Spain: Royal Decree Law 4/2014 adopting urgent measures on business debt refinancing and restructuring

18 March 2014

Andrés Lorrio

On March 7, 2014 the Spanish Government approved the Royal Decree Law 4/2014 adopting urgent measures on business debt refinancing and restructuring ("Real Decreto-ley 4/2014, de 7 de marzo, por el que se adoptan medidas urgentes en material de refinanciación y reestructuración de deuda empresarial" or "RDL 4/2014"). The aim of this new regulation is the implementation of legal measures necessary to achieve the viable restructuring of debtors. Through this RDL 4/2014 certain provisions of the Spanish Insolvency Law ("Ley 22/2003, de 9 de julio, Concursal") are heavily reformed.

The main measures introduced by RDL 4/2014 are the following: 

I.        Reinforcement of the pre-insolvency scenario

RDL 4/2014 modifies article 5 bis of the Spanish Insolvency Law in order to encourage negotiations in order to avoid the initiation of an insolvency situation forced by the enforcement proceeding over certain assets of the debtor. In this regards, any enforcement proceeding over assets that are necessary for the debtor's activity shall not be initiated or shall be suspended during the period of pre-insolvency situation, as well as any other individual enforcements by creditors holding financial claims within whom negotiations have been initiated for the approval of a refinancing agreement.

II.        Mechanisms aimed to encourage refinancing agreements

The refinancing agreements are now regulated under a new article (71bis), which introduces the following reforms:

(i)    The former requirement that the refinancing agreement must be supported by a report issued by an independent expert appointed by the Commercial Registry shall be replaced by a certificate issued by the auditor supporting that the agreement has been approved by at least 3/5 of the creditors.

(ii)   Introduction of a new category of agreement with legal immunity. In accordance with article 71bis. 2 any bilateral or multilateral refinancing agreements improving the debtor’s financial position and solvency that might have had been reached between the debtor and one or more of its creditors shall not be rescinded by the judge, creating a safe harbour ("puerto seguro") against a future insolvency proceeding of the debtor. Such new legal immunity shall be applicable to agreements that meet the following requirements:

a)    they increase the assets of the debtor over the previous liabilities;

b)    the current assets are, as a result of the agreement, equal or higher than the current liabilities;

c)     the value of the security package created in favour of the creditors that participate in the agreement, plus the existing guaranties, does not exceed 9/10 of the outstanding debt due to those creditors;

d)    the interest rate applicable to the debt resulting from the refinancing agreement shall not exceed more than 1/3 of the interest applicable to the previous debt; and

e)    the agreement must be formalized before a Spanish public notary through a public deed (“instrumento público”).

(iii)  Incentives for fresh money. During a period of two years as from the entry into force of RDL 4/2014, fresh money from refinancing shall be considered to be privileged credits against any future insolvency estate ("créditos contra la masa") of the debtor. Currently only 50% of this fresh money had such consideration.

III.        Modification to the schemes of arrangement in Additional Provision 4
The Additional Provision 4 has been significantly changed by this new reform. The main changes are the following:

(i)     Schemes of arrangement are eligible for sanction when they have been signed by creditors representing at least 51% (it's been brought down from 55% to 51%) and they meet the requirements established under article 71 bis 1*.

For the purpose of calculating the above majority, it shall be taken into account the financial debts held by financial creditors. Such creditors are understood to be the holders of any financial debt (excluding trade creditors and public administration creditors), and not exclusively financial institutions as required by the previous reform.

(ii)    Specific provisions of the sanctioned scheme of arrangement shall be imposed on dissident creditors on the following terms:

a)    If the schemes of arrangement have been signed by creditors representing at least 60% of the financial debt, the following effects may be extended to dissident creditors: (i) debt rescheduling ("espera") for a maximum term of five years; or (ii) the conversion of debt into profit participating loans (PPLs) for the same term.

b)    If the schemes of arrangement have been signed by creditors representing at least 75% of the financial debt, the following effects may be extended to dissident creditors: (i) debt rescheduling up to 10 years; (ii) debt cut off ("quita"); (iii) debt to equity swaps; (iv) the conversion of debt into PPLs for a period not exceeding 10 years, convertible bonds or subordinated loans, capitalised interest loans or any other financial instrument with a ranking, maturity or characteristics that differ from the original; and (v) the delivery of assets or rights to creditors to release all or part of the debt.

The sanctioned scheme of arrangement will extend to dissident creditors holding unsecured financial debts, and to creditors holding secured financial debts, although only en relation to the part of the credit exceeding the security.

In this regard, RDL 4/2014 defines the "value of the security" as the amount resulting from deducting from nine tenths of the value of the relevant asset the outstanding debts secured by such asset, being the value of the security in no event lower than zero or higher than the value of the credit held by the creditor in question.

Specific rules are also included in order to establish what is understood as the reasonable value of the asset: (i) in relation to securities listed on a secondary market, the average weighted listed price during the last quarter before the date the negotiations started in relation to the agreement; (ii) in relation to real estate assets, the value set out in a report issued by an authorised appraisal company; and (iii) in relation to all other cases, the reasonable value shall be the value determined by an independent expert through the issuance of a report.

The effects of the arrangement may also extend to the part of the credit of a dissident creditor included within the value of its security, provided that the effects of the arrangement that it aims to extend to the dissident creditor are supported by the following majorities (percentage of the value of the security held by the entities accepting the refinancing over the total value of the security granted): (i) in relation to III (ii) a above, a majority of 65%; and (ii) in relation to III (ii) b above, a majority of 80%.

This RDL 4/2014 entered into force the day after its publication in the Official State Gazette.


* Except for the requirement that the agreement needs to be signed by 3/5 of the debtor's total debt.