The direction and trends of the loan market in Spain have been more impacted by recent economic developments than by the regulatory environment.

Spain’s GDP grew during 2023 by 2.5% and, according to the EU Directorate-General for Economic and Financial Affairs, the overall GDP growth is expected to reach 2.1% in 2024 and 1.9% in 2025, mainly driven by domestic demand and sustained by continued labour market resilience.

In Spain, the implementation of the “Recovery and Resilience Plan” (RRP) is set to underpin investment growth over the forecast horizon. The strong GDP growth was bolstered by robust labour market developments which sustained private consumption, and the contribution from net exports and public consumption. In an environment marked by a high interest rate environment and general uncertainty, overall investment growth was tempered, particularly in the second half of 2023.

Spanish annual inflation was 3.4% on average in 2023, which was the same as the European Union annual inflation, favoured in part by the slow-down in energy prices. It is projected to further decelerate in 2024, reaching 3.1%, although the phasing out of most government measures to mitigate the impact of high energy prices is expected to play upward pressure on inflation. According to preliminary data, Spain’s annual inflation rate fell to 1.5% in September 2024, the lowest since March 2021 and below market expectations of 1.9%.

Tourism continues to be one of the key economic pillars of the Spanish economy. The country received more than 85 million foreign tourists in 2023, and Spain keeps the momentum in 2023 (it received more than 71.2 million foreign tourists between January and August 2024).

In 2022, the war added to the inflationary pressures building up in the euro area, pushing up consumer prices (particularly energy and food prices), which forced the ECB to act firmly to ensure that inflation returned to its 2% medium-term target in a timely manner.

Currently, the potential re-intensification or prolongation of geopolitical tensions is the main source of risk to the projections on the inflation forecast for 2024 (as stated in 1.1 The Regulatory Environment and Economic Background). Should this risk materialise, it could most likely have a negative impact on economic growth, as greater geopolitical uncertainty makes for a less favourable environment for investment and spending decision-making by economic agents, and may trigger episodes of financial market turmoil.

The stable Spanish bank loan market with experienced banks and borrowers remains dominant as the preferred option for Spanish companies to access debt.

Traditionally, only large Spanish companies had the sophistication, the interest and resources to access high-yield markets. Although this option continues to grow annually, the minimum amounts that make this option cost efficient limit the number of potential candidates that opt for the high-yield markets.

Alternative credit providers continue to increase their lending activities in Spain with a special focus on SMEs, real estate projects and capital call financings, through senior secured and unsecured loans, mezzanine debt facilities, bridge loans, profit participating loans and subordinated debt.

Since alternative credit providers are not subject to capital and liquidity requirements and the prudential regulation that applies to credit institutions, the offer of flexible private debt structures by direct lending participants is complimentary to that offered by traditional banks.

The number and specialisation of alternative credit providers active in the Spanish market is expected to keep growing in the coming years.

The investor base, the purpose and specifics of each transaction, the needs of the borrowers and the collateral and guarantee support that can be granted in favour of the lenders to secure the borrowers’ obligations under the financing will determine the most appropriate structure.

Loan facilities in Spain usually include different tranches or sub-facilities to cover the needs of the borrowers, including term loans, credit facilities (revolving or not), issuance of letters of credit and ancillary banking products such as factoring and confirming. The loan facilities can co-exist and be complementary to debt securities financings.

Green loans (ie, those made available to finance or refinance new or existing eligible green projects) and sustainability-linked loans (ie, those incentivising the improvement of the borrower’s ESG performance by linking the margin to attaining certain pre-defined “sustainability performance targets”) keep growing.

Sophisticated lenders promoting Sustainability-Linked Loans (SLL) in Spain have been generally following the Sustainability-Linked Loan Principles (SLLP) that the LMA has been promoting since 2018. Notwithstanding the efforts made by the LMA including the latest update of the SLLP in February 2023, the publication of the Draft Provisions for Sustainability-Linked Loans in May 2023, of the Term Sheet for Draft Provisions for Sustainability-Linked Loans in October 2023 and of the Sustainability Co-ordinator Letter in April 2024, the lack of clarity and market standards in Spain pose some difficulties in the implementation of SLL, resulting in the relevant provisions to adjust the loan to the SLLP being negotiated by the parties on a case-by-case basis.

Providing financing to companies is not a regulated activity in Spain, and therefore both foreign and Spanish banks and non-banks can provide financing to Spanish companies.

Notwithstanding, when considering providing financing to a Spanish company, non-banking lenders need to be aware that not all types of creditors can benefit from certain Spanish security interests, such as floating mortgages and financial guarantees. Such limitations may impact the structuring of the security to be granted in favour of the lenders.

In accordance with Spanish Law 19/2003, dated 4 July, on legal regime of movements of capital and economic transactions abroad and on certain measures for prevention of money laundering, any acts and transactions between residents and non-residents in Spain that imply or from the fulfilment of which foreign collections and payments may derive are free.

In any case, it should be noted that such acts and transactions shall be prohibited or limited in respect of third countries in relation to which the Council of the European Union has adopted the relevant restrictive measures in accordance with EU legislation.

It should be noted that, according to Spanish Law 10/2014, dated June 26, on the regulation, supervision and solvency of credit institutions, it may be necessary to require authorisation from the Bank of Spain in order to operate in Spain. Credit institutions domiciled in the European Economic Area may usually passport their services subject to mutual recognition, but that is not generally possible for those credit institutions domiciled outside the European Economic Area. In general, the activity of lending money alone does not require the relevant entity granting the loan to obtain a licence or authorisation from the Bank of Spain, but other activities reserved in Spain for credit institutions duly authorised and registered (such as accepting deposits) may be subject to the obtainment of such licence or authorisation.

It is necessary that this requirement be analysed on a case-by-case basis.

Generally, there is no restriction on foreign lenders receiving security or guarantees according to Spanish law.

It should be noted that in accordance with Article 7 of Spanish Law 19/2003, dated 4 July, on legal regime of movements of capital and economic transactions abroad and on certain measures for prevention of money laundering, the Spanish government may suspend the liberalisation regime on acts and transactions between residents and non-residents implying transfers of money in cases of acts or transactions that, by their nature, form or conditions, affect or may affect (even if only occasionally) activities related to the exercise of public power or national defence, or activities that affect or may affect public order, public safety and public health.

Notwithstanding the foregoing, there is a suspension of the liberalisation regime of direct foreign investments in Spain, which are made in certain sectors which affect public order, public safety and public health. This suspension was included as Article 7 bis to Spanish Law 19/2003. Such sectors include, among others, critical infrastructures, critical and dual-use technologies, supply of fundamental inputs, sectors with access to sensitive information and media. Therefore, authorisation by the Spanish government shall be obtained for such direct foreign investments.

The liberalisation regime is also suspended in the following circumstances:

• if the foreign investor is directly or indirectly controlled by the government of a third country;
• if the foreign investor has invested or participated in activities in sectors affecting security, public order and public health in another member state; or
• if there is a serious risk that the foreign investor carries out criminal or illegal activities affecting public safety, public order or public health in Spain.

