The new Spanish Scheme: cram-down, secured creditors and valuation

May 2014 | LEGAL & REGULATORY | BANKRUPTCY & RESTRUCTURING

Financier Worldwide Magazine

The Spanish Insolvency Act was recently amended by means of the Royal Decree Law 4/2014, dated 7 March, based on urgent measures for refinancing and restructuring corporate debt, approved by the Spanish government. The Royal Decree has significantly modified the country’s insolvency regulation on several key aspects which generally deal with pre-petition distressed situations and, importantly, court-sanctioned (homologation) refinancing agreements (Spanish Scheme) under the fourth Additional Provision of the Spanish Insolvency Law.

The Royal Decree has introduced a new Spanish Scheme framework which enhances pre-petition restructurings and provides new tools to facilitate refinancing processes in Spain. This allows both debtors and creditors to undertake restructurings to secure the viability of the company and rationalise its debt. The scheme can now consist of alternatives that go beyond mere extensions of the term and, instead, can include write-offs, debt-for-equity swaps or debt-for-asset swaps, for example. Further, pursuant to a Spanish Scheme, secured creditors benefiting from in rem securities will now also be crammed down provided certain thresholds are achieved (and not only for unsecured creditors as was the case before).

The main features of the new Spanish Scheme are outlined below.

Only creditors holding financial debt can be crammed-down. The reform has introduced the concept of creditors holding financial debt at the time of approval of the scheme. This answers one key concern in many Spanish Schemes which consisted of whether hedge funds or institutional investors could be effectively crammed-down under a Spanish Scheme. Now, the fact that the creditor is, or is not, a financial entity subject to supervision is no longer relevant and, therefore, all creditors holding financial debt, notwithstanding their specific nature and regulatory regime, will be potentially subject to cram-down.

Two additional rules are introduced in connection with the universe of creditors to be crammed-down under a Spanish Scheme: (i) financial debt held by specially related parties to the debtor (for example, shareholders) are excluded for the purposes of calculating the relevant majorities but, instead, the effects of the scheme can be extended to them since specially related parties will be bound by the homologation; and (ii) creditors holding commercial receivables are not included within the scope of the Spanish Scheme but have the ability to adhere to it.

Majorities. A new set of majority thresholds has been introduced by the reform which will depend on the class of creditors and effects of the Spanish Scheme being crammed-down. The low majority level is 51 percent over the financial liabilities held by all creditors at the time of approval. If such a majority is achieved, the scheme would be protected against avoidance actions and its effects will apply to participant creditors. As per the literality of the law it appears that this protection is absolute as not even the trustee will be able to challenge these agreements if this majority is achieved.

The intermediate level of majority is 60 percent of the total financial debt. If such a majority is obtained the scheme can be imposed to dissenting unsecured creditors (over its total position) and to dissenting in rem secured creditors – but only over the amount non secured by the collateral (deficiency claim). This scheme can consists of: (i) payment deferrals of principal, interests and other due amounts, up to five years; and (ii) senior debt-to-profit participating loans (PPLs), up to five years. Further, these same effects will be crammed-down over secured amounts of dissenting in rem secured creditors when the scheme is supported by 65 percent of the secured claims (by value) held by all creditors of financial liabilities.

Finally, the heightened level of majority consists of 75 percent of the total financial debt. If such a majority is obtained the scheme will be imposed to dissenting unsecured creditors (over its total position) and to dissenting in rem secured creditors (but only over the deficiency claim). This scheme now includes: (i) payment deferrals of principal, interests and other due amounts, from five up to 10 years; (ii) unlimited debt write-offs (literally, there is no express limitation in the rule); (iii) debt-for-equity swaps; (iv) senior debt-to-profit participating loans (PPLs), from five up to 10 years, or convertible obligations or conversion into any financial instrument; and (vi) payments in kind or debt-for-asset swaps. Secured creditors will also be crammed-down, for the secured portion of their claim, if 80 percent of the secured claims held by all creditors of financial liabilities support the scheme.

