees – which are charged on a sliding scale – are all linked to the amount secured by the mortgage (ie, principal, ordinary interest, default interest and costs).
Furthermore, (i) specific guarantees granted by persons who are not engaged in business activities (eg, natural persons) may trigger Spanish transfer tax (typically 1% of the secured amount) for the guaranteed party, and (ii) specific promissory notes and cheques may also be subject to stamp duty (generally at a 0.3% rate on the face value of the specific commercial instrument). These rates may change depending on the specific autonomous region.
In general, interest payments from a Spanish source are subject to withholding tax at the current rate of 19%. Specific exemptions or reductions may apply to such withholding obligations depending primarily on the lenders’ particular circumstances and tax residence. The actual taxation and withholding requirements applicable in Spain must be determined on a case-by-case basis.
Having said that, if the lender is the beneficial owner of the Spanish-source income and is (i) a Spanish credit entity, (ii) a Spanish branch of a foreign credit entity (validly registered with the Bank of Spain), (iii) an entity resident in an EU or EEA (with a tax information exchange agreement with Spain in the latter case (eg, Iceland and Norway)) member state not acting through a country or territory considered a tax haven pursuant to Spanish law or through a permanent establishment located outside the EU (or EEA, as indicated), or (iv) an entity resident in a jurisdiction that has entered into a double taxation treaty with Spain that contains an exemption for interest payments and is fully entitled to benefit from that treaty, the interest payment should be exempt from withholding tax in Spain. Note that, for these purposes, EU residents and treaty lenders must (i) not operate a business in Spain through a permanent establishment with which that lender is effectively connected and (ii) obtain a valid and in-force certificate of tax residency in their specific country of residence (within the meaning of the tax treaty, if applicable). The certificate should be provided in a timely manner to the borrower before any payment of interest is due or made (whichever occurs first).
Therefore, although there is no legal definition of the term, these categories of lenders are usually referred to as qualifying lenders. Beneficial owner status (including in the case of the EU/EEA lender exemption) must also be carefully reviewed in light of the ECJ decisions of 26 February 2019 (in cases C-115/16, C-118/16, C-119/16 and C-299/16, N Luxembourg I et al, and cases C-116/16 and C-117/16, T Danmark et al) and the resolutions subsequently issued by the Spanish High Tax Court.
Since 2012, Spanish law has had no thin-capitalisation rules or restrictions on debt financing, as these rules were substituted by the interest deduction barrier rules set out below. However, it is advisable to apply an arm’s-length thin cap ratio for the financing of Spanish companies by related parties, something that must be analysed on a case-by-case basis (as the former 1:3 equity-to-debt ratio is not a safe harbour any more).
The deductibility of financial expenses is subject to the following limits under Spanish tax law.
Potentially Abusive Financing Schemes
Spanish law excludes the deductibility of financial expenses that arise from debts contracted with other entities that belong to the same commercial group – within the meaning of Article 42 of the Spanish Commercial Code and regardless of the residence of the companies and the obligation to formulate consolidated financial statements – when such debts are intended to finance (i) the acquisition of shares of any type of entities from another entity in the group or (ii) a contribution (or increase) to the share capital or equity of other entities in the group; unless it is proved (both in (i) and (ii)) that there are valid and sound economic and business reasons for such transactions.
The corresponding regulations do not define “sound business reasons” for these purposes, but the preamble to the law introducing this limitation states that a group restructuring that is the direct consequence of an acquisition from third parties (which could include specific debt push-downs) or situations in which the acquired companies are actually managed from Spain can be deemed reasonable from an economic perspective.
Besides this limitation, Spanish law provides that, in the event that the lender and borrower are part of the same commercial group – within the meaning of Article 42 of the Spanish Commercial Code and regardless of the residence of the companies and the obligation to formulate consolidated financial statements – interests generated by profit-sharing loans are not deductible as this interest is considered a payment from the equity.
Furthermore, financial expenses deriving from hybrid mismatches (eg, generating a double deduction or a deduction without inclusion in specific cases, pursuant to Council Directive (EU) 2017/952 and Council Directive (EU) 2016/1164, and as implemented in Article 15 bis of the Spanish corporate income tax law), either with related parties or incurred upon a structured arrangement, are not deductible either.
Finally, the Spanish tax authorities have scrutinised and challenged the deductibility of financial expenses incurred upon specific financing transactions, such as dividend recaps or leveraged treasury-stock acquisitions, taking the view that, inter alia, the financial expenses incurred do not benefit the debtor but its shareholders. Recently, the Spanish Supreme Court ruled out the Spanish tax authorities’ position in a specific leveraged buyout (LBO), although the position is yet to be cleared.