A “direct foreign investment” should be understood as any foreign investment in Spain as a result of which a relevant investor (or investors) acquires a stake of 10% or more of the share capital of a Spanish company, and all those other investments in which the investor/s acquires control of the Spanish company, provided that one of the following circumstances is met:

• that the investment is carried out by residents of countries outside the European Union and the European Free Trade Association; or
• that the investment is carried out by residents of European Union or European Free Trade Association countries whose beneficial ownership corresponds to residents of countries outside the European Union and the European Free Trade Association.

Moreover, following the COVID-19 health crisis, the Spanish government approved to extend the suspension of the liberalisation regime previously described (regulated in Article 7 bis of Spanish Law 19/2003) to such direct foreign investments made in listed companies in Spain, or in unlisted companies, if the value of the investment exceeds EUR500 million, made by residents of other countries in the European Union and the European Free Trade Association. This suspension has been extended several times, and it is currently in place until 31 December 2024.

The foregoing provisions should not affect in principle loan transactions, but should be considered if, for instance, a lender acquires a stake in the share capital of a Spanish company as a result of enforcing a security interest over the shares of the Spanish company.

Generally, there are no legal restrictions, controls or concerns under Spanish law regarding foreign currency exchange with respect to foreign entities.

It should be noted that Spanish entities are subject to certain controls from the Bank of Spain, such as the obligation of publishing the minimum purchase and maximum sale rates or, if applicable, the single rates that they shall apply in spot transactions (operaciones de contado).

There are no legal restrictions under Spanish law on the borrower’s use of proceeds. The uses and restrictions of a financing are usually specified in the loan documentation.

Restrictions that a specific lender requires in the loan documentation would also depend on the rules applying to it and the obligations it has to fulfil in accordance with the relevant law applicable to it. For instance, Spanish financial entities usually include restrictions regarding anti-money laundering, anti-corruption, terrorism financing or sanctions.

Spanish law does not recognise the concepts of agent and trust. Parallel debt structures are not in principle recognised under Spanish law, as security interests are considered as accessory to a main obligation. Spanish law does not recognise the difference between legal and beneficial ownership. Therefore, the beneficiaries of such security interests shall be the lenders to a financing transaction.

Nonetheless, the concept of agent is commonly used in Spain, but it should be taken into account that for such concept to be fully valid under Spanish law (for instance, for the purposes of enforcing security interests) it would be necessary that all lenders grant powers of attorney in favour of such agent. In any case, common practice in Spain is that security interests are granted to all lenders to avoid future risks on recognition of the concept of agent.

Under Spanish law, loans are usually transferred through the assignment of a contractual position or through the assignment of the credit rights derived from the loan documentation. Assignment of a contractual position entails the assignment of both rights and obligations under the agreement (ie, the assignee receives the full contractual relationship), but the assignment of the credit rights derived from the agreement entails the transfer of the credit rights owned by the assignee.

It should be noted that assignment of a contractual position requires consent of the rest of the parties to an agreement, but it is usual that the loan documentation already contains a pre-consent from the rest of the parties. Assignment of credit rights does not require consent from the debtor, but it is usual in Spain that the debtor is notified of the assignment as otherwise the debtor could pay the assignor and be released from fulfilment of the relevant obligations.

Assignment by a lender under the loan documents is usually documented in a public document (either via public deed (escritura pública) or notarial policy (póliza notarial)) granted before a Spanish notary. It is not legally required for its validity, but loan documents granted as public documents benefit from a much simpler and faster enforcement procedure. That is why it is market standard in Spain to grant all loan documents as public documents. In any case, please note that under Spanish law, assignment of credit rights is only effective against third parties since the date on which the assignment is documented in a public document.

With respect to the security package associated to the loan documentation, under Spanish law, guarantees and security interests are accessory to the main obligation, therefore, security interests subject to Spanish law would be assigned to the new beneficiary with the assignment of the main obligation. Nonetheless, please note that some formalities may be necessary depending on the security interest granted in order for the assignee to maintain an enforceable right over them, such as to document the change of beneficiary in a public document and register the same with the relevant Spanish Public Registry.

In any case, when assigning a lender’s contractual position, it is common in Spain to grant a document in which the relevant security interests and guarantees are ratified by the guarantors. If the original security interests were granted in a public document, it is also common that this ratification is also granted as a public document. In any case, it is advisable to document such ratification in a public document in order to benefit from the much simpler enforcement procedure.

In case there is a facility/security agent in the financing transaction, the relevant formalities for the authorisation of such agent should also be carried out by the new lender (ie, granting of powers of attorney in favour of the agent).

In case the contractual position assigned is one of the facility/security agent, it should be noted that it will be necessary that all lenders to the transaction grant new powers of attorney to the new agent.

Debt buyback by the borrower or the sponsor is legally permitted, as long as the loan documentation does not prohibit it.

It should be taken into account that in accordance with the Spanish Civil Code, in case of debt buyback by the borrower, the obligations derived from the transaction would be extinguished upon the debtor and the creditor becoming the same person.

The acquisition of shares of a listed Spanish company is usually made through a takeover bid, which is regulated in Spanish Royal Decree 1066/2007, dated 27 July, on the regime of takeover bids.

Takeover bids shall be announced, and the offeror shall file a takeover prospectus with the CNMV (Comisión Nacional del Mercado de Valores) for its authorisation, which shall include certain information, in accordance with Spanish Royal Decree 1066/2007. In this regard, among other items, the offeror shall accredit in the prospectus the creation of sufficient guarantees that ensure fulfilment of the obligations resulting from the takeover bid. Once the authorisation is granted by the CNMV, the offer shall be publicly filed.

When the consideration for the bid consists, in whole or in part, of cash, the offeror shall comply with the foregoing condition via the provision of a guarantee issued by a credit institution or documentation accrediting the creation of a cash deposit in a credit institution which guarantees the payment of the consideration in cash.

It should be noted that for the purposes of providing such guarantee, if the credit institution issuing the guarantee is not located in the European Union, the CNMV may require additional information and requirements to certify the sufficiency of the guarantee. Also, as a general rule, CNMV will not accept guarantees issued by a company of the same group as the offeror.

When the consideration offered consists of securities already issued, the availability of such securities and their allocation to the result of the bid mush be justified.

In any case and irrespective on the legislation regarding takeover bids, is should be noted that listed companies are obliged to deliver information to the CNMV with respect to a number of matters, and one of them is any information that may affect the price of its shares.

At the time of writing, there is an avalanche of takeover bids in Spain for a value of approximately EUR23 billion, including relevant Spanish companies such as Banco Sabadell, Grifols, Applus, Talgo, Lar España, Ercros, Árima Real Estate, eDreams and Prosegur. The reactivation of the M&A market, the surge in global private equity dry powder, the attractive valuation of these listed companies and the shifting to a new phase of the interest rate cycle are the main factors underpinning this environment.

