Following years of financial turmoil, the Spanish economy has been recovering steadily since 2014. GDP growth was 2.6 per cent in 2018, well above the euro area average. This trend is expected to continue in 2019 and 2020, albeit at a more moderate pace.2 Spain, like other European Union Member States, faces both political and financial challenges in the near future. Deleveraging the private and public sectors and achieving higher productivity are still priorities. Although unemployment has significantly decreased since the crisis, Spain still has one of the highest unemployment rates among the Western economies. Likewise, Brexit has opened a door to unknown risks that will need to be addressed. Elections have been held at both national and regional levels, with negotiations to form a national government ongoing at the date of this publication.
Spanish banks have benefited from Spain's steady growth, as well as from access to liquidity and low funding costs, which have facilitated new lending activity. The Spanish banking sector currently meets applicable regulatory capital requirements and is in a comfortable liquidity position. However, Spanish banks, like international banks, continue to be exposed to the pressures of increasing regulation, low interest rates and increased competition. Innovation and shadow banking are also big challenges. As a consequence, further integration and measures to reduce costs and improve capitalisation are expected.
Although the non-performing loan (NPL) ratio for Spanish banks has declined to close to the EU average, Spanish banks have continued to be very active in selling loan portfolios and distressed real estate assets. The sale of NPL mortgage portfolios in Europe rose in 2018, recording a historical amount of €205 billion, the Spanish market being one of the main contributors totalling 21.05 per cent of all transactions.3 Several institutions are following a 'large-scale deals' strategy. As an example, Banco Sabadell agreed to transfer two portfolios of real estate assets to Cerberus, with a total gross book value according to public sources of almost €9.1 billion, and Lone Star acquired two portfolios of real estate assets from CaixaBank and Bankia, with a total gross book value of €12 billion and €1.65 billion, respectively.
Large restructuring transactions have continued to play an important role, although they are less prevalent while the Spanish economy remains stable. In 2018, significant deals closed or were still in process – some of which are the continuation of previous restructuring processes (among others, Abengoa). In 2018, a number of restructured companies closed their first post-restructuring financing transactions (e.g., FCC).
Meanwhile, the use of leveraged loans to finance merger and acquisition (M&A) activity has increased (e.g., in the first five months of 2019 alone, six takeovers of listed companies have been either authorised or approved, including in respect of Telepizza, NH Hotel Group, GAM, Parques Reunidos, Bodegas Bilbaínas and Natra). Furthermore, a large number of companies have refinanced their debt or issued bonds, including in a high-yield format bonds (including Cirsa, eDreams, El Corte Inglés and Gestamp Automoción).
Project finance activity is also due to increase, particularly as new policies that boost public spending in infrastructure and green projects are put in place (particularly in renewable energy). The year 2018 marked a new record in the issuance of green bonds in Spain.
II LEGAL AND REGULATORY DEVELOPMENTS
In recent years, one of the main aims of Spanish legislators has been to amend the Spanish Insolvency Act to introduce mechanisms that incentivise out-of-court restructuring and facilitate a fresh start for both companies and individuals. Since 2003, the Spanish Insolvency Act has been amended over 17 times. Among other things, ground-breaking amendments were gradually approved to (1) allow companies to delay the insolvency filing for four months once they communicate to the courts that they are negotiating a composition or refinancing agreement with their creditors; (2) protect creditors from clawback risk if a refinancing agreement complies with certain requirements; (3) facilitate the cramming down of dissenting creditors in out-of-court restructuring processes, provided that a refinancing agreement is approved by the courts; and (4) allow for the faster sale of companies subject to insolvency proceedings.
This trend is to continue as the General Codifying Commission is currently drafting a consolidated Spanish Insolvency Act, which will likely introduce important amendments to the insolvency regime. Although as at the time of writing it is unclear when this consolidated text will be approved, it will probably incorporate further amendments to the insolvency procedure regarding preventive restructuring tools (including, in particular, majorities, cross-class cramdown and allowing the sale of the entire business of an insolvent debtor as a going concern).
