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 not so far from 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 high leverage acquisitions). 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 of the COVID-19 health crisis lessened, acquisition financing recovered its level of activity along with M&A deals, which were reactivated or initiated.
While administrative approvals have never been required for financing transactions, a screening mechanism was 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 indirectly affected the timing of certain M&A deals and, consequently, the financing transactions.
The Spanish banking sector, which, at the beginning of the health crisis, was enjoying a rather good liquidity position, has played a very important role in the financial market, particularly for companies with working capital needs, pumping new money secured by state-backed guarantees into the Spanish economy. In terms of COVID-19 provisions, depending on the deal, some covenants (especially those focused on cash management) were tightened in order to ensure debt service.
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) activated in March 2020 as a consequence of the health crisis was subsequently extended until 30 June 2022.
On 5 September 2022, Law 16/2022, which implements the Directive (EU) 2019/1023 of the European Parliament and of the Council of 20 June 2019 on preventive restructuring frameworks, on discharge of debt and disqualifications, and on measures to increase the efficiency of procedures concerning restructuring, insolvency and discharge of debt, and amending Directive (EU) 2017/1132 (Directive on restructuring and insolvency) (the “Restructuring Directive”) and amends the Insolvency Law was finally published (“Law 16/2022”).
Law 16/2022 has submitted a number of amendments to the former applicable regime. Among others, the main change is a significant reform of the pre-insolvency regime, including the introduction of the new concept “likelihood of insolvency” (different from the existing “imminent insolvency” or “actual insolvency”) and which applies when it is objectively foreseeable that the borrower will not be able to regularly fulfil the obligations that fall due in the next two years, unless it enters into a restructuring plan with its creditors. In such case, the borrower will be entitled to start negotiations with its creditors for the implementation of a restructuring plan or even file for pre-insolvency in court.
A grace period of three months (or of up to six months if required by the borrower or by lenders holding more than 50% of the affected debts) to continue negotiations to agree a restructuring plan between the borrower and its creditors has been introduced to the pre-insolvency period, initiated by the borrower filing pre-insolvency notification to the court.
Following one of the main principles of the Restructuring Directive, the framework implemented by the Law 16/2022 tries to increase flexibility and provides alternative methods to successfully restructure business that may be viable: the restructuring plans. The restructuring plans are envisaged to be negotiated in a pre-insolvency stage between the borrower and its creditors with minimum court involvement. The scope of the new plan could be ambitious and, by means of it, sales of assets, sale of business as a “going concern”, extensions, write-offs, debt-for-equity swaps may be implemented.
Creditors are grouped now into classes attending to their common interest and have the right to vote within their assigned class. The voting majority within each class will be two-thirds majority of the total class for unsecured classes of creditors and three-fourths majority for classes of secured credits. Those majorities will also apply for cram-down within a syndicate of creditors.
In the context of the geopolitical situation and the inflationary environment, financial conditions and costs have continued to tighten in Spain during the last year. Despite the uncertainty about the outlook, Spanish markets have proved resilient to the global financial situation. However, an increase of debt restructuring deals is expected for the following year.
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 (the “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 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, in some cases, governed by 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.
The Spanish market commonly uses LMA 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 Loan Market Association providing a Spanish-language translation, Spanish law-governed multicurrency term and revolving facility agreement for Investment Grade, it is only used sporadically, since lenders prefer drafts based on Spanish law firms’ forms and adapted to the relevant transaction by the counsel. 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.
There is an increasing tendency to draft the facilities in English, either because non-Spanish financing entities are becoming part of the syndicate or due to the borrower’s sponsor being a non-Spanish entity or fund that demands it.
However, an English drafted agreement, either governed by Spanish law or by the law of England and Wales and the courts of the same but containing special enforcement provisions before Spanish courts, also has its downsides. It requires the obtention of a Spanish sworn translation (also regular translations are admitted, but may be challenged in court) for the purposes of initiating litigation in Spanish courts.
Ancillary agreements, such as the security package, are occasionally drafted in a two-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 since registration is required with the relevant land or commercial registry, as explained in 5. Security).
Lenders’ counsel issues the opinion on the legality, validity, enforceability and binding nature of the finance documents, while the borrower’s counsel is required to issue an opinion on the capacity, authority, incorporation and non-insolvency of the borrower.
Senior facilities generally consist of a variety of lending mechanisms (eg, term loans, revolving loans, ancillary facilities, letters of credit and guarantees) that may be utilised by the borrower 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 (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, provided that other players do not have yet the capacity or structure required 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.