With respect to syndicated facilities, new voting rules have been introduced according to which all lenders within a syndicated facility will be considered to support the refinancing scheme if creditors representing at least 75 percent of the syndicated loan debt (or a lower percentage if agreed in the syndication rules established in the loan agreement) have voted in favour of the refinancing scheme. This rule will certainly raise controversy as certain concepts remain unclear: what is a syndicated facility? What happens if the 75 percent threshold is not achieved? Will the syndicated facility be considered to vote against the scheme or will the votes of the creditors of the syndicated facility always be counted for majority purposes (in the corresponding percentage)?

Secured creditors and valuation. One of the key developments introduced by the reform is that secured creditors can now be crammed-down pursuant to a Spanish Scheme, even if the majorities required to cram secured creditors down will vary depending on whether their claim is covered by the collateral or not. In this regard, valuation and, specifically, determining where ‘value breaks’ in terms of a secured creditor’s position will become a key issue in many Spanish restructurings.

The value of the security is determined as the result of deducting nine-tenths of the reasonable value of the collateral (based on the rules set forth by the Spanish Insolvency Act) from the outstanding debts that have a privilege over that collateral asset. This value cannot be lower than zero or higher than the value of the credit held by the relevant creditor. Special rules in those cases where: (i) the security has been granted in co-ownership in favour of two or more creditors in which case the value of each creditor’s security will be the amount resulting from applying the proportion held by the relevant creditor to the total value of the security; and (ii) if the security has been granted over more than one asset, the valuation of each asset must be added and the whole value of the security must not exceed the value of the credit held by the relevant creditor.

Equity cram-down? One of the main obstacles in Spanish restructurings is the ability of shareholders to ‘block’ debt-for-equity swaps even if they have no interest in the equity due to the fact that shareholder approval in the context of a debt-for-equity swap is always required. Therefore, shareholders have ‘formal’ rights which are not aligned with their economic interest in the process which, in turn, results in shareholders having strong leverage in all restructuring processes.

To address this situation, the reform has introduced a new rebuttable presumption to determine the liability of shareholders of the debtor when they reject, without a reasonable cause, a debt-for-equity swap, capitalisation process or the issue of convertible obligations, which frustrates a collective refinancing or a court sanctioned scheme. Even if this a big step and certainly a major change in Spanish restructurings, we understand that the introduction in Spain of ‘real’ equity cram-down mechanisms based on the interest of shareholders in the equity (similar to what has been introduced with respect to secured creditors) is necessary and still demanded by practitioners and market players.

New money. The Spanish new money regime is still insufficient and lacks a comprehensive framework which provides new cash injections to distressed debtor incentives similar to those available in other jurisdictions (superpriority administrative status or priming liens). Instead, the Spanish legislator has provided that new money, for a period of two years (following the effectiveness of the reform), granted (or to be granted) under the scheme will qualify 100 percent as administrative expense (créditos contra la masa), increasing the previous 50 percent administrative status to the total new money. The debtor and any specially related party may benefit from this regime provided that the new money is not structured as an increase of share capital. Interests will be deemed, however, subordinated claims.

The reform is a decisive step to create a comprehensive pre-petition refinancing scheme to allow debtors and creditors to undertake a financial restructuring which secures the viability of companies through the deleveraging and rationalisation of the capital structure. Investors and market players should be aware of these changes and the impact they can have on their current positions and investments going forward. Case law will have to be monitored closely as it is our understanding that judges will play a key role in the future success of this reform, especially when it comes to valuation battles and the determination of where the ‘fulcrum security’ is located.

Iñigo Rubio is a partner and Ignacio Buil Aldana is a senior associate at Cuatrecasas, Gonçalves Pereira. Mr Rubio can be contacted on +34 915 247 603 or by email: inigo.rubio@cuatrecasas.com. Mr Buil Aldana can be contacted on +44 (0)207 382 0400 or by email: ignacio.buil@cuatrecasas.com.

Iñigo Rubio and Ignacio Buil Aldana

Cuatrecasas, Gonçalves Pereira