Spanish Spotlight Edition 2: Brexit, Recognition of English law judgements and Equitable Subordination 

Welcome to the second edition of Spanish Spotlight, a quarterly update on the Spanish loan market prepared by the English law team in the banking and international finance department of Ashurst Spain.

Hot topic

Brexit- An English lawyer's perspective

In the previous edition of Spanish Spotlight, we looked at the potential impact a decision by the UK to leave the EU would have; with a particular focus on concerns that there would be a disproportionate effect on providers of financial services.  Just over two months after a victory for the "leave" campaign, there is still a considerable amount of uncertainty.  Most recently, concern has shifted to fears that the rest of Europe will resist any attempts by Britain to retain "partial" access to the single market.  As discussed in the previous edition, if the UK was to leave the single market in its entirety, unless an alternative is created, the City of London would lose its passporting arrangements into the Eurozone.  This in itself could have a significant impact on the future investment into Spain by UK and international institutions.  However, as is the case with much of the fallout from the referendum result, this remains still very much an unknown.

From our perspective, there is very little immediate action required in relation to the English law documentation that we use in Spanish transactions. The majority of transactions are based on standard LMA terms and these will remain unaffected by the leave decision of itself. There are a number of references to the EU and EU legislation that will need to be updated once their replacements, if any, are enacted into English law. However, these cannot be anticipated and the LMA will no doubt update the core terms of its documentation as and when changes to the underlying laws are made. We will provide you with updates on this once we receive more guidance from the LMA.

 We have seen some attempts in the market to include bail-in clauses in English law contracts pursuant to the BRRD requirement that in-scope entities must include a bail-in provision when they enter a contract under which they have liabilities under a law of a non-EEA country.  However the UK remains in the EEA so we do not believe that this is currently necessary.  There may, however, be a move in the market towards including such provisions in contracts that create long term liabilities which straddle a potential "Brexit" date (likely to be 2+ years away).  

English law update

Recognition of English law judgements in Spain

Our international clients investing in Spain often choose English law to govern the facility agreement with exclusive jurisdiction to the courts of England and Wales.  Borrower assets such as shares, real estate, and commercial/procurement contracts are secured under Spanish law documents.  In the event of a default the parties have the benefit of litigation procedures in England and a clear route to enforcement over Spanish assets due to the recognition of English judgments in Spain.

Under EU Regulation No 1215/2012 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters (the "Brussels Regulation"), a judgment given in a Member State which is enforceable in that Member State can be enforced in the other Member States without any declaration of enforceability being required.

There are only very limited circumstances in which the Spanish courts may refuse to enforce a judgment.  These include where enforcement would be manifestly contrary to public policy in Spain, or where the judgment is irreconcilable with a judgment given between the same parties in Spain or in another State involving the same cause of action and between the same parties.

Despite the UK´s decision to leave the EU, at present it remains a Member State and the Brussels Regulation continues to apply.  There are other international conventions to which the UK is either already a signatory or could become a signatory, which have a similar effect to the Brussels Regulation.  These include the Lugano Convention, which applies between all EU countries and Norway, Iceland and Switzerland.  It is possible that the UK would accede to this in its own right following Brexit.  It may also accede to the Hague Convention, which has a similar effect but applies only where exclusive jurisdiction clauses are used.  So, while Brexit could result in initial uncertainty and relatively minor changes to contractual documentation – perhaps a shift to exclusive jurisdiction clauses or even to arbitration clauses – it is unlikely to be particularly problematic in the medium to long term.

Spanish Loan Market

Equitable Subordination - Investors beware

In a number of deals that we have acted on over the past few months we have seen an increased focus on the risks and consequences of equitable subordination in Spain following the insolvency of an Obligor.  In the light of the (challenged) decision by the Spanish courts in the insolvency proceedings of Marme Inversiones, in which RBS´ claim was deemed to be subordinated following a payment made by RBS from a transaction account on behalf of Marme Inversiones, there has been a revised look at the account provisions in facility agreements that rely on forecasted cash flow for the repayment of the loan; in particular NPL financings and real estate finance where cash flow from the servicing of loans or leases are passed through a waterfall within the account structure set out in the agreement.

In many transactions under English law, in order to maintain a degree of control over cash coming in and out, the accounts at Borrower level are opened in the name of the Borrower but sole signing rights are granted to the Facility Agent only. This allows the Facility Agent to manage the cash flows and ensure that the account provisions are complied with.  There is a risk that following an insolvency the Facility Agent (who is often the same entity as the Lender in this type of financing) may be deemed to have been acting as a shadow director of the Borrower.  This would result in the Lender´s claim being subordinated by the insolvency court, delaying any receipt of distributions upon a liquidation of the Borrower and in most cases reducing the amount received.

We have seen a number of different solutions to this potential problem. These include the opening of separate accounts in the name of the Agent and adjusting the waterfall so that certain proceeds are paid straight into accounts owned and controlled by the Agent and also amending the cash waterfall structure to ensure that proceeds are regularly swept (by the Obligor) into accounts in the name of the Agent and/or Lender.  It should also be noted that Spanish lenders do not traditionally expect to have signing rights over accounts, so this may give them a competitive advantage if the absence of signing rights creates an issue for Non-Spanish lenders.

The account provisions in NPL and REF transactions in particular are often some of the most negotiated so it is important to consider what solutions are most appropriate for the nature of each individual deal.  We will continue to assess how this topic develops over the coming months.  In the meantime, please do contact us if you would like to discuss this topic in more detail or would like further information.