Some of these takeover bids require the authorisation of the Spanish government in accordance with Article 7 bis of Spanish Law 19/2003, dated 4 July, on legal regime of movements of capital and economic transactions abroad and on certain measures for prevention of money laundering (see 3.2 Restrictions on Foreign Lenders Receiving Security with regards to this authorisation).

The following recent changes need to be taken into account when drafting loan documentation.

• Brexit – due to Brexit, the United Kingdom is no longer a member state of the European Union and therefore no longer benefits from its regulations, especially with regards to the freedom of movement inside the European Union.
• Russian invasion of Ukraine – in light of the fact that the European Union has enacted several pieces of legislation on sanctions on transactions with Russia, it would be advisable to review the usual relevant provisions regarding sanctions to ensure that these regulations are properly covered in the loan documents.
• Benchmarks – due to the EU Benchmarks regulation and the LIBOR transition process, it is necessary to include rate-switch provisions, replacement of screen rate clauses, and to assess the need to enter into reference rate selection agreements in relation to legacy transactions.

Spanish Law of 23 July 1908, on the nullity of usurious loan agreements, regulates the nullity of financing agreements when these are considered usurious.

According to such law, a loan agreement shall be null and void if:

• it includes an interest rate significantly higher than the normal interest rate for money (as periodically published by the Bank of Spain);
• it is manifestly disproportionate to the circumstances of the case or under such conditions as to make the interest rate ludicrous;
• it has been accepted by the borrower due to their distressed situation, inexperience or limited mental faculties; or
• it is assumed that a greater amount has been received than that delivered, whatever its amount and circumstances may be.

The waiver of the debtor’s own jurisdiction made by the debtor in these types of agreements shall also be null and void.

The consequence of the declaration of a loan agreement as usurious is that the agreement will be null and void and the debtor will only be obliged to repay the principal amount of the financing.

The usurious character of a financing agreement shall be considered on a case-by-case basis considering the foregoing circumstances.

Other specific Spanish regulations shall be taken into account when determining the interest rate of a loan in certain circumstances. For instance, Spanish Law 5/2019, dated 15 March, regulating real estate credit agreements establishes that, in the case of loans secured by mortgages or other security rights over real estate for residential use or whose purpose is to acquire or preserve property rights over land or real estate built or to be built:

• the default interest shall be the ordinary interest rate plus 3%;
• default interests can only accrue over the principal due and pending payment and cannot be capitalised;
• the ordinary interest rate of a loan cannot be modified during the term of the loan to the detriment of the borrower, except in case of mutual agreement; and
• in case of variable interest rates, it will not be possible to set a downward limit.

Spanish Law 5/2019 only applies in cases where the lender is a natural or legal person carrying out such lending activity in a professional manner, when the borrower or guarantor of the financing is a natural person.

Legal and natural persons domiciled in Spain that carry out transactions with non-residents in Spain which involve, among others, collections, payments and/or foreign transfer of funds, shall inform the Bank of Spain of such transactions. The periodicity of the provision of such information will vary depending on the volume of transactions made.

• Monthly, if the volume of transactions during the previous year is equal to or higher than EUR300 million.
• Quarterly, if the volume of transactions during the previous year is equal to or higher than EUR100 million and lower than EUR300 million.
• Annually, if the volume of transactions during the previous year is lower than EUR100 million euros. If the volume is lower than EUR1 million, such declaration will only be made at the express request of the Bank of Spain.

Interest paid to resident individuals and companies is generally subject to a 19% withholding tax. However, interest payments made to qualifying lenders (ie, Spanish banks or a Spanish securitisation fund) are exempt from withholding tax.

Spanish-sourced interest payments to non-resident individuals or companies (without a permanent establishment in Spain) are prima facie subject to a 19% withholding tax. However, under the provisions of the different tax treaties signed between Spain and other jurisdictions, withholding tax rates are, subject to different conditions, reduced or even exempt.

Interest paid to an EU resident or EEA resident (with a tax information exchange agreement with Spain, in the latter case) are exempt insofar as the EU Interest and Royalties Directive provisions are satisfied.

Financing agreements are generally exempt from value added tax and not subject to transfer taxes.

However, stamp duty tax is levied in transactions performed in a public deed, with economic valuable content, eligible to be registered in a public registry (eg, land registry, movable property registry or commercial registry) and not subject to transfer tax, capital duty or inheritance and gift tax. The applicable stamp duty tax rate depends on the autonomous region where the taxable event is triggered, generally ranging from 0.5% to 2%. The taxpayer is the beneficiary of the transaction (ie, generally understood as the lender) except for mortgage loans where the law undoubtedly states that the taxpayer is the lender. Hence, taxes arising from the creation of in rem rights documented in a public deed that requires registration within a Spanish public registry can be significant.

For instance, a mortgage loan would trigger stamp duty tax for the amount secured by the mortgage (ie, principal, ordinary interest, default interest and costs) provided that the transaction is documented in a public deed.

Should the lender be an EU or EEA resident, interest payments are exempt insofar as the EU Interest and Royalties Directive provisions are satisfied. It should be noted that these provisions are subject to the “beneficial ownership test” and the relevant anti-abuse tax provisions of the EU Directive based on the criteria set by the European Court of Justice in its rulings C-115/16, C-118/16, C-119/16 and C-299/16 (ie, generally known as the “Danish cases”).

If the lender is not an EU or EEA resident, interest payments are subject to a 19% withholding tax unless an applicable tax treaty, signed between Spain and the lender’s tax residence jurisdiction, reduces or exempts such 19% withholding tax. For the tax treaty benefits to apply, the following cumulative conditions must be met:

• the relevant tax treaty has to be applicable by virtue of the aforementioned “beneficial ownership test”; and
• the lender has to obtain in its jurisdiction of residence, and provide the Spanish borrower with a tax certificate of residence issued within the meaning of the applicable tax treaty during the 12 months prior to the date when the relevant interest payment is due.

Should interest payments be subject to taxation in Spain, the borrower will have the obligation to withhold on account of the non-resident the corresponding tax through the filing of tax forms 216 and 296.

General Overview

Under Spanish law, various instruments are available to establish valid and enforceable security. However, unlike other jurisdictions, Spanish law does not recognise the all-assets security concept. Security can take the form of personal guarantees or in rem security over specific assets. In rem security interest must be granted over identified or identifiable assets, which need to be specified or specifiable in the security document.

Security interest and guarantees under Spanish law are ancillary to the main obligation it secures; thus, the nullity or termination of the main obligations implies the nullity or termination of the security interest or guarantees.

Guarantees

Guarantees entitle the beneficiary to make claims against all the borrower’s assets. Typically, these are structured as first-demand guarantees rather than personal guarantees or fianzas. Such guarantees operate independently from the primary obligation, allowing the borrower to request payment from the guarantor under most circumstances, even if the main obligation has not been breached. Under first-demand guarantees, the guarantor does not have the privileges of excussion (excusión), division (división) and order (orden), as foreseen for fianzas. The benefit of excussion refers to the right of the guarantor to require that, before proceeding against them, the principal debtor’s assets are pursued first. Division is a benefit by which, if there is more than one guarantor, each one is only responsible for their proportional part of the debt or the commitment undertaken. Finally, the benefit of order refers to the right of the guarantor to determine the order in which the debtor’s assets must be liquidated to satisfy the debt.

