Pre insolvency restructurings in Spain

State of play

When some years ago Spain enacted its preinsolvency restructuring, widely known as “homologation”, it was well received by the market as a flexible and well thought through regime to carry out restructurings in Spain, although there were still some aspects where the regulation stuck to a more conservative approach such as in the structuring of classes of claims, with only secured and unsecured classes being available. The homologation has been widely used and the only negative reaction in the market has come from the time is takes courts to resolve on a challenge of the homologation if one of the dissenting creditors argues that it has suffered a disproportionate sacrifice.

In this context Spain has to adapt its restructuring regime to EU Directive 2019/1023, dated 20 June 2019, on preventive restructurings (the “Directive”), and there is a very much advanced draft bill of law with the Parliament that is expected to be enacted next month with little change to the draft that has been disclosed (the “Draft Restructuring Law”).

Main guidelines of the Draft restructuring Law

In order to be able to be backed by all EU Member States, the Directive caters for a flexible regime where each EU Member State needs to make a number of choices within the room of manoeuvring allowed by the Directive. In this sense, the following elements can be highlighted:

(i) The restructuring plans can now not be limited to just financial claims but encompass other types of liabilities of the debtor;

(ii) The Draft Restructuring Law clarifies something that was not clear in the current regime and that had been backed by the court in several cases, namely that the parties can choose not to restructure the aggregate liabilities of the debtor but freely establish a perimeter (encompassed by the claims that will be “affected” by the intended restructuring to the extent such perimeter is homogeneous);

(iii) In order to avoid the delays embedded in challenges to the plan, the parties can obtain from the court a pre-approval of the structure of classes they have designed so that the court signs off on the fact that they are compliant with the applicable regime;

(iv) As regards classes, the Spanish regime departs from the traditional split between secured and unsecured classes as the only rationale for setting up the classes and allows the parties a substantial degree of freedom when designing the classes subject to the following general principles:

a. Classes need to respond to a common interest of those included in a specific class;

b. The initial principle is for classes to be based on insolvency rankings of creditors, but that can be amended setting up different classes for example (A) for different types of claims (ie financial claims vis-à-vis non-financial claims), (B) on the basis of conflicts of interests (practice will determine for example how this can be used in case of cross-holdings in different bond issuances), (C) how the claims will be affected by the plan;

c. In terms of secured claims the Draft Restructuring Law clearly provides that secured and unsecured claims can never form part of the same class. On this basis, it goes further by stating that in principle all secured claims will form part of the same class unless the heterogeneous condition of the assets underlying the security (ie not of the financial claims!) justifies the creation of sub-classes: therefore, on the face of it and unless secured by completely different security packages, a secured bond and a secured facility would in principle form part of the same class).

(v) In terms of contingent claims, which have been a consistent point of friction in Spanish restructurings in the past (in terms of sureties and guarantee lines), the Draft Restructuring Law takes the view: contingent claims are included for their aggregate amount unless the restructuring plan includes a lower amount and they will only be impacted in respect of the amount crystallised; and

(vi) Lastly, as regards credit facilities, the Draft Restructuring Law clearly foresees that only amounts drawn will be considered (and hence entitled to vote and affected by the plan), which is an important element for RCF lines.

In summary, flexibility when designing classes is significantly enhanced although there are some issues where courts (when deciding to sign-off on the proposal made by the parties) will have to confirm how far that flexibility can be taken.

Majorities and cross-class cramdown

A class will be deemed to approve the plan that has been put forward to voting if (i) 2/3 (by value) of a class that is not made up of secured claims or privileged claims under Spanish insolvency law votes in favour of the plan; and (ii) 75% of classes made up of secured claims or privileged claims under Spanish insolvency law votes in favour of the plan.

It is important to note that the specific rule applicable to syndicated facilities whereby a 75% favourable vote in the syndicated facility will mean that the entire facility is deemed to vote in favour of the plan stays, and is further clarified in the sense that if such percentage is not achieved the plan will not be deemed to be rejected by the syndicate but rather that each vote will be taken into account separately, which enhances the likelihood of a favourable vote. 

In terms of cross-class cramdown, ie the ability of some classes to drag dissenting classes of claims, this was not available under the current regime and is expressly foreseen in the Draft Restructuring Law as follows: if a restructuring plan has been approved by a majority of classes, it can be imposed on dissenting classes if and to the extent that (i) at least one of the classes backing the plan is a secured class; and (ii) at least one of the classes is in the money (which needs to be backed by a valuation report when requesting the cramdown)

Shareholders as a class

One of the key elements of the Directive is the treatment of the shareholders (specially if they are “out of the money”). Spain has taken a balanced approach, moving away from the conservative approach we have had in the past which made imposing a debt for equity swap difficult against a dissenting shareholder.

Pursuant to the Draft Restructuring Law, in the event of an actual or imminent insolvency only a cramdown can be imposed on the shareholders if and only if the equity is out of the money, the logic behind it being that in such scenario the shareholders shouldn’t be able to impair a restructuring from happening. In summary, the new regime will treat the shareholders as a class and voting within such class will primarily be governed by the majority regime of a general shareholders’ meeting (without any enhanced majorities being applicable). If the general shareholders’ meeting does not approve the plan and the aforesaid conditions are met the plan can be imposed on the shareholders.

By way of summary, the Draft Restructuring Law will provide for a significantly more flexible regime in Spanish restructurings than what we had to date, although some aspects will have to be defined in more detail by practice and case law.

Author: Jose Christian Bertram , Partner