Spanish restructuring market remains fairly busy ahead of potentially game changing insolvency reform
As the distressed market has been languishing across all Europe, Spain made no exception. Compared to peak times of restructuring between 2008 and 2010, activity in the distressed and restructuring space has remained subdued so far this year. Yet, investors in the country have been busier than elsewhere in the continent, amidst new money opportunities and some full-blown workouts, according to panelists at the Debtwire Europe 2021 conference on 9 September.
“The size of the country is [large] enough to offer [opportunities] for the restructuring market. Spain was one of the countries most affected by the pandemic in Europe, with GDP contracting 11%. On the other side, the government measures were very ambitious, so they delayed [some distressed] deals to come,” Manuel Rodríguez, Head of Sanne Spain, said. “But government measures can’t last forever, and with a 120% GDP to debt ratio and high unemployment rate, we are ready [for more activity] ahead.”
“Spain had indeed one of the strictest lockdowns in the initial phase of the pandemic, with all non-essential activities suspended,” concurred Ferran Foix, Partner at Gómez-Acebo & Pombo. “Yet, the number of insolvencies in 2020 decreased by 14%. That trend has reversed so far this year, but it is still below the level seen during other crisis, largely due to government measures.”
The Spanish government was quick at tackling the pandemic with a vast programme of support measures, including furlough schemes (ERTE) and state guarantees via Instituto de Crédito Oficial (ICO) on up to 80% of new loans extended by relationship banks.
“Some EUR 100bn have been used in such guarantees so far, which means that roughly EUR 130bn of credit has flown into companies since the start of the pandemic,” Foix continued. “Spanish companies are among the ones that have used state-backed loans the most across Europe.”
Under the spotlight: SEPI
In addition to ICO loans, the Spanish government has also made available funding under its Sociedad Estatal de Participaciones Industriales (SEPI) according to a temporary scheme approved by the European Commission for state aid. Companies applying for it must meet some eligibility criteria, including being strategic for the Spanish economy, not being in a situation of financial distress pre-pandemic, and having an exit or reimbursement plan ready upon application.
Out of the EUR 10bn available under SEPI, only EUR 1.1bn has been used so far. Companies that have benefitted from it include Duro Felguera and Plus Ultra, while Celsa and Abengoa are queuing up for it.
However, the length of the process, with a large amount of due diligence required, as well as some controversy surrounding the use of the funding in the case of Plus Ultra, have made the tool less palatable and accessible that it would seem at a first glance, the panelists noted.
“ICO was a success – banks did great with it,” Rodríguez commented. “SEPI has been more controversial and political.”
“What we experienced in some cases has been the impact of ‘irrational money’,” noted Francisco Garcia-Ginovart, Director at Houlihan Lokey. “It is no secret that some companies that had difficulties pre-COVID had a chance to survive thanks to this money – which is difficult to explain from the outside,” he continued. "In certain situations, going to ICO and SEPI first has delayed the restructuring itself; also, as SEPI has lots of strings attached, for instance in terms of governance, this can create issues with other lenders and shareholders.”
Deciphering future restructurings
A big question mark at the top of everyone’s mind is how ICO-backed loans or SEPI funding would play out in the event of a debt restructuring down the line.
In the aftermath of the pandemic outbreak, there were concerns that if a bank decided to trade an ICO-backed loan, it would lose guarantees on it and face risks in a potential workout scenario, Foix noted. However, a code of best practice was soon approved, allowing banks to restructure the ICO loans by extending the maturities, converting into participative loans (PPLs) or even taking up to 50%-75% haircut. A cram-down mechanism in the event a borrower had an ICO loan with more than a bank was also introduced.
“If an ICO loan ends up in a restructuring, banks [that have provided it] have good collateral given the state guarantees, so that is an incentive to avoid any aggressive behaviour and rather kick the can down the road and wait for better times to come,” Garcia-Ginovart noted. “SEPI is more of an unknown. But the reality is that SEPI has been involved in few processes to date – so it hasn’t been a game-changer in restructuring for now. It may change dynamics when it comes to timing [of a process], and given it can often take the junior part of the capital structure, that’s very interesting as well.”
New reform on the block
The Spanish government made public over the summer a draft insolvency amendment to comply with the EU Restructuring Directive, which seeks to introduce a minimum standard among the Member States for preventive restructuring frameworks available to debtors in financial difficulty.
“We have been a long way since a few years back when we didn’t have any restructuring tool and all had to be done consensually via amend and extend or you had to fly to UK [to do a Scheme of Arrangement],” Foix commented.
Since then, the Spanish legislator introduced back in 2014 the homologación judicial, which proved to be a quite effective and widely used tool, and allowed, among other things, a cram-down of financial creditors. However, the absence of an equity cram-down mechanism as well as the fact that such proceeding could affect only financial and not trade liabilities limited somewhat the overall scope of it.
“The reform introduces more agile and effective restructuring tools,” Foix said. “The main change is the newly-introduced concept of the Restructuring Plan, very similar to the UK one, to replace the so-called refinancing agreement, which will allow a cross-class cram-down.”
Additional improvements feature proposing the sale of assets or business units under a restructuring; affecting trade and contingent liabilities; and the introduction of a new player in the form of a restructuring expert, to be appointed by the debtor or a majority of creditors, to assist with the process.
“Finally, there is a new concept of classes and vote by classes based on common interest; before you would only distinguish between secured and unsecured creditors,” Foix went on to say. “Voting by classes may be tricky at first as we don’t have a track record of how classes are formed as in the UK and US; however, there will be a confirmation mechanism from the court as to avoid future challenges.”
With the new reform – likely to be approved early next year – having the potential of being a game-changer for the domestic restructuring market, further opportunities may also come from companies that have gone through restructuring but still do not have an optimal capital structure.
“Those would not be plain vanilla refinancings,” Garcia-Ginovart commented. “But some borrowers could take advantage of opportunities to decrease average interest cost and have more flexibility,” he said. “We also expect strategics to take a more prominent role in the context of a restructuring – as they would have a better sense of the market and the [underlying] business.”