In Rem Security Interest

Contrary to recognising floating charge security interest, Spanish law mandates that security interests be individually established for each asset. Likewise, as a general rule, security interest should only secure one main obligation. Depending on the class of asset on which security is to be created, a specific instrument and formalities for its validity and perfection are required. Generally, for any asset to be eligible as collateral, it needs to be situated in Spain, or the originating agreement for credit rights should be governed by Spanish law. Some regional laws in Spain might have specific rules for assets in those areas. The most common type of security comes in the form of mortgages and pledges with or without transfer of possession. The chosen form of security relies on the nature of the asset being secured, those being the following. 

Mortgages

Mortgages are used for real estate and moveable assets, including machinery, vessels, aircrafts, business premises and intellectual property. Mortgages need to be documented in a public deed (escritura pública) and registered in the applicable public registry for their perfection. A stamp duty, usually between 0.5% and 2% of the secured amount, depending on the region of Spain where the asset is located, is generally applicable to the mortgage deed. Some of the most relevant assets given as security by means of a mortgage are the following.

• Real estate assets – mortgages over real estate are usually given as collateral in transactions where the real estate property is a key element of the company or business. This is usually avoided when the company has other key assets, as otherwise it gets an expensive security interest as it attracts stamp duty at a relevant amount. The public deed (escritura pública) of mortgage needs to be presented and registered in the relevant Land Registry where the property is located. Despite the general rule mentioned above, floating mortgages securing multiple liabilities (not multiple assets) are available under Spanish law if the secured parties are financial institutions.
• Intellectual and industrial property rights – this covers assets such as patents, trade marks, trade names, industrial designs, software, literary or artistic works, etc. In any case, intangible assets must be registered in the Intellectual Property Registry. The mortgage on industrial property extends to developments or improvements in registered rights; however, in the case of intellectual property assets, the guarantee does not cover their adaptations, transformations, translations, etc.
• Vessels, aircrafts, vehicles, and machinery – documented by means of chattel mortgages (hipotecas mobiliarias) need to be registered in the relevant Movable Assets Registry. Chattel mortgages attract stamp duty except for mortgages over vessels if those are formalised by means of a private document.
• Business establishment (establecimiento mercantil) – the mortgage covers the business premises and associated assets. The mortgagor should either own or lease the premises. The scope of assets in the mortgage varies but can extend to fully paid merchandise and raw materials if expressly agreed upon. This mortgage is not usually used as it attracts stamp duty.

Pledges with transfer of possession

In order for the pledge with transfer of possession to be perfected, this requires the possession of the pledged asset to be transferred to the creditor or a third party. For non-physically transferable assets, certain actions freely agreed between the parties, like formalising the pledge as a póliza or notifying the underlying debtor, are seen as equivalent to the transfer of possession. This form is generally free from stamp duty. Typical assets subject to a pledge with transfer of possession are the following.

• Shares – there are two main types of shares usually pledged which will determine the required formalities applicable. Private limited liability companies (sociedades limitadas) require annotation in the book of registered shareholders (libro registro de socios) and in the ownership titles (títulos de propiedad). Public limited companies (sociedades anónimas) require annotation in the book of registered shares, ownership titles and in the share certificates (títulos multiples) which should additionally be delivered to the creditors. In case of listed shares, the required formalities are: annotation in the registry book, notification to the custodian and issuance of the certificate of legitimation.
• Bank accounts – common practice is that the account holder is notified through a notarised letter.
• Credit rights – common practice is to notify the underlying debtor through a notarised letter, although it is also usual to only notify the underlying debtor upon the occurrence of an event of default for commercial, strategic, or sensitive purposes.

Other forms of in rem security interest

• Pledges without transfer of possession – these pledges do not require asset delivery but need registration in the appropriate movable assets registry for perfection. Non-possessory pledges can be documented in a póliza, avoiding stamp duty.
• Pledges over trade receivables – these are often sidestepped due to their complexities, recurrent expenses and potential data and confidentiality issues. Yet they are usually required for specific financings like asset base financings or special situations financing.
• Promissory mortgages – although they do not create security interest, promissory mortgages are frequently used as a defensive measure over real estate assets without incurring in stamp duty costs. To convert them into a real mortgage, stamp duty will have to be paid.

As explained in 5.1 Assets and Forms of Security, there is no equivalent under Spanish law to the universal floating security seen in English law debentures or the all-asset security under New York law in a single document. Instead, every asset or right category must be outlined in distinct pledge or mortgage documents, which need to be notarised by a Spanish notary public and, in some cases, registered before the relevant Public Registry.

In addition, if there are any alterations to the assets or rights, a notarial update may also be required, and sometimes, this update also needs registration.

Under the Spanish legal framework, directors have an inherent responsibility to perform their roles with unwavering loyalty and diligence, ensuring alignment with prevailing laws, the company’s by-laws, and its intrinsic interests (interés social).

While the Spanish legal system recognises the structure of corporate groups and the legitimacy of intra-group transactions, it underscores the paramount importance of preserving the independent existence and operational autonomy of individual companies. In this spirit, directors must perpetually prioritise their company’s specific interests, lest they face potential liabilities.

The notion of “corporate benefit”, although not overtly elucidated in Spanish law, emerges as pivotal when delving into the realm of guarantees or in rem security interests. It is essential that, when Spanish entities contemplate giving guarantees or establishing security interests, there exists a palpable corporate advantage. This does not mandate the guarantor’s direct involvement as a borrower in the financing continuum, but the tangible benefit should be discernibly manifest.

Given the emphasis on individual company interests, the legal framework does allow for the provision of downstream, upstream, or cross-stream guarantees in instances where they align with the group’s interests. Nevertheless, the directors of the guarantee-issuing company should meticulously evaluate the corporate benefits derived from such actions, ensuring they do not run counter to the guarantor’s interests. Downstream guarantees often present a clearer case for corporate benefit since they can enhance future dividend flows for the parent company and bolster the subsidiary’s operational viability. On the other hand, upstream or cross-stream guarantees present a more intricate challenge, necessitating demonstrable and, often, clear compensation to the guarantor. Such compensation can come in different forms and at different times. Thus, determining the alignment of a guarantee or security with a company’s best interests often demands a case-specific analysis, encompassing various facets:

• indirect benefits accrued by the guarantor;
• financial robustness of the Spanish guarantor and the parent group;
• direct and tangential advantages derived from the financing;
• financing proceeds bolstering the guarantor’s liquidity or fortifying the group’s long-term stability;
• approval from shareholders and management bodies; or
• access to more financing and on better terms within the group.

Spanish companies are prohibited from advancing funds, granting loans, providing guarantees or security interest, or providing any form of financial assistance to a third party for: (i) in case of private limited liability companies (sociedades limitadas), the acquisition of its own shares or the shares in any of its group-affiliated companies; and (ii) in case of public limited liability companies (sociedades anónimas), its own shares or shares of its controlling entity.