Mezzanine facilities are coming back to the Spanish markets. Mezzanine lenders have usually been banks that also participate in the senior syndicate, although alternative lenders and institutional investors are developing an appetite for such instruments. Mezzanine facilities are 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, as junior debt, mezzanine loans are only paid after the discharge of the senior facility. However, in so many 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 traditionally used when the acquisition price must be paid or a specific project shall start and the debt refinancing process of the Target cannot be set up prior to the closing of the transaction. 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).
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).
Private placements are 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 in the context of asset deals, rather than share deals. 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 or shares. For details on the type of security, please refer to 5. Security.
Under Spanish law, save for some exceptions, the rights of lenders in the context of a syndicate are mutually independent. Thus, each lender has a separate claim against the borrower that would, in principle and unless otherwise stated in the applicable legislation or the relevant finance documents, allow each lender to individually take steps to protect its rights. As this is seen as a general risk for the financing transaction, the facility agreement – and especially the intercreditor agreement – seek to limit lenders’ individual 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). Notwithstanding the above, requiring a majority of lenders’ consent to enforce personal guarantees is increasingly becoming a new trend in the Spanish market, especially if such guarantees are being granted by subsidiaries of the borrower rather than by its shareholders. Such new pace leaves the individual lender an exclusive recourse vis-à-vis the borrower and its assets. In addition, such termination rights can also be subject to stricter rules established in the intercreditor agreements.
This individual right to terminate and accelerate is 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, depending on the deal structure, debtors may not be party to them to avoid any risk of claw-back due to the insolvency of the debtor).
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.
The importance and complexity of intercreditor agreements increase when creditors of diverse natures are party to them. 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 that has been commercially agreed – pari passu or any of such classes being senior to the other – and whether the majorities combine both types of creditors or 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. Due to volatility around interest rates, new or innovative hedging strategies have been put in place (such as CAPs, collars, shorter terms hedging, and a combination of IRS-CAP products).
Hedging facilities are usually documented under separate master agreements, attaching schedules that include specific provisions to ensure that the master agreement corresponds to the main terms of the financing agreement (eg, representations and warranties, covenants, events of default). Two types of master agreements are used in Spain: (i) the International Swaps and Derivatives Association (ISDA) master agreement, and (ii) the Spanish law-governed Contrato Marco de Operaciones Financieras (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 are usually granted 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 main security taken in acquisition finance transactions, except in the context of asset deals of real estate transactions, where the key security will be the real estate mortgage.
Real Estate Mortgages
Real estate mortgages are granted over any real estate asset and are registered with the relevant land registry. As a consequence of it, the furnishing of real estate mortgages involves significant costs, such as notarial and registry fees and taxes, including stamp duty (discussed in 8. Tax Issues). The maximum liability amount secured by the mortgage, which usually ranges between 110%-130% of the principal, is used for the calculation of these costs.
Spanish law also allows for floating mortgages, which is a security interest created over a specific real estate asset to secure liabilities which are not identified at the time of the furnishing of the mortgage up to a maximum cap or maximum liability amount, 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 this 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 to calculate 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, planes and other motor vehicles, machinery and equipment, and intellectual and industrial property. There is a specific type of mortgage for ships (known as 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 the relevant 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, which is quite common).
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 main financial obligations. Although the meaning of this expression has been discussed 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 relate to 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) is not affected by the suspension of enforcement in the context of an insolvency proceeding 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.
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 third party of the furnishing of the pledge, so as to ensure that the third party is aware of the existence of the pledge and that the lender may require direct payment upon enforcement, or to inform the relevant company or the depositary of shares, so that the relevant book reflects the existence of the pledge over the pledged shares.
Real estate mortgages, chattel mortgages and pledges without displacement do require registration in order to be completed, as outlined at 5.1 Types of Security Commonly Used. Registration shall be, generally speaking, 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 review 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. It is generally accepted to include, in the facilities, an event of default if the security is not registered within a three or four month period following the granting of the mortgage.
Spanish law allows upstream or cross-stream security or guarantees (indistinctly speaking between them). However, in the context of acquisition finance, the main restriction on upstream security results from the financial assistance rule, which is explained at 5.5 Financial Assistance. Another 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 majority shareholder or 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 sole 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 advisable.