Recent consumer-friendly court rulings present further challenges for banks. In December 2016, the European Court of Justice (ECJ) ruled that 'floor clauses' (being clauses in Spanish mortgage contracts that set a minimum interest rate) were unfair to consumers. Controversially, the ruling had retroactive effect, and a significant volume of mortgage contracts executed prior to the ruling were impacted. Similarly, the Spanish Supreme Court, in its judgment of 23 December 2015, declared that clauses that impose all the expenses of creating a mortgage on the client to be null and void. Furthermore, provisions that allowed for the acceleration of loans made to consumers upon payment default have been widely challenged and considered to be abusive by the Spanish Supreme Court and the ECJ. On 26 March 2019, the ECJ issued a long-awaited judgment regarding the acceleration of loans secured by residential mortgages. In this ruling the ECJ clarified that the use of the 'blue pencil rule' is not permitted and that courts, therefore, are not allowed to retain those parts of the clause that are deemed valid and delete those that are null and void (which was a solution that had been used to allow the continuation of enforcement proceedings). The ECJ has, however, left the door open to replacing the clauses that are deemed to be null and void with legal provisions if it is established that the mortgage loan would not remain in force without the offending clause. This solution is not entirely satisfactory and will no doubt lead to further litigation. At the same time, the Real Estate Credit Agreements Law was enacted on 16 March 2019 to partially transpose into Spanish law the protective regime set out in Directive 2014/17EU of 4 February 2014 regarding credit agreements for consumers relating to residential real estate. The main purposes of the Real Estate Credit Agreements Law are to increase legal certainty, avoid any lack of transparency regarding real estate credits and reduce the litigiousness associated with certain unfair contractual clauses. Although these rulings and consumer regulations should not apply to corporate lending, they are expected to have a significant impact on Spanish banks.
On 13 February 2018, the National Commission on Markets and Competition (CNMC) fined four major Spanish banks a total of €91 million for colluding to fix the price of interest rate derivatives attached to syndicated loans above market price. The decision is an additional indication that syndicated loans are coming under the scrutiny of competition authorities. On 5 April 2019, the European Commission published a long-expected report on loan syndication and its impact on competition in credit markets in the European Union, focusing on six countries (including Spain). The report concluded that certain practices could give rise to concerns about collusive behaviour and included recommendations to avoid those behaviours.
On 23 May 2019, Decree-Law 9/2019 was passed in Catalonia to lift some restrictions that applied before to the creation of Catalonian pledges (i.e., those granted over assets located in Catalonia). Among others, the creation of concurrent pledges and pledges of different rankings is expressly allowed (thus deleting a historical restriction that had little justification) and further flexibility is included in relation to the enforcement of pledges.
III TAX CONSIDERATIONS
The main corporate tax chargeable on interest and other amounts receivable under a loan is corporation tax, which applies to the entire income obtained by the taxpayer. Interest received should therefore be included with all the other income generated by the lender. Interest must be included within the corporation tax base when accrued. The accrual principle for tax purposes follows International Financial Reporting Standards rules. The general corporation tax rate is 25 per cent (30 per cent for credit institutions).
Borrowing costs are deductible expenses for corporation tax purposes. Borrowing costs include interest of any kind, transaction costs and other similar expenses, and may be deducted when accrued.
Nevertheless, the tax deductibility of interest payments is contingent upon some limitations, namely:
- Interest paid on participating loans in which the lender and the borrower are members of the same group of companies is not deductible.
- Interest paid on loans in which the lender and the borrower are members of the same group of companies is not deductible if the funds borrowed are used to buy shares, where the seller is an entity that is also a member of the same group of companies, unless the taxpayer proves that the transaction has a valid commercial rationale.
- Net interest paid in any financial year, to the extent that it exceeds 30 per cent of operating profit in respect of that financial year, is not deductible. Net interest means the excess of financial expenses over financial income. Operating profit is calculated in a similar way to earnings before interest, tax, depreciation and amortisation (EBITDA). Any net financial expenses that have not been deducted in one financial year can be carried forward to future financial years with no time limit, subject always to the 30 per cent limit in respect of each fiscal year. This limitation is not applicable to, inter alia, credit institutions or insurance companies.
- The deductibility of interest paid in any financial year on from loans used to acquire shares is generally limited to 30 per cent of the EBIDTA of the acquiring company in prespect of that financial year. However, this limitation should not apply: (1) in the tax year in which the acquisition is executed to the extent that the acquisition is financed with a maximum debt of 70 per cent of the acquisition price; and (2) in the following tax years, should the loan be reduced, proportionally, on an annual basis within the following eight years, until the debt is 30 per cent of the acquisition price.
Interest paid is generally subject to withholding tax at the rate of 19 per cent.