Considering Spanish law does not provide for any whitewash procedure mechanisms and that it does not clarify a specific duration for which such restriction may apply, the most conservative approach is to consider that debt tainted with financial assistance prohibition may include any refinancing of debt incurred for acquisition purposes. The implications for contravening these financial assistance guidelines can be grave. Directors might incur civil (and in some cases even criminal) liability and the financing transactions, guarantees, and/or security interest may be rendered null and void.

There are several mitigation measures and financing structures against these prohibitions that have been implemented in order to mitigate financial assistance prohibition risks, although these need to be reviewed on a case-by-case basis.

While the central intent of this rule is to protect a company’s assets, the applicable law for assessing implications should logically be that of the target entity. Nonetheless, discussions persist about its relevance to non-Spanish target companies.

In addition to the restrictions above with respect to the corporate benefit and financial assistance prohibition, granting of security may also need to be approved by the shareholders if the assets given as security are considered essential for the company.

Assets are presumed essential when their book value represents more than 25% of the asset’s value. In addition, other limitations may be included in the by-laws or shareholders’ agreements of a company.

When the primary obligation is fulfilled, securities and guarantees are inherently terminated. Nonetheless, specific procedures might be necessary to erase all mention of the security.

For example:

• for mortgages, whether they are on tangible assets or chattel, and for non-possessory pledges, the termination should be registered with the appropriate authority. This requires the involved parties to produce a public document; and
• for possessory pledges, the collateral must be handed back to the individual who provided it. It is also worth noting that any power of attorney given to the party holding the security within this framework might necessitate formal revocation via a public document.

In Spain, the rules governing the priority of competing security interests are primarily dictated by the principle of “priority in time” and formal registration. As a general rule, the first security interest to be created and registered has priority over subsequent ones. Thus, if any security needs to be registered, that presented before the registry prior will prevail over any presented subsequently, irrespective of the final registration.

In the event of a debtor’s insolvency, the Spanish Insolvency Act (Ley Concursal) establishes a hierarchy for the repayment of debts. Secured creditors (like mortgage or pledge holders) generally have preference over unsecured ones, but they might be subordinate to certain privileged claims like employee salaries or public debts. On the contrary, certain credits might be subject to equitable subordination by operation of law in an insolvency scenario, including, amongst others: (i) claims held by specially related parties to the insolvent entity (eg, shareholders or family members at a certain level, administrators or companies within the same group); (ii) creditors who fail to report their claims within the stipulated timeframe; or (iii) claims arising as a consequence of a claw-back action.

Parties can contractually agree to modify the priority of their claims, but such agreements might not be enforceable against third parties who are not part of the agreement. While contractual subordination is generally recognised, insolvency administrators and courts may review these arrangements to ensure they adhere to insolvency law principles.

Generally, creditors holding in rem security interests benefit from special privilege in an insolvency scenario and are entitled to receive payment from the liquidation of the encumbered assets.

However, certain claims may prime a lender’s security interest if there are insufficient assets in the company to satisfy the so-called claims against the estate (créditos contra la masa), which include, amongst others, labour-related claims (up to a maximum), tax and social security law claims and other claims arising from the insolvency proceedings.

Spain tends to favour borrowers in its jurisdiction, which can make it challenging to expedite loans governed by Spanish law and to enforce security measures. Spanish courts may hesitate to approve acceleration unless two primary conditions are met: (i) a significant violation has occurred, primarily involving a payment default of a minimum of three months’ instalments or an equivalent sum, and (ii) no other solutions, like debt restructuring or refinancing, are viable.

Securities governed by Spanish law can be enforced in two principal manners: through judicial or notarial methods. Directly selling or seizing secured assets is typically unfeasible.

Judicial Approach

Outlined in Article 681 and subsequent sections of the Civil Procedure Law (Ley 1/2000, dated 7 January), the process to execute an in rem security interest involves a court-supervised public auction. This method is optional for any in rem security enforcement. For obligations secured by pledge agreements on a periodic basis, a minimum of three unpaid instalments (or its three-month equivalent) must be defaulted before initiating the pledge enforcement or hastening the debt and enforcing the pledge for the entire secured amount.

Notarial Approach

The out-of-court or notarial auction method, defined primarily by Article 1,872 of the Spanish Civil Code and related provisions from the Spanish Notarial Law (Ley 28 de mayo de 1862, del Notariado), permits alternative enforcement of an in rem security interest via a public auction conducted under a Spanish notary’s oversight. The notarial procedure grants parties flexibility in establishing the process’s specifics, which should be documented in the security agreements. Key facets of this procedure include:

• oversight by a Spanish notary;
• public auction-based sales;
• borrower and collateral owner notification;
• option for multiple auctions if the initial one lacks attendees or fails;
• a 5% asset value deposit requirement for auction participation;
• secured parties initiating the process are exempt from the deposit; and
• direct asset appropriation is barred, with exceptions if no bidders are present and the claim is fully absolved.

For cash pledges, due to their fungible nature, the enforcement may involve offsetting cash against the remaining secured obligations or directly using the cash from the pledged bank accounts. This process, however, requires clear mention in the pledge agreement and notifying the bank account holder about the pledge enforcement, prompting them to transfer the due amounts to the secured parties.

Specific Regulation (RDL 5/2005)

The Spanish Royal Decree Law 5/2005, dated 11 March, which incorporates the EU Collateral Directive in Spain, explicitly presents the potential to enforce specific security interests via a direct sale or appropriation when an enforcement event transpires. It offers protection during insolvency, provided certain conditions are met.

Assets eligible for a security interest under RDL 5/2005 include:

• monies in any account, irrespective of the currency;
• marketable securities or other financial instruments, as described in the Spanish Securities Markets Act (Real Decreto Legislativo 4/2015, dated 23 October) and associated rules, alongside any direct or indirect rights over these securities or financial instruments; and
• credit rights, referring to monetary rights from an agreement where a credit institution provides a loan or credit, excluding specific exceptions.

The applicability of RDL 5/2005 should be examined individually. Eligibility to create a security interest under this provision demands that neither party is a natural person and at least one party in every security agreement is a qualified entity, such as a public institution, central bank, or credit institution, among others.

Generally, parties are free to negotiate and choose the law applicable to the agreement. When Spanish law is not used, English law is often agreed, especially in large cross-border transactions where the arrangers act from the United Kingdom or from other European jurisdictions.

Spanish banks will tend to agree on the law applicable to the facilities agreement not being Spanish law if there is a material connection from a solvency standpoint between the borrower and the relevant jurisdiction. From a legal perspective, Spanish courts would recognise a foreign governing law in contracts in accordance with Regulation (EC) No 593/2008 of the European Parliament and of the Council of 17 June 2008, on the law applicable to contractual obligations (Rome I), and therefore, the choice of law should be enforceable.