Under Spanish law, financial assistance, defined as the Target or any of its controlled companies not being allowed to provide financial assistance, guarantees or securities over its assets guaranteeing the acquisition financing, is prohibited. Breaching this prohibition could entail both liability for directors and the nullity of the transaction by virtue of which the financial assistance was provided. In such case, the security and guarantees could be declared 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 have 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, both directors 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, which is an accountant or auditor (rather than a lawyer) so 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. Please note that an amendment to the current Law 3/2009, of 3 April, on structural changes to commercial companies is expected to enter into force in the following months to implement Directive (EU) 2019/2121 of the European Parliament of the Council of 27 November 2019 amending Directive (EU) 2017/1132 as regards cross-border conversions, mergers and divisions. Such amendment may imply changes to the financial assistance rules.
Asset deals do not entail financial assistance risk.
Directors and shareholders have a duty to avoid conflicts of interest. Specifically:
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.
Under Spanish law, the appropriation of collateral by the creditor (pacto comisorio) is generally prohibited, save for the exceptions of financial collateral arrangements and pledges of certain credit rights. A secured party is neither entitled to directly dispose of the collateral, so it must initiate the enforcement proceedings of the security interest and apply the proceeds obtained from the sale of the collateral at a public auction or through other proceedings contemplated under the law, aimed at ensuring that a fair value is obtained from the collateral’s sale, as payment of the debt. Depending on the case, these proceedings are monitored by a court or notary public.
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).
Enforcement proceedings of financial collateral arrangements may neither been affected nor stayed by the debtor’s declaration of insolvency as provided for in Law 16/2022.
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.
Although there is no general rule, 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 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 usually 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 any 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.
Specific agreements between the lender and the borrower or amendments of the main obligation 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, it is advisable that any amendments to the senior, second lien or mezzanine facilities agreements (including a refinancing thereof) 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).
According to the Insolvency Law currently in force, 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.
The list of subordinated claims is a numerus clausus pursuant to the Spanish Insolvency Law currently in force and is defined as any claim against the debtor held by legal or natural persons who qualify as “specially related” to the debtor.
Under the Insolvency Law, as amended by Law 16/2022, if the debtor becomes insolvent, any action carried out or agreement entered into by the debtor within the two years preceding the filing of the insolvency petition, as well as those carried out since the filing until the declaration of insolvency, may 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). Law 16/2022 introduces, upon the occurrence of certain circumstances, the same rescission grounds to actions and agreements entered into by the borrower within two years preceding the filing of a pre-insolvency proceeding.
Although the Spanish Insolvency Law does not define “detrimental”, according to the case law, 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.
In any case, 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.
Specific transactions cannot be rescinded in accordance with the Spanish Insolvency Law, namely:
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, movable property 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 generally from 0.5 to 3%, depending on the autonomous region), notarial fees and Land Registry 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, the interest payment should be exempt from withholding tax in Spain if the lender is the beneficial owner of the Spanish-source income and is:
Note that, for these purposes, EU/EEA 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 no longer a safe harbour).
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.
Lastly, 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.
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 and 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, represent a majority of the target company’s board of directors.
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.
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 of note in this jurisdiction.
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A Pretty Active Year for Leveraged Finance Players, in Both New Money and Old Money Deals
Despite macroeconomic and geopolitical headwinds that are changing the investment environment since 2022, Spanish leveraged finance markets continue showing relatively good health, particularly in secondary buyouts in the renewables industry and in mid-market add-on deals, while Spanish practitioners also remain very busy with amend-and-extend deals and debt restructuring under the new Spanish insolvency regulations for preventative refinancing schemes.
New Money Deals: Fewer Mega-market Corporate Deals, but More PE-Sponsored Mid-market Deals Being Leveraged With Direct-Lending Providers
Market trends driving the new money and a few hot legal topics
During the first half of 2023 (and expected to continue to be a clear trend throughout the year), the Spanish M&A market has shown a good number of deals related to secondary buyouts in the renewables industry and to acquisitions of small and mid-market companies that, most of the time, are complementary (add-ons) to those developed by those companies acquired during the frenetic years of 2021 and 2022, according to build-up strategies that are also quite common in the EMEA (Europe, the Middle East and Africa) private equity (PE) market.
Mega-market deals are scarce and mainly restricted to M&A deals in the Spanish renewables energy business. During the first quarter of 2023, only three transactions exceeded EUR0.5 billion of deal value and all of these related to the renewables industry, namely:
More recently, in May 2023, France-based PE firm Ardian has agreed to sell its Spanish subsidiary ASR Wind, with a portfolio of 12 brownfield wind farms totalling 422 MWs plus a pipeline of 435 MW of hybrid photovoltaic farms, to the Spanish energy utility Naturgy (EUR536 million), following a competitive sale process where the Norwegian utility Statkraft and the Portuguese utility Galp also posted bids.