Withholding taxes applied on interest payments to taxpayers who are residents of Spain are refundable from the corporate tax of the recipient. In addition, some interest payments to Spanish residents are exempt from withholding tax, for instance:
- interest paid to entities that are exempt from corporation tax (e.g., Spain, its political subdivisions and its administrative agencies, including the Bank of Spain);
- loan interest paid to banks and certain other financial institutions;
- loan interest paid to securitisation funds; and
- interest paid between entities belonging to the same tax consolidation group.
Withholding tax levied on the payment of interest to taxpayers who are not resident in Spain is not refundable, but there are some exemptions from withholding tax:
- interest paid to EU residents is exempt; and
- interest paid to non-EU residents who are residents in a jurisdiction with which Spain hasa double tax treaty may, under the applicable treaty, benefit from withholding tax reductions or exemptions.
The granting and negotiating of loans and credits as part of an economic activity is a supply of services that is subject to, but exempt from, value added tax. No other taxes are due upon the execution of a corporate loan agreement.
Mortgages are subject to stamp duties ranging between 0.25 per cent and 1.5 per cent (depending on the Spanish region in which the mortgaged asset is located) on the total amount (principal, interest, default interest, etc.) secured by the mortgage.
The assignment of loans or credits secured by a mortgage is generally subject to stamp duty, unless made in a private agreement (i.e., a document not having access to the Land Registry). This is why it is not uncommon in the Spanish market for mortgaged credits to be assigned in private documents and notarised upon the borrower's default (i.e., when there is a need to enforce the mortgage).
In 2013, the United States and Spain entered into an intergovernmental agreement to provide for the implementation of the US Foreign Account Tax Compliance Act (FATCA). FATCA requires financial institutions (FFIs) outside the United States to report certain information on US account holders to the US tax authorities. If those FFIs fail to report the required information (non-participating FFIs), a 30 per cent tax would be withheld on, inter alia, their US source income.
The Loan Market Association (LMA) published and subsequently amended a template investment-grade facility agreement, including FATCA provisions that are generally used in cross-border transactions and by Spanish lenders and borrowers. In summary, the FATCA provisions include the following:
- defined terms;
- the obligation to provide FATCA information (that is, mainly, whether the parties are exempt from FATCA; and
- FATCA gross-up clauses.
The gross-up obligation varies depending on who should be protected from FATCA withholding. However, it is now market practice that borrowers should not make additional payments in the event of FATCA withholding because it only arises when the lender is a non-participating FFI; therefore, the risk of FATCA withholding is essentially one that can be mitigated by the lender. In addition, when the transaction requires a paying agent, it is common to include provisions requiring the resignation of the agent if the agent becomes a non-participating FFI. Therefore, the practice in Spain does not differ substantially from that that is followed in other jurisdictions.
IV CREDIT SUPPORT AND SUBORDINATION
Financing transactions governed by Spanish law are frequently secured by security interests and guaranteed by personal guarantees that will generally only be enforced by the security agent (to avoid partial foreclosures by any creditor). As the legal concept of the security trust does not exist under Spanish law, the agent will need to prove that it has been duly and expressly empowered4 to carry out this enforcement.
Pledges are created over movable assets, and possession of the collateral must be transferred to the pledgee.
Standard pledges include pledges over shares and pledges over credit rights (e.g., those arising from the balances in bank accounts, operational agreements, insurance policies or hedging agreements).
Real estate mortgages
Real estate mortgages are created over any real estate, and must be executed in a public deed before a notary public and registered with the land registry where the asset is located. Real estate mortgages generate significant costs and taxes.5
Spanish law provides for the possibility of creating a floating mortgage, which is a security interest created over a specific real estate asset to secure an amount of liabilities up to a maximum cap. Floating mortgages can only be granted in favour of financial institutions and public authorities (and in the latter case, exclusively to guarantee tax or social security receivables). The floating mortgage deed must include a description of the actual or potential secured liabilities, the maximum mortgage liability (which will cover all the obligations without allocating mortgage liability to each of them), the term of the mortgage, and the method of calculating the final secured amount and balance payable.
Chattel mortgages and pledges without displacement
Chattel mortgages can only be created over:
- business premises;
- cars, trains and other motor vehicles;
- machinery and equipment; and
- intellectual and industrial property.
There is a specific type of mortgage for ships (naval mortgage). The chattel mortgage must be executed in a public deed before a notary public and registered with the Movable Assets Registry.
Pledges without displacement can only be created over:
- animals on plots;
- harvesting machinery;
- raw materials in warehouses;
- merchandise in warehouses;
- art collections; and
- credit rights held by the beneficiaries of administrative contracts, licences, awards or subsidies, provided that this is permitted by law or the corresponding granting title, and over receivables (including future receivables) not represented by securities or qualified as financial instruments.