However, the choice of a foreign laws as the governing law of the agreement will not restrict the application of the Spanish “overriding mandatory provisions”, as defined in Article 9.1 of the Regulation (EC) No 593/2008 of the European Parliament and of the Council of 17 June 2008 on the law applicable to contractual obligations (Rome I).

Furthermore, Spanish courts may refuse to apply a provision of the chosen law if such application is manifestly incompatible with Spanish public policy. Spanish courts may also give effect to the overriding mandatory provisions of the law of the country in which the obligations arising from the contract have been performed or must be performed.

The exclusive jurisdiction of the Spanish courts includes matters relating to the incorporation, validity, nullity and dissolution of companies or legal entities domiciled in Spain, and any decisions and resolutions of their governing bodies, the validity or nullity of any recording in a Spanish registry, and the recognition and enforcement of any judgment or arbitration award in Spain that has been obtained in a foreign country.

Please note that Spanish law does not grant immunity from legal proceedings or the enforcement of judgments to Spanish companies. In certain cases, in the context of a security enforcement, the transfer of certain assets may require a prior administrative authorisation.

The enforcement in Spain of the judgments issued by the courts of a jurisdiction which is part of the EU Regulation No 1215/2012 of the European Parliament and the Council, would be immediately enforced, without a prior exequatur procedure.

An unappealable judgment duly rendered by the courts of a different jurisdiction could be recognised and enforceable by the courts of Spain pursuant to the following regulations.

• The Hague Convention of 30 June 2005 on Choice of Court Agreements (the “Hague Convention”), which applies to international cases with exclusive choice of court agreements concluded in civil or commercial matters. The Hague Convention regulates the recognition and enforcement of judgments of a court of a contracting state designated in an exclusive choice of court agreement in the other contracting states. According to the Hague Convention, such judgments are in principle to be recognised and enforced without review of the merits of the case, unless there are obstacles to recognition and enforcement (obstacles that will be listed within the qualifications section). Please note that the Hague Convention applies to exclusive choice of court agreements concluded after the Hague Convention has entered into force for the state of the court agreed upon.
• If the Hague Convention is not applicable, the judgments issued by the court’s other jurisdiction could be recognised and enforced in Spain, provided that the requirements in Spanish Law 29/2015 of 30 July, on international co-operation in civil matters (the “Law 29/2015”) are complied with. These provisions set out that any unappealable judgment rendered outside of Spain (apart from countries bound by Regulation (EU) No 1215/2012 of the European Parliament and of the Council of 12 December 2012 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters) may be enforced in Spain in two different situations: (i) in accordance with any applicable international treaty, or (ii) in the absence of any such treaty, when the requirements in Title V of Law 29/2015, including those applicable to exequatur proceedings, are met.

In those cases when there is no applicable treaty between Spain and the relevant jurisdiction, the conditions referred to in the second bullet point of the previous paragraph must be satisfied to recognise and enforce in Spain an unappealable judgment issued in the relevant jurisdiction. These conditions are, among others, that the judgment is not irreconcilable with another earlier judgment issued in Spain or in another country (provided in this latter case that the earlier judgment fulfils the conditions to be recognised in Spain), that there are no prior proceedings on the same matter pending in Spain, that the judgment does not infringe public policy and that the relevant matter does not fall under the exclusive jurisdiction of the Spanish courts.

The recognition and enforcement could be refused pursuant to the Hague Convention (if applicable) if:

• the agreement allows one of the parties to submit a dispute to any other court with jurisdiction different to the one established in the choice of court agreement;
• the agreement was null and void under the law of the state of the chosen court, unless the chosen court has determined that the agreement is valid;
• a party lacked the capacity to conclude the agreement under the law of the requested state;
• the document which instituted the proceedings or an equivalent document, including the essential elements of the claim:
1. was not notified to the defendant in sufficient time and in such a way as to enable them to arrange for their defence, unless the defendant entered an appearance and presented their case without contesting notification in the court of origin, provided that the law of the state of origin permitted notification to be contested; or
2. was notified to the defendant in the requested state in a manner that is incompatible with fundamental principles of the requested state concerning service of documents;
• the judgment was obtained by fraud in connection with a matter of procedure;
• recognition or enforcement would be manifestly incompatible with the public policy of the requested state, including situations where the specific proceedings leading to the judgment were incompatible with fundamental principles of procedural fairness of that state;
• the judgment is inconsistent with a judgment given in the requested state in a dispute between the same parties;
• the judgment is inconsistent with an earlier judgment given in another state between the same parties on the same cause of action, provided that the earlier judgment fulfils the conditions necessary for its recognition in the requested state; or
• the judgment awards damages, including exemplary or punitive damages, that do not compensate a party for actual loss or harm suffered.

The specific reasons why the Spanish courts could refuse the recognition and the enforcement of a judgment pursuant to Law 29/2015 (if applicable) are the following:

• when the judgment is contrary to public order;
• if the defendant was not given formal notice or equivalent document on a regular basis and in sufficient time to defend themselves;
• if the decision was ruled on a matter in respect of which the court of origin does not have a reasonable connection or if the court of origin has ruled on matters in respect of which the Spanish courts are exclusively competent. The exclusive jurisdiction of the Spanish courts includes matters relating to the incorporation, validity, nullity and dissolution of companies or legal entities domiciled in Spain, and any decisions and resolutions of their governing bodies, the validity or nullity of any recording in a Spanish registry, and the recognition and enforcement of any judgment or arbitration award in Spain that has been obtained in a foreign country;
• if the decision was irreconcilable with an earlier decision issued in Spain or in another country (provided that this decision issued abroad fulfils the requirements for it to be recognised and enforced in Spain); or
• when there is a pending dispute in Spain between the same parties and with the same object, initiated before the foreign proceedings.

Generally, there is no restriction on foreign lenders’ ability to enforce their rights under a loan or security agreement.

Also, if an agreement was to be enforced by a foreign lender (or agent, in the context of a syndicated transaction), it shall be duly empowered to this end. In this regard, a power of attorney must be granted before a Notary Public in the relevant jurisdiction, which fulfils all the required formalities under Spanish law, and duly apostilled if necessary pursuant to the Hague Convention of 5 October 1961.

Notwithstanding the foregoing, please see 3.2 Restrictions on Foreign Lenders Receiving Security in connection with the restrictions that could be imposed by the government on the transactions between residents and non-residents and the suspension of the liberalisation regime in certain circumstances due to the nature of the specific transaction.

Also note that for any document to be admissible by a court or authority in Spain which is not in Spanish, it must be accompanied by an official sworn translation into Spanish.

The main effects of the declaration of insolvency can be classified within three different categories: (i) effects on court or arbitration proceedings; (ii) effects on claims; and (iii) effects on agreements.

Effects on Judicial or Arbitration Proceedings

As a general rule, and subject to certain exceptions, proceedings that are already in progress will continue until the judgment becomes final.

Upon declaration of insolvency, no enforcement may be initiated against the debtor’s assets and rights, and those enforcement proceedings that initiated before the declaration of the insolvency shall be suspended, even in the case of secured creditors (ie, mortgages). The insolvency court is empowered to order the lifting and cancellation of attachments on the debtor’s assets, in the event that such attachments would hinder the debtor’s business.