Interest Barrier Rule
Net financing expenses exceeding 30% of EBITDA of a given tax year will not be deductible. Financing expenses exceeding the ceiling can be carried forward and deducted in future tax periods. Net financing expenses not exceeding EUR1 million will be tax deductible in all cases.
Spanish law also establishes further limits on the tax deductibility of interest arising from LBOs. In particular, the tax deductibility of interest paid in connection with a debt incurred to acquire shares in a company is limited to 30% of the acquiring company’s EBITDA, disregarding the EBITDA corresponding to any company that merges with the acquiring company or that joins the same tax group as the acquiring company within the four-year period following the acquisition. This limit does not apply if at least 30% of the acquisition is financed with equity (ie, the financing does not exceed 70% of the purchase price of the interest in the company), and the debt incurred to that end is reduced every year by at least the proportion required to reduce the debt to 30% of the acquisition price in eight years, until that level of debt is reached.
Only if the Target operates in specific regulated sectors that may affect Spain’s national economy (eg, banking, insurance, telecommunications, air transportation, energy, weaponry, healthcare) may special supervision rules and licensing requirements be triggered.
The main impact on the transaction would be that it would have to be structured and documented in such a way that all mandatory authorisations and licences are obtained prior to closing. This usually means structuring the transaction in two distinct stages (signing and closing) and establishing the granting of the authorisation as a condition precedent to drawdown.
The most common way of acquiring a listed company is a takeover bid to purchase the shares of the target company or a merger. Spanish law establishes special rules on takeover bids, mainly through the Spanish takeover regulation. The main types of takeover bids are as follows.
They must be made for all of the company’s shares for an “equitable price” and be unconditional.
The equitable price must be no less than the highest price paid, or agreed on, by the offeror or its concert parties in respect of the target securities over the 12 months prior to the announcement of the bid. If the offeror has not acquired securities during the 12 months prior to the announcement of the bid, the equitable price must be no less than the price calculated in accordance with the valuation rules that apply to delisting offers, which take into account several valuation methods. The National Securities Market Commission (Comisión Nacional del Mercado de Valores, or CNMV) may modify the equitable price resulting from the provisions described in certain circumstances.
The obligation to make a mandatory bid is triggered when a person acquires “control” of a listed company by (i) directly or indirectly acquiring the Target’s securities with voting rights, or (ii) executing shareholders’ agreements. According to Spanish takeover regulations, control thresholds triggering the obligation to make a mandatory bid are (i) the direct or indirect acquisition of at least 30% of the voting rights, or (ii) holding any interest carrying less than 30% of the voting rights but appointing, within the 24 months following acquisition, a number of directors that, together with any members already appointed by the bidder, represents a majority of the target company’s board of directors.
Mandatory bids must generally be made within one month of acquiring control (unless the participation in the Target is reduced below the threshold during that month). Very limited exceptions apply to the obligation to launch a takeover bid.
There are no restrictions on the proportion of shares to be acquired or their price, and they can be subject to conditions (such as the Target’s approval of amendments to its articles of association or structural changes, such as a merger, or a minimum level of acceptance). However, if, as a result of a voluntary bid, the bidco acquires control over the Target on the terms described above, the obligation to launch a mandatory takeover bid may be triggered.
According to Spanish takeover regulations, bidders wishing to take over a listed company must evidence to the CNMV that guarantees securing compliance with the obligations arising from the takeover bid have been provided.
If the consideration is not cash (eg, securities), the regulations are vague and merely state that the offeror must have adopted all reasonable measures to guarantee its satisfaction. Conversely, when the consideration is totally or partially cash, the offeror must provide a first-demand bank guarantee or corroborate that a cash deposit has been made with a credit institution. Bidders normally opt for a bank guarantee. Issuing the bank guarantee is usually structured as a drawdown under the corresponding finance documentation (which is divided into two different products, the bank guarantee and the acquisition financing itself).
Following UK practice, it is also standard in Spain to include “certain funds” clauses, pursuant to which, the circumstances under which the lenders are entitled to refuse to fund the transaction are significantly restricted. This is one clear example in which the LMA tends to be followed (and is, in fact, invoked by borrowers).
Furthermore, and as in other jurisdictions, sponsors increasingly require that lenders offer the same certainty in terms of funding in relation to private acquisitions. In private transactions, “certain funds” defaults are substantially similar to those established in LMA documentation and will include only material defaults.
The Spanish takeover regulations also regulate squeeze-out and sell-out mechanisms during the three months following the expiry of the takeover bid acceptance period.
There are no other major issues worth covering in this jurisdiction.