It is also true that other mega-market, jumbo deals will eventually arrive later in 2023, as in the combination of TMT businesses between Orange Spain and Masmovil Group under a 50:50 co-controlled joint venture with a combined enterprise value of EUR18.6 billion, including as part of the transaction a EUR6.6 billion non-recourse financing package mainly comprised of bank debt that was already underwritten during 2022, which will undoubtedly be one of the largest leveraged debt financings in the EMEA region once the full-scale EU antitrust investigation is completed (by August 2023).
Leaving aside the few facilities and bond issuances required to finance these large secondary buyout transactions in the renewable energy sector and other M&A transactions, the largest number of leveraged finance operations Spanish practitioners are advising upon during 2023 relate to the financing of small and mid-market “add-ons”, either on a “sponsorless” basis or to borrowers with PE firms acting as majority shareholders or sponsors, pursuing build-up strategies in both domestic deals and cross-border transactions involving other markets across Europe and, a few of these, also in LATAM.
In particular, as regards sponsor-led transactions, it is common knowledge that many PE firms active in the Spanish market are still sitting on cash piles previously raised in the hectic year of 2021 and first half of 2022, and that these firms still need to deploy in order to provide their limited partners with the expected returns. But, in addition to this dry powder, PE firms continue increasing the uncalled commitments for both existing and new funds and they are also obtaining third-party financing mainly from direct lending firms which are growing steadily in Spain as competitors to commercial banking, mainly because of the ability of direct lending firms to provide for term loans with a bullet maturity in five to seven years under financing structures that combine elements of commercial banks’ TLAs (Term Loan A) with features closer to TLBs (Term Loan B) being granted by institutional investors.
Instead of financing the acquisition of new targets, a clear trend we are experiencing in 2023 is that PE firms are preferring to devote more resources to the management of their current portfolio of invested companies and to their growth by pursuing the acquisition of add-on companies within the same industry and complementary markets.
In order to finance these add-on deals, PE sponsors are negotiating more frequently with their financiers (either banks, direct lending firms or a mix of both types of lenders under the same facilities agreement) the need to include provisions allowing for incremental facilities in both existing facilities agreements previously executed (by amending and upsizing these with new tranches or sub-tranches) and in new facilities agreements, with a view to optimising the costs of the new financing to the extent the lenders granting those incremental facilities will benefit from the same security package as the original facilities on a first-ranking, pari passu basis.
Some of the legal topics that are usually negotiated among principals and legal counsels when drafting the documentation required to implement these add-on, incremental facilities are as follows.
Bridge-to-equity facilities increasingly used by PE firms
In addition to long-term term loan financing agreements including TLA and/or TLB tranches, the Spanish acquisition financing market is also providing for equity bridge facilities (EBF) agreements to allow the relevant fund’s management to delay the timing on which capital calls must be made within the fund’s subscription period, optimising fund’s cash flow management and internal rate returns, while obtaining financing on a certain funds basis to move quickly with the closing of a M&A transaction.
The facility documentation for EBF is pretty standard, with a particular focus on the negotiation of clauses related to financial covenants, mandatory prepayment events and events of default. As for security interests being granted as collateral for EBF financing, these are usually limited to pledge over uncalled commitments with an irrevocable power of attorney in favour of the relevant lenders or their agent to call such uncalled commitments, and pledge over bank accounts where such commitments must be disbursed from time to time by the fund’s investors.
Old Money Deals: Amend-and-Extend (A&E) Facilities and Pre-insolvency Restructuring Plans Under New Spanish Insolvency Regulations
A huge pipeline of A&E deals over lawyers’ desks
Due to the tightening US and European debt markets to refinance existing facilities on better terms because of rising borrowing costs, and the high discounts currently existing in secondary markets that continue encouraging institutional investors to pick up bargain secondary sales of debt rather than supporting new refinancings, Spanish lawyers in the leveraged finance practice are also experiencing a heavy workload in the drafting and negotiation of amend and extend (A&E) arrangements of senior and mezzanine facilities agreements in both sponsorless and sponsor-led financing transactions.
Spanish borrowers and sponsors facing maturities in the next 12 to 24 months, particularly in growing, or at least sound, businesses, are knocking on lenders’ doors asking for waivers and/or amendments of financial covenants that may be much more stressed than those anticipated at the time the relevant financing was originated and that many times also have an impact on the financing costs in those facilities with margin ratchets, causing a much higher interest rate when adding the applicable margin to the rising EURIBOR.