Holders of in rem rights may also initiate or continue enforcement proceedings in the event that liquidation has not been initiated within one year of the declaration of insolvency, although they will lose their right to a separate enforcement if they have not initiated the enforcement prior to the commencement of the liquidation phase.

The declaration of insolvency by itself does not affect the effectiveness of arbitration agreements. Ongoing proceedings will continue until the arbitration award is final. However, in the case of new proceedings, the insolvency court is empowered to suspend the arbitration agreements if they could be detrimental to the processing of the insolvency proceeding.

Effects on Claims

The aim is to avoid an increase in the amount of the debtor’s liabilities, thus favouring the creditors’ chances of payment. Consequently:

• the accrual of interests on insolvency claims will cease, except for secured claims (to the extent of their amount), among others;
• liens on assets of the insolvency estate will be suspended;
• the offsetting of claims will not proceed, unless they derive from the same legal relationship and the requirements for offsetting the claims were met prior to the declaration of insolvency; and
• the statute of limitations on legal actions against the debtor for claims prior to the declaration of insolvency shall be interrupted.

Effects on Agreements

Agreements may not be terminated by the mere declaration of insolvency. Early termination clauses based on this trigger will be null and void, unless otherwise stated by law (ie, financial collateral).

Agreements with outstanding obligations shall be executed in accordance with the agreed terms.

Only agreements with successive performance may be terminated for breaches prior to the declaration of insolvency. In the event of breaches after the declaration of insolvency, the agreements may be terminated.

Notwithstanding the foregoing, the insolvency court may, in the interest of the insolvency proceeding: (i) enforce the compliance of an agreement, even if there is ground for termination; and (ii) require the termination of an agreement that has not been breached.

Likewise, the insolvency administration may renew financing agreements (and purchase agreements with deferred price payment), that were terminated due to non-payments occurring in the three months prior to the declaration of insolvency and prevent eviction actions before eviction takes place.

Pursuant to the Spanish Insolvency Act, there are three types of insolvency creditors: (i) privileged claims, which can be specially privileged or generally privileged claims; (ii) ordinary claims; and (iii) subordinate claims.

Specially Privileged Claims

Specially privileged claims are those that have an in rem right over a specific asset or right. This type of creditor holds a preferential claim in relation to the enforcement, or the proceeds of the sale of the asset or right affected by their in rem right. One condition in order to consider a creditor as specially privileged is that the right in rem must be granted before the commencement of the insolvency process, and it must comply with the legal requirements for it to be enforceable against third parties.

Generally Privileged Claims

Generally privileged claims are those paid after the repayment of specially privileged claims, but prior to ordinary claims. These claims, unlike specially privileged claims, are paid from the debtor’s assets rather than with the attachment or enforcement of a specific asset. These claims include, among others: (i) pre-insolvency claims for wages, compensation for the termination of employment agreements, compensation for work-related accidents or illness or amounts owed for the breach of employment or health-related obligations established before the declaration of insolvency; (ii) claims for unpaid withholding taxes and social security contributions; (iii) claims of individuals deriving from non-dependent personal work; (iv) claims for amounts to be paid to tax authorities and social security contributions; (v) claims for tort liability; (vi) 50% of the claims arising from interim or new financing granted under a restructuring plan; and (vii) claims held by the creditor that requested the commencement of the insolvency process.

If the debtor’s assets are insufficient to fully satisfy any of the subclasses listed above, creditors of the same subclass will be paid on a pro rata basis to the amount of their claims.

Ordinary Claims

Ordinary claims are those that are not privileged nor subordinate claims. Payment of ordinary claims shall be made after payment of credit against the state and privileged claims on a pro rata basis.

Subordinated Claims

Subordinated claims are those paid last and only if ordinary creditors have been paid in full. Subordinate claims include, among others: (i) claims that were communicated to the insolvency administration out of time; (ii) claims that are contractually subordinated; (iii) claims for interests and surcharges accrued before the declaration of insolvency, except those in connection with secured claims; (iv) claims for fines and sanctions; (v) claims held by any of the persons specially related to the insolvent company; (vi) claims in favour of a creditor due to claw-back actions if the court declares that the creditor acted in bad faith; and (vii) claims arising from reciprocal obligations or reinstated financing contracts.

Notwithstanding the foregoing, before the insolvency creditors are paid pursuant to the order established above, certain creditors, called “creditors of the insolvency estate”, are paid from the insolvency estate as they fall due.

According to the latest information published by the Spanish Judiciary (Poder Judicial) corresponding to the year 2022, the average length of an insolvency proceeding in 2022 was 33.6 months.

Note that on 1 September 2020, Royal Legislative Decree 1/2020, of 5 May, implementing Directive (EU) 2019/1023 of the European Parliament and of the Council of 20 June 2019, on frameworks for preventive restructuring, debt discharge and disqualifications, and on measures to increase the efficiency of debt restructuring, insolvency and discharge procedures, entered into force, which replaced the previous Insolvency Law 22/2003, of 9 July, and which in turn was amended by the recent Law 16/2022, of 5 September, on the reform of the consolidated text of the Insolvency Law.

From the information available on the website of the Spanish Judiciary (Poder Judicial), there is a clear decrease in the length of bankruptcy proceedings, which in 2020 stood at 52.1 months, so that if it is compared with respect to 2022, the average term has been reduced by 18.5 months in the last two years.

Outside of an insolvency proceeding, there is a mechanism that can be used in order to address the financial difficulties of companies at an early stage prior to the commencement of the insolvency proceeding. This mechanism is designed to help financially distressed companies address their difficulties and avoid the full-blown insolvency process.

In this regard, in the event that there is a “likelihood of insolvency” of a debtor, the debtor may notify the commercial court of the existence of negotiations with its creditors or the intention to begin such negotiations in order to reach a restructuring plan to overcome its financial situation, thus allowing debtors to react and initiate processes earlier. The debtor and the creditors shall reach a restructuring plan within three months of the notification of the communications to the commercial court. This term may be extended, under certain circumstances, up to three more months. In the event that no agreement has been reached in the term, the debtor must apply for the insolvency proceeding within the following month.

The restructuring plan is a restructuring mechanism by virtue of which debtors suffering from financial difficulties and their creditors may agree on any type of procedure that is deemed sufficient to restructure the debtor’s business (this could include sales of the debtor’s assets or even part of, or the entire business). The effects of the plan can be imposed on most types of creditors and claims.

The restructuring plan must have reasonable prospects of preventing the insolvency process and it must be formalised in a public deed. In certain cases, the restructuring plan must be approved by the commercial court. Once the restructuring plan is approved by the court, it will not be possible to request its termination in case of a breach, unless the plan states otherwise. Despite the fact that the plan cannot be terminated because of the debtor’s breach, in the event that the breach is caused by the debtor’s insolvency, any person shall be entitled to file an insolvency petition against the debtor.