Pledges without displacement must be executed in a public deed before a notary public, and registered with the Movable Assets Registry.
Except for pledges without displacement over credit rights and inventories, these security interests are seldom used in Spain, mainly because:
- the pledgor or the mortgagor would not be able to sell the relevant assets without the pledgees' or the mortgagees' consent, respectively;
- most of the assets that can be mortgaged with a chattel mortgage (mainly those that are not movable) can be covered by a real estate mortgage if expressly agreed to by the parties in the real estate mortgage deed; and
- in most cases, the assets that cannot be covered by a real estate mortgage are not valuable enough to warrant the cost of creating the chattel mortgage.
Financial collateral secures the fulfilment of principal financial obligations. Although the meaning of this expression has been subject to debate among academics, the most common construction is that obligations pursuant to almost any financing document can be secured by financial collateral. Financial collateral can consist of cash or securities and other financial instruments, and certain types of credit rights held by credit institutions. Therefore, financial collateral could comprise shares issued by public limited liability companies – although some academics doubt whether shares in non-listed companies can constitute financial collateral – and credit rights arising from the balances in bank accounts.
This type of security interest (1) may benefit from a separate enforcement if the debtor becomes insolvent, and (2) as regards pledges over shares, can be foreclosed by a private sale (instead of in a public auction, as is the general rule under Spanish law) conducted by the depository of the shares or by the pledgee's direct appropriation of the shares. This is in contrast to the general Spanish law principle that prohibits any form of foreclosure of a security agreement that enables the holder of the security interest to directly and immediately acquire the secured asset.
ii Personal guarantees
Normally, the borrower's shareholders and each of its subsidiaries provide, to the extent permitted by law (specifically, the financial assistance prohibition and conflict of interest restrictions), first demand guarantees or other types of personal guarantees in respect of the fulfilment of the obligations assumed by the borrower under the financing documents.
A personal guarantee may be created by agreement between the creditor and the guarantor, or by operation of law. To facilitate the enforcement of a personal guarantee against a Spanish company, a settlement clause establishing the method of calculating the outstanding debt is usually included.
In the absence of an agreement to the contrary, a guarantor cannot be obliged to pay the beneficiary of the guarantee until all the debtor's assets have been realised. However, this restriction does not apply as follows:
- if the guarantor has waived the restriction;
- if the guarantee is joint and several;
- if the debtor is declared insolvent; or
- if the debtor cannot be sued in Spain.
Additionally, all exceptions and defences available to the debtor as against the creditor will also be available to the guarantor.
First-demand guarantees, which are not regulated by law, are separate and independent from the main obligation, create a primary liability on the guarantor and are not subject to the debtor's assets being realised. Lenders usually request that all personal guarantees created under the finance documents be first-demand guarantees.
Security interests are governed by the principle that security created earlier has priority over that created later. With respect to real estate mortgages, chattel mortgages and pledges without displacement, priority is determined by the date (and time) on which they are registered with the public registry, which is deemed to be the date (and time) on which the relevant document was submitted for registration. With regard to pledges, which are not registered in any public registry, priority is determined by the date (and time) on which possession is transferred. However, Spanish law allows creditors to agree on the priority of pledges and real estate mortgages. Therefore, creditors can agree that all the credits have the same priority or different ranking.
Pursuant to the Spanish Insolvency Act, in the context of bankruptcy proceedings, secured credit rights will benefit from priority up to the value of the collateral. The creditor is generally considered an ordinary creditor in respect of the excess.6
Notwithstanding this, if a secured credit is classified as a subordinated credit, the benefit of any priority arising from the security is lost. Under Spanish law, subordination can arise ex lege (as a matter of law) or ex contracto (from a contract).
Contractual subordination is recognised in Spain in accordance with international practice. Contractual subordination provisions used in Spain are similar to those used in other jurisdictions.
Spanish insolvency law provides for the subordination of certain claims by operation of law. These subordinated claims include, among others, the following:
- claims that are not notified by the creditors to the insolvency trustee in a timely manner;
- claims that are contractually subordinated to all remaining claims of the debtor;
- claims for interest; and
- most importantly, all rights against the debtor held by legal or natural persons who qualify as 'specially related' to the debtor. This category includes, among others, shareholders with a stake of 10 per cent in the insolvent entity (5 per cent if it is a listed company) when their credit right arose, formal directors or shadow directors, and companies of the insolvent entity's group.
