Overall leveraged finance activity in Spain declined in 2022, driven primarily by a severe drop in high yield bond issuance—as was the case in virtually all markets. Having weathered the worst of COVID-19, many companies had already taken steps to bring their debt under control. However, the new year brought with it new challenges, from rising inflation to events in Ukraine.
The market responded accordingly—while leveraged loan issuance managed to climb 10% year-on-year, high yield activity fell dramatically, dropping 76% during the same period.
As a result, going into the new year, concerns are being raised over a potential increase in insolvencies. At the end of September 2022, Spain finalized a package of reforms to its insolvency framework in a move stakeholders hope will simplify and improve the restructuring processes.
The reforms make Spain one of the latest European countries to incorporate the EU Restructuring Directive into local law. The Directive’s aim is to put in place preventative restructuring frameworks throughout Europe so that debtors and creditors have restructuring alternatives to full-blown insolvencies. The Directive also focuses on improving the efficiency of the restructuring process and making it easier for entrepreneurs to obtain a discharge of their debts in a shorter period.
Spain follows the Netherlands, Germany, France and Italy in updating its insolvency and restructuring regime to be in line with the new Directive’s requirements.
Restructuring to preserve value
The implementation of the new regime has been broadly welcomed across Spain’s restructuring ecosystem. Although the reforms have yet to be fully tested, there is cautious optimism that the new framework will help preserve the value of companies and prevent companies from collapsing. The new regime mirrors even more than before the UK’s Scheme of Arrangement, which allows most companies and lenders to restructure their debt, but it is not an insolvency process.
Under the old framework, many restructuring proceedings filed in Spain saw companies end up in administration with limited prospects of recovery for creditors.
The new system, however, is designed to tackle distress earlier, allow for debt restructurings to proceed if they are supported by a majority of creditors, and avoid situations where individual creditors are blocking sensible restructuring plans.
For the first time, the new rules include detailed provisions for “intra-class, cross-class and shareholders cramdown” situations (where restructuring plans are approved by a court over the objection of creditors (or shareholders, where applicable) provided it is fair and equitable). These provisions will improve the chances of restructuring plans progressing even if certain classes of creditors or shareholders are opposed to the plan.
The new framework also includes business unit disposal provisions, similar to the UK’s pre-pack regime, where deals with rescue buyers can be lined up and executed prior to a company commencing an insolvency process. The Spanish rules will require the appointment of an independent expert to assess bids and ensure that deals are scrutinized, with the hope of salvaging the profitable parts of troubled businesses.
Another key shift is the focus on simplifying and speeding up the insolvency procedures for microenterprises, which have smaller stakeholder groups and less complex capital structures.
Keeping it local
The new restructuring toolkit, it is hoped, will stop Spanish debtors from jurisdiction shopping, particularly in the UK, where the Scheme of Arrangement regime has attracted a steady stream of Spanish debtors in recent years.
Under the previous Spanish restructuring framework, restructuring complex capital structures that included bonds, loans, mezzanine and payment-in-kind debt was very difficult and often pushed debtors to look elsewhere for restructuring options.
The introduction of the “homologación” judicial process in 2014, which moved Spain closer to the UK Scheme of Arrangement, made complex restructurings slightly easier to execute, but even this was not sufficient to stop debtors from looking abroad for better solutions.
In 2022, for example—prior to the adoption of Spain’s new insolvency regime—Spanish real estate and non-performing loan platform Haya Real Estate proceeded with its restructuring under the UK Scheme of Arrangement. In doing so, it followed Spanish infrastructure business OHL and Spanish paper manufacturer Lecta.
OHL’s successful restructuring under the UK Scheme of Arrangement was particularly significant. It demonstrated that UK procedures could still be used by Spanish debtors post-Brexit. Following its UK Scheme of Arrangement, however, OHL executed a standalone Spanish restructuring framework agreement sanctioned in Spain, thereby avoiding Spanish exequatur proceedings (a procedure allowing the enforcement of a judgement obtained in a foreign country in Spain), which had yet to be tested following the UK’s departure from the EU.
The new restructuring features introduced with the September reforms, however, may encourage large Spanish companies looking to restructure to use Spain’s regime. Spain has incorporated the attractive features of the UK Scheme of Arrangement in its new framework without the lingering post-Brexit uncertainty around the enforcement of UK judgements.
Ready to be tested
The Spanish restructuring community is now waiting to see how the market responds to the new reforms. Some debtors may have waited until the new regime was implemented in September 2022 before commencing any filings; thus, a clearer picture on the effectiveness of the reforms will likely emerge by the end of the first quarter in 2023.
The market will be watching to see what strategies borrowers pursue and how creditors view restructurings under the new regime.
With Fitch Ratings predicting spikes in European leveraged loan and high yield bond defaults, and European bankruptcies increasing by double-digits, there might be several case studies to review in the near future.