Lenders should consider the remoteness of the borrower’s insolvency since certain transactions and security interests may involve a claw-back risk if they are concluded within the “suspect period” determined by the court in the judgment declaring the insolvency of the borrower (usually two years before declaration of insolvency).

For the effects of the commencement of an insolvency proceeding please note 7.1 Impact of Insolvency Processes.

The Spanish project finance market is wide and stable, with experienced and active banks and sponsors familiarised with the available structures to finance the construction and operation of energy, infrastructure and real estate projects.

The most active users of this form of financing are Spanish banks and sponsors of renewable energy projects (mainly photovoltaic, wind farms and, to a lesser extent, thermo-solar and biomass projects) where cash flows are generated through power purchase agreements (PPAs), feed-in tariffs or merchant price for the electricity produced.

Social and transportation infrastructure projects (such as hospitals, public buildings, schools, roads, trams, interconnection stations and railways) are also usually financed through project financing structures.

The financing for the development of real estate projects is also commonly structured based on the cashflows that the assets will generate, particularly in the case of hotels, shopping centres, offices and logistics platforms.

Public-private partnership (PPP) transactions have been prompted in Spain by public entities aiming to collaborate with private investors to develop, finance and manage large and critical public infrastructures.

The financing of PPPs requires a thorough legal analysis of the applicable legislation (national, regional and local) and the rights and obligations of the parties according to the tender documents.

Although not expressly regulated, Law 9/2017, of 8 November, on public sector contracts, regulates concession contracts used to finance public works with private capital. The investors assume construction, operational and service risk and are allowed to obtain returns on their investment (receiving fees from the users of the infrastructure or the relevant public entity, or both) and must return the infrastructure to the public entity when the concession terminates.

Although financing on the public side is to be totally or partially assumed by the concessionaire (typically in the form of a project financing), in case of public works concessions contracts, financial or social profitability or specific requirements arise from the public interest in the concession, and public entities may contribute public resources by means of grants and/or loans to finance the infrastructure.

Finally, Spanish Royal Decree-Law 36/2020, of 30 December 2020, establishing urgent measures to modernise the public administration and implement the government’s recovery, transformation and resilience plan, provides the rules to manage projects, with a special focus on the digital and environmental transformation of the Spanish economy, together with territorial, economic and social cohesion, that shall benefit from Next Generation EU funds. This Royal Decree-Law creates a new form of public-private co-operation initiative called PERTE (Strategic Projects for the Economy Recovery and Transformation), which is expected to have a significant impact in the coming years in terms of PPP.

Parties are free to negotiate and chose the applicable law for their project documents.

From a legal perspective, Spanish courts would recognise a foreign governing law in contracts in accordance with Regulation (EC) No 593/2009 of the European Parliament and of the Council of 17 June 2008, on the law applicable to contractual obligations (Rome I) and, therefore, the choice of law should be enforceable, unless manifestly incompatible with Spanish public policy. Submitting project documents to a foreign jurisdiction is generally valid under Spanish law, to the extent the choice of jurisdiction has been validly made according to Spanish law.

Notwithstanding, it is necessary to bear in mind that in project financing, the most relevant jurisdiction is the one where the project is physically located, and in areas of public law, the courts of the jurisdiction where the project is located will assert jurisdiction in matters of private law affecting public interest.

In the case of project documents related to Spanish real estate, infrastructure or energy projects, project documents are usually governed by local law and disputes resolved in local courts, although it is not unusual to have cross-border PPAs governed by foreign law containing arbitration clauses.

Please review the references to the suspension of the liberalisation regime of direct foreign investments in Spain referred to in 3.4 Restrictions on the Borrower’s Use of Proceeds.

Structuring project financing deals requires a thorough analysis of the project costs and the revenue that will be generated by the project once it operates, which will need to cover the operating costs and the debt service and generate investment returns to the project sponsors.

A careful environmental, technical, financial and legal due diligence exercise, and the input of insurance advisers is of the essence to determine the viability of the project, the risks involved, its allocation and potential mitigators.

The debt-to-equity ratio (ie, third-party debt-to-equity injected by the sponsors) will be adjusted considering the overall project costs, the risk profile of the project and the sponsors’ experience. 

To the extent that project financing is structured as non-recourse (or limited-recourse) financing, it will be crucial for the parties (i) to determine a structure that is sustainable through the entire life cycle of the project (ie, from the design and construction phases until the operating phase), to ensure that the project will be built and ready to operate as planned and (ii) to set up a robust project contractual matrix, payment waterfall and security package that will assist the parties in case any construction delays, cost overruns or any other difficulties or contingencies arise during the operation of the project.

The typical financing source for project financing is the use of bank debt by the special purpose vehicle (SPV), the separate legal entity that the sponsors of the project will incorporate (to ring-fence the project from the rest of the businesses of the sponsors) and into which they will inject the equity.

Project bonds are not a frequent source for project financing in Spain, mainly because Spanish banks have structured and devoted teams of project finance bankers specialised in the infrastructure, energy and real estate sectors that have been able to understand and assist Spanish sponsors, traditionally more inclined towards bank debt, in structuring and closing successful project financing. 

In recent years, alternative credit providers have increased their interest towards Spanish projects and also provide funding to complete projects in Spain, mainly through mezzanine loans to the SPVs or equity loans to the sponsors.

There are no relevant natural resources projects in Spain. The export of natural resources remains minimal. Spain has highly negative net exports of mineral fuels, including oil.

This section will assess the impacts of the applicable environmental, health and safety laws in terms of authorisations and obligations of the special purpose vehicle (SPV), the legal entity created by the project sponsors.

The Spanish Constitution establishes the right to enjoy the environment and the duty to preserve it, and that public authorities shall safeguard rational use of all natural resources with a view to protecting and improving quality of life and preserving and restoring the environment, without prejudice to the obligation to repair any damages caused and the criminal or administrative sanctions that may be imposed on those who fail to comply.

The Spanish environmental legal framework comprises laws regulating particular industries and activities, and laws protecting the environment and controlling certain contaminating agents.

The relevant applicable authorisations necessary to build and operate a project in Spain from the state, regional and local authorities take into consideration the environmental impact of each project.

Environmental, social and governance (ESG) issues are relevant not only because certain projects may be financed under green loans or sustainability-linked loan principles, but also because ESG reporting duties apply to companies and group companies exceeding certain thresholds and, in accordance with the public procurement regime, ESG breaches may result in prohibitions on entering into public contracts.

Spanish banks adhere to the Equator Principles, a voluntary set of guidelines for managing social and environmental issues related to the financing of development projects, aimed to mitigate any potential negative impacts on the environment, people and climate. It is common practice for Spanish banks to require the application of the Equator Principles when financing projects in Spain.

In terms of health and safety, sponsors and potential lenders participating in project financing in Spain shall bear in mind that in addition to labour legislation, employers shall ensure the health, safety and well-being of their personnel in the work environment in accordance with the occupational risk prevention legislation, that comprises the obligation to identify the risks that exist in workplaces, to assess the impacts on the health of workers and to take measures to prevent or reduce these risks.