There is also a rebuttable presumption that any person who acquired a credit against the insolvent debtor from any of those related parties in the period of two years prior to the commencement of the bankruptcy proceedings is a related party for insolvency law purposes.
V LEGAL RESERVATIONS AND OPINIONS PRACTICE
Standards applicable to the issuance of legal opinions in Spain are not very different from those applicable in other jurisdictions. In pure lending transactions, legal opinions are usually issued by counsel to the lenders or arrangers, except when capacity opinions are requested from counsel to the borrowers. This also applies in plain vanilla bond issuances. On the contrary, in high-yield bond transactions it is usual that legal opinions are issued by counsel to the arrangers or initial purchasers and by counsel to the issuer. Limitations apply to disclosing legal opinions to third parties other than the initial addressees. Disclosure without reliance may be permitted in some cases (e.g., if required by law or a court order, or to auditors or rating agencies on a need-to-know basis). Exceptionally, disclosure with reliance is permitted during the syndication of the loan, but this is normally restricted to a very short time frame, and is subject to limitations and restrictions (including a requirement for the disclosing entity to notify the opinion provider of such disclosure).
Below is a description of the main issues and most frequent legal reservations in practice in Spain.
i Corporate benefit
Directors of Spanish companies have a general duty to act loyally and diligently, in compliance with applicable law, and in the best interests of the company.
It is not always straightforward to prove that providing security or guarantees in the context of a group financing is in the best interests of a company. This question ultimately turns on the facts of the relevant transaction.
Accordingly, corporate benefit should be analysed on a case-by-case basis considering, among other things, the structure of the group, the nature and amount of the guarantees provided, the purposes of the financing and the direct and indirect consideration received by the relevant guarantor. With regard to downstream guarantees, corporate benefit may be easier to prove. However, courts have been less willing to recognise corporate benefit in the case of upstream or cross-stream guarantees.
According to the Spanish Insolvency Act, any action taken or agreement reached in the two years preceding the declaration of insolvency of a company can be rescinded by the court if the receiver can prove that the action or agreement was 'detrimental to the insolvency estate'. 'Detrimental' is not defined and has been construed rather broadly by the courts. The Spanish Insolvency Act also provides for certain circumstances in which a detriment to the insolvency estate is presumed to exist. Among others, unless proven otherwise, the granting of security in respect of pre-existing or refinanced debt is presumed to be detrimental to the insolvency estate. Moreover, debt prepayment (with some exceptions in secured loans), gifts and other benefits for no consideration are automatically presumed to be detrimental.
However, the Spanish Insolvency Act provides some safe harbours for the refinancing of existing debt, which is protected from clawback risk subject to compliance with specific formalities and majority thresholds, which differ depending on whether the refinancing agreement has been subject to court sanction.
iii Financial assistance
Companies are generally prohibited from providing financial assistance for the purchase of shares. Breaching this prohibition could entail both liability for directors and the nullity of the transaction in which the financial assistance was provided.
Acquisition finance transactions have been structured to comply with the restrictions on financial assistance by creating separate debt tranches and implementing a debt push-down by way of a forward merger. As from 2009, however, a specific regulation applies to forward mergers whereby if two or more companies merge and any of them has received financing within three years prior to the acquisition of a controlling stake in, or essential assets of, any of the companies that are part of the merger, some protective measures apply. Among others, the directors must issue a report justifying the merger, and an independent expert must issue a fairness opinion confirming that the transaction is reasonable and that there has been no financial assistance. This provision has been subject to much debate, especially in relation to the scope and effects of the report issued by the independent expert.
iv Security trustee and parallel debt
Spanish law does not recognise the concept of a 'security trustee' who is the holder of legal title to the security package and enforces the security package on behalf of the lenders from time to time. Thus, legal title over a security interest must be held by each creditor under the secured facility.
Furthermore, any parallel debt governed by Spanish law is unlikely to be considered valid, since under Spanish law contracts and obligations are only valid and enforceable if they are based on a valid and legitimate reason.
In view of the above, lenders in secured syndicated loan transactions typically provide a notarised and (in the case of foreign lenders) apostilled power of attorney in favour of the security agent to enable it to lead a coordinated enforcement process on behalf of all the lenders.
