The risk of a potential knock-on effect of an interim relief: the Celsa case

The lending and restructuring markets both in Madrid and London have been surprised by a court resolution dated 30 April 2020 by the First Instance Court 60 of Madrid granting injunction relief to Celsa and its group companies vis-à-vis the lenders of its €900 million facilities. We analyse both the context and the consequences this might have for other transactions:

1. WHAT IS THE CONTEXT?

The facilities agreement regarding the Celsa Group is dated 31 October 2017 with a principal amount of €900,000,000. The repayment schedule of Tranche A is on a half-yearly basis, with payments being due on 4 May and 4 November every year. Additionally, the agreement foresees that a leverage ratio (the "Leverage Ratio") be tested quarterly and a cash cover ratio (the "Cash Cover Ratio") be tested monthly. It is worth noting further that events of default under the agreement include a payment default and two consecutive breaches of financial covenants.

In this context the Celsa Group requested an injunction in order to suspend payment of principal and interest due 4 May 2020 and 4 November 2020 for a year, have a covenant holiday from 1 April 2020 until 31 March 2021 and ban the lenders from accelerating the facilities and starting enforcement actions for a period of one year. Moreover, given that the writ was filed with the court close to 4 May 2020, Celsa considered that granting the lenders a hearing prior to adopting the injunction would be detrimental since it would not be able to meet the payment obligation due 4 May and lenders could accelerate the facilities and enforce certain security interests (notably bank account pledges and share pledges subject to RDL 5/2005, which implements the Collateral Directive in Spain and allows for enforcement by appropriation rather than going through an auction process) and hence requested the granting of the injunction without further delay.

2. WHY AN INJUNCTION WITHOUT HAVING GRANTED ANY TIME FOR LENDERS TO OPPOSE THE CLAIM?

This possibility is foreseen by Spanish law subject to compliance with a series of main requirements:

• The likelihood of the claim being backed by the court (the so called "fumus boni iuris"), which basically considers at first sight (and without a deep analysis) if the case has merits; and
• the danger of damages occurring if the injunction is not granted swiftly, i.e. the lack of the injunction would make a subsequent court action very difficult in practice (e.g. because acceleration of the loan and enforcement of the security would already have taken place)
• lastly: proportionality of the relief, that no equivalent and less damaging measure is available and that the injunction does not alter a factual situation that has been consented for a long time.

In any case, the measures will need to be confirmed after the lenders are granted a hearing. At that point they may be lifted if the lenders manage to get the judge to accept their arguments.

3. ARGUMENTS BROUGHT BY CELSA AND THE "REBUS SIC STANTIBUS" PRINCIPLE

Celsa considers that the restructuring was backed by a viability plan from 2017 to 2022 and that such plan was based on "normal circumstances". They further argue the company has been complying with such plan and with the scheduled repayments and financial covenant measures under such normal circumstances but the unforeseeable and extraordinary COVID-19 crisis affected the company's business in such a manner that the plan was no longer achievable in its current form. The claimant argues that COVID-19 affected its business and that the stoppage of certain industries as a consequence of the lockdown (notably car manufacturing) and the difficulty to obtain raw materials has had a severe impact on the business of Celsa.

An event of default in these circumstances could, according to Celsa, trigger an acceleration and fast track enforcement by the lenders that could lead to around 9,000 employees losing their jobs and the company ending up in liquidation.

The entire argument goes back to the "rebus sic stantibus" principle or to a change in circumstances that doesn't have to be assessed generally but, according to Spanish case law, needs to look into the specific merits of the case and needs to give rise to an extraordinary lack of proportion between the undertakings of the relevant parties under the agreement.
The "rebus sic stantibus" principle is a case law construction which allows a party to an agreement (normally a long term one) to re-adjust the economic terms of the agreement when, subsequent to the agreement having been entered into, a set of unforeseen and extraordinary circumstances arise which affect the contract in such a manner that they make it exorbitantly onerous. It is normally required that such circumstances are of an entity that they completely shatter the basis of the agreement – and that there is no other provision or agreed mechanism in the relevant agreement for those events. The application of the rebus sic stantibus clause by the Spanish Supreme Court has been very rare and exceptional, and even if in a 2014 Court resolution the Supreme Court stated that it should be applied in a more flexible manner, the truth is that, up to now, it hasn't.

4. OUR VIEW

The current climate might make certain courts prone to pull the trigger on injunctions, especially when possible loss of jobs is at stake. We understand however that the injunction goes too far when it grants a term of one year of suspension for payment obligations and compliance with financial covenants without granting a hearing to the lenders. There are several points worth highlighting in our view:

• a recent injunction has provided a similar suspension but for that suspension to be disapplied if no claim is filed within a period of 20 days. We see little rationale in awarding an injunction for 1 year like in the Celsa case on an unconditional basis;
• the injunction considers as evidence documents prepared by Celsa itself on the basis that they didn't have time to come up with independent reports;
• the fact that as a general rule syndicated loan documentation has specific provisions accepted by the parties dealing with the consequences of material adverse changes should work against the operation of a rebus sic stantibus principle; and
• The fact that lawfully obtained security that benefits from a fast-track enforcement process and is immune to insolvency as per EU regulations and Spanish laws can't be held against the secured parties. Considering that such enforcement could per se lead to the loss of jobs and the liquidation of the company is a line of thought that has several examples of the contrary in the context of the downturn, where pre-packs, enforcements and loan to own strategies led to companies being owned by lenders without such change of hands triggering the adverse consequences mentioned in the injunction.

By way of summary, and although we cannot discard that other judges rule in favour of similar injunctions in the current context, we understand the courts should weigh (i) if the measures could have been requested earlier and are only requested at a very late stage in order to argue that they should be granted without hearing the lenders due to there being no time to do so; (ii) the specific provisions of the loan documentation; (iii) if the situation is only deriving from COVID-19 or if there was a prior deterioration of the business; and (iv) the duration of the measures. In the case at hand, the lenders will have the chance to file a writ with the court and attend a hearing following which the injunction will be confirmed, revoked or tweaked.