The start of 2017 has seen increasing levels of direct lending activity in the Spanish markets despite the political uncertainty (at least locally) of a year without a national Government in place and the risk of market-averse political parties forming a national Government.
Security
One of the issues affecting funds when lending into Spain is understanding the extent to which they can benefit from the same security package as banks (and under similar terms). There are a number of fall-backs here, namely:
(a) in the event the relevant fund wants hard asset security, there are certain types of mortgages (notably the so-called “floating mortgages”) which are only available to credit institutions; and
(b) as a general rule Spanish law does not allow for foreclosure on the assets given by way of security, and typically enforcement occurs by means of a public auction of the asset. An exception is if the security falls within the Spanish implementation of the EU Collateral Directive (Royal Decree Law 5/2005), “RDL 5/2005”, which as a general rule does not benefit credit funds, in which case (a) the security had specific protections in the event of an insolvency of the security provider; and (b) it allowed enforcement by direct sale or appropriation. This specifically affects security interests over shares in Spanish sociedades anónimas or S.A.S and security interests over bank account balances.
A recent EU Court of Justice ruling in connection with a Latvian case has however cast a shadow over the usefulness of pledges over bank accounts under RDL 5/2005. The ruling not only limits the insolvency protection to only moneys credited to the pledged account prior to the declaration of insolvency, but it also deals with the concept of when a pledge over a bank account is deemed to fall within the RDL 5/2005.
In this respect, the court ruling found that the RDL 5/2005 requires that the beneficiary of the pledge is given control of the secured assets. In practice, in order for a pledge to benefit from the protection afforded by the account pledge, the pledge/lender must ensure that the pledger/borrower is prevented from being able to freely use the pledged account.
The natural consequence of this is that it is now very difficult to impose this type of security interest on borrowers in the market (other than in very specific circumstances, such as debt service reserve accounts in project financings). Bank lenders are therefore turning away from bank account pledges that follow this structure and are now in this respect operating on a level playing field with credit funds.
Super senior money in restructurings
The other development we have witnessed in recent months is related to super senior facilities provided in the context of a restructuring. Since Spain enacted the last reform to the so-called homologation process, a restructuring that effectively abides by creditor majorities set out in Additional Provision 4 of the Spanish Insolvency Act can easily be sanctioned by a court and can then only be opposed by creditors on two grounds, namely either: (i) that the necessary majorities were not achieved; or (ii) that there is a disproportionate sacrifice for the dissenting creditors challenging it.
A recent court ruling in a homologation proceeding backed a credit fund that had bought debt in the senior piece of the financing structure of a borrower in the secondary market and, in the context of the restructuring, had structured a super senior financing. One of the reasons for the rejection of the disproportionate sacrifice arguments from a dissenting creditor was that the new money piece had been offered to all existing senior creditors, and thus a dissenting creditor voluntarily deciding not to take part in the super senior facility was not entitled to claim that it had been treated worse than other creditors.
The concept we have started to see of disproportionate sacrifice is still not entirely developed. More court rulings in the market are helping set the boundaries of what the insolvency courts consider qualify as such. The existence of several significant restructurings in the market that are going through homologation will in all likelihood help to refine the concept and add more certainty for credit funds interested in that segment of the market.
Insights
- Increased activity in the Spanish market.
- A recent EU court of Justice ruling has cast doubts around the types of security available to banks.
- Super senior facilities in the context of the restructurings is being backed by court rulings.