In the negotiation of these A&E deals, lenders are usually willing to provide for greater flexibility in some of the provisions of the facilities affecting the calculation of financial covenants, and, depending on investor lender’s appetite or internal requirements, also exchanging cash-pay interest totally or partially with PIK-interest features depending on the amount of cash available for debt service.
In exchange for these sacrifices, lenders usually require the payment of consent fees, higher margins in revised margin ratchets, more covenant protections, additional security over new collateral (if possible) and additional sponsors’ equity injections.
However, A&E arrangements are not always feasible even for healthy and reliable borrowers, as extension of maturities may have important limitations, for instance when the relevant facility has been securitised and the new extended maturity does not meet the weighted average tests of CLO investors, or when the constitutional documents or investment criteria of a direct lending fund impose a maximum term of maturity since the time the original financing was granted.
Amend and extend facilities granted under LBO structures must also take into consideration and get advice from tax advisers as regards the application of the so-called escape clause under the anti-LBO provisions that Spanish corporate income tax (CIT) regulations provide for and that must be tested for companies that are members of a Spanish tax consolidation group for CIT purposes and having acquisition financing in their balance sheets.
In Spanish LBO practice, it is quite common that the target and the holdco incorporated for the purpose of acquiring the target’s shares elect being party to a tax consolidation regime for CIT purposes in order that the financing expenses being payable by holdco under the acquisition facilities can be offset with the target’s taxable operating profit, allowing for net financing expenses on a tax consolidation level to be deductible for CIT purposes. For such deductibility to apply for interest exceeding EUR1 million, the leverage ratio in respect of all facilities used for the purposes of acquiring shares in the target must meet the criteria to apply the following “escape clause”: (i) must not exceed 70% of the purchase price of the shares at the time of the origination of the acquisition facilities; and (ii) must be repaid within the eight-year period following the closing date of the acquisition, at least at a one-eighth pace per year.
Therefore, if an A&E is on the table including the need to extend the tenor of acquisition facilities, tax advisers should pay particular attention to whether the new repayment schedule of such facilities (including any PIK-element incorporated thereunder) continues benefiting from this escape clause.
New opportunities for loan-to-own strategies under new Spanish insolvency law
In September 2022, the Spanish lawmaker approved a very important reform of the Spanish Insolvency Act that implies a thorough overhaul of the Spanish insolvency regulations, particularly those related to the pre-insolvency stage and the negotiation of restructuring plans with a debtor’s creditors and shareholders.
This reform of the Insolvency Act has been made with the aim of improving the legal framework governing insolvency in Spain and implementing in Spain the framework required by Directive (EU) 2019/1023 as regards preventative restructuring frameworks (the “Restructuring Directive”).
Among other relevant changes (eg, rules on the sale of business units during the pre-insolvency stage under the so-called pre-pack scheme), the reform opens up a wide range of debt restructuring and turnaround opportunities that Spanish players are starting to advise upon and negotiate with the relevant stakeholders of distressed companies, and testing the feasibility for a group of creditors to cram-down other creditors (both financial and non-financial) and debtor’s shareholders under a non-consensual restructuring plan.
In this regard, it is important to note that the reform provides for the possibility of cramming down the debtor’s shareholders provided that the relevant debtor has filed a restructuring plan by stating that the company is in a state of either actual or imminent insolvency (“imminent” meaning that it is foreseeable that payment obligations cannot be met regularly and timely within the next three months), but not when the debtor has filed the restructuring plan by alleging that it has a “likelihood of insolvency” (probabilidad de insolvencia) because it is objectively foreseeable that the debtor will be unable to regularly fulfil its obligations that fall due in the next two years (which is a concept that was not included in the Restructuring Directive).
It is arguable that the construction of this “likelihood of insolvency” can be used by the debtor’s managers to be quite proactive in the sense of initiating debt and capital restructuring processes with the purpose of shielding the debtor’s shareholders towards non-consensual creditors intending to implement loan-to-own strategies.
But if the relevant debtor is under a state of actual or imminent insolvency, the reform certainly allows for new and interesting possibilities for loan-to-own strategies in Spain by special-situations funds and distressed investors, similar to those strategies better known for a number of years particularly in US and UK leveraged markets.
One of the cornerstones of the new regime of pre-insolvency restructuring plans that is already proving to be a battlefield among the different stakeholders of a company is that related to the formation of “classes”, according to which, creditors with a sufficient commonality of interest would be grouped into the same class for the purposes of voting for or against the restructuring plan and to cram-down not only claims falling under same class (“intra-class cram-down”), but also claims under other classes (“cross-class cram-down”).
Prior to the reform, a pre-insolvency refinancing scheme would be court-approved or “homologated” to the extent creditors representing at least 51% of the debtor’s financial indebtedness approve such scheme, with certain majority thresholds to cram-down of unsecured creditors and certain super-majority thresholds for intra-class cram-down of secured creditors according to the collateral value of each secured claim. This implied that any refinancing scheme necessarily required to obtain consent from secured creditors holding a majority of secured financial indebtedness. Therefore, owning first-ranking secured debt (including purchase of such debt in secondary deals) or reaching a consensual agreement with those first-tier secured creditors was the key for the success of a pre-insolvency refinancing scheme.
Now, thanks to the reform approved in September 2022, the Insolvency Act allows for the intra-class and cross-class cramming down of all types of creditors: not only financial creditors, but also commercial creditors and, with a very limited reach, holders of public law credits, and, for the first time under Spanish law, debtors’ shareholders, under a “whatever it takes” approach with the ultimate goal of enabling the company to become viable rather than going to insolvency proceedings that usually end up in liquidation. And, for the first time under Spanish law, a restructuring plan can be court-approved with cramming-down effects towards dissenting creditors even if the class or classes formed by secured creditors have voted against it (though these creditors will continue having their enforcement rights over collateral unless the plan expressly provides for a cash payment in an amount equal to the secured claim that is covered by the collateral value within no more than 120 days).
Restructuring plan filed by creditors
Although the revised text of the Insolvency Act only refers to debtors in a state of actual, imminent or likelihood of insolvency as entity having the right to file for a restructuring plan before the competent court, not expressly allowing such filing to creditors or a group of them (though creditors do have the right to seek the court’s approval of the plan for extending its effects to other creditors and stakeholders), Spanish practitioners are arguing whether a group of creditors may have the right to take the initiative of filing a non-consensual restructuring plan before the court, as well as whether several restructuring plans (eg, a plan proposed by the company, another plan by a group of creditors) can compete and be analysed by the competent court at the same time.
The filing of a restructuring plan by a group of creditors rather than by the debtor has occurred in the first big test of the revised Insolvency Act, with an old acquaintance for any player in Spanish restructuring and special situations practices: the restructuring of Celsa, a large Spanish industrial steel group headquartered in Barcelona with 120 work centres across nine European countries, with EUR2.8 billion of debt.
On the very first day on which the reform entered into force in September 2002, a group of bondholders of Celsa led by Deutsche Bank, SVP and Cross Ocean filed for a plan: its main element is the conversion of EUR1.2 billion of debt into equity, which would wipe out all current equity holders. Indeed, this case is the latest (or second to last) episode in a mediatic, long-running battle between Celsa’s controlling shareholders and its creditors, as this battle has been raging since the debt restructurings arrangements that were agreed during 2010, 2013 and 2017.
Although Spanish insolvency law does not provide for any rule permitting a hostile, creditor-led scheme brought by a group of creditors (even by creditors holding a majority stake in the company’s indebtedness), the competent Spanish court has had very few doubts in allowing for the continuance of this restructuring plan, despite several outraged challenges by Celsa’s managers and also by a Spanish commercial bank that is opposed to the formation of creditors’ classes.
The latest proposal made by the group of bondholders in April 2023 has been strongly opposed by Celsa’s managers, who are arguing that the new pre-insolvency regime cannot be applied without the debtor’s consent and that the creditors cannot enforce the debt acquired at a discount in order to take over 100% shareholding in the company, also stressing that the group is not close to insolvency.
Other case studies that are putting Spain’s new insolvency law to test, particularly on whether loan-to-own strategies may become successful, also relate to Spanish corporates that have been involved in several restructurings for a long time, Pronovias, Telepizza, Naviera Armas and Single Home being the best-known names.
On first approach, the conclusions drawn by Spanish practitioners are that the new insolvency law can provide for flexibility and creative solutions in consensual restructuring plans, but that hostile, non-consensual restructuring plans without the co-operation of the company’s directors will be much more difficult to achieve (and, in any case, undoubtedly, very costly).
A Few Relevant Developments in Spanish Regulations Affecting M&A Financing
To conclude this article, it is worth mentioning two pieces of legislation that may have a significant impact in the coming months on the Spanish M&A market and, consequently, on leveraged finance practice.
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