In the Spanish market, the decision to accelerate a loan and enforce the security is usually a last resort once all other alternatives such as debt restructuring have failed. However, the courts have traditionally been reluctant to uphold loan acceleration and the subsequent enforcement of security if the default is not deemed to be material. In this regard, to be able to enforce a mortgage, at least three principal instalments must be outstanding or a payment default must be outstanding for at least three months. Although it is believed that these provisions should only apply to mortgage-backed loans with consumers, the position is currently unclear.
The recent Real Estate Credit Agreements Law also includes a detailed and mandatory regulation for the acceleration clauses if there is a payment default of a mortgage loan by consumers.
VI LOAN TRADING
The assignment of a lender's participation under a facility agreement governed by Spanish law may be carried out by:
- assigning the credit rights, which would result in transferring to the assignee the credit rights held by the assignor against the borrower (but not the contractual obligations assumed by the assignor as regards the borrower); or
- assigning the contractual position under the agreement to any third party, and thus the relevant rights and obligations.
Therefore, assigning the contractual position under an agreement would be relatively similar to a novation under English law, as it entails the transfer of both rights and obligations, and the subrogation of the assignee to the contractual position of the assignor. However, the previous contractual relation does not need to be terminated.
No specific formalities need to be complied with for an ordinary transfer to be effective between the parties. However, under Spanish law, the transfer date must be certain and unambiguous for it to be fully effective regarding third parties. Therefore, it is very common to formalise the assignment agreement in a public deed before a Spanish notary public. Furthermore, a notice must be served to the debtor to guarantee the assignee that any payment made by the debtor to the assignor will not release the former from its obligations as regards the assignee. Recent amendments to the legislation of the autonomous regions of Catalonia and Valencia require that a notice shall be served to the debtor (and, if applicable, to the relevant mortgagor) to inform of the assignment and of the main terms and conditions of the assignment, including, in particular, the price paid by the assignee to the assignor. Other amendments introduced to the legislation of the autonomous regions of Castilla La-Mancha and Extremadura require that a notice shall be served if the relevant credit is assigned to a securitisation fund within a securitisation (i.e., not if the credit is transferred to the assignee through a direct assignment). The drafting of these amendments is rather obscure and the consequences of not serving these notices are unclear.
Spanish notarial documents are essentially public deeds, which must be used, among other things, for any transaction that requires registration with a land registry, and public policies, which can only be used to formalise contracts of a commercial and financial nature corresponding to the ordinary course of business of at least one of the parties.
Although the creation and assignment of mortgages must be documented in a public deed, other types of security interests are usually documented in a public policy. The creation or assignment of a mortgage, when documented in a public deed, triggers stamp duty,7 which must be paid and the mortgage registered for it to be able benefit from the advantages established under Spanish law (particularly, an expedited enforcement proceeding). In turn, pledges without displacement, which must be registered with the Movable Assets Registry, may be documented in public policies (and thus no stamp duty accrues).
Moreover, some Spanish security interests cannot be assigned to every type of creditor. Floating mortgages can only be assigned to financial institutions and public authorities (and in the latter case, exclusively to guarantee tax or social security receivables), and financial collateral can only be assigned to:
- credit entities;
- investment services companies;
- insurance companies;
- collective investment in transferable securities;
- mortgage securitisation funds, asset securitisation funds and their managing entities;
- pension funds; and
- financial institutions.
In practice, this constitutes an additional restriction on the Spanish debt trading market.
Syndicated facility agreements governed by Spanish law usually provide for a specific form of assignment agreement, which is used by lenders when carrying out any assignment of their participation in the loan. They also set out the conditions under which an assignment may be carried out without the debtor's consent. Although the lenders' aim is to make the above-mentioned conditions more flexible, the borrower usually wishes to limit the concept of 'permitted assignee' or 'permitted assignment' for the financing to remain under the control of its banks, namely the banks with which it has a special relationship and is familiar.
It is not unusual for creditors to close the terms and conditions of the assignment pursuant to LMA trade forms, but executing trade confirmations is generally supplemented by executing the form set out in the facility agreement or any other assignment agreement governed by Spanish law that is subsequently formalised in a public deed. This requirement is particularly important to evidence the title to claim the assigned indebtedness and enforce the security interests and personal guarantees. This is especially relevant for movable or immovable mortgages and pledges without displacement, where the creditor must be a registered creditor.
The financial crisis created a market from what was previously an ancillary practice to financing transactions. Spanish financial institutions are carrying out several competitive processes to transfer single names when they are not confident about a particular economic sector or about the debtor's ability to recover financially. Likewise, credit rights are sometimes grouped together (according to the type of security attached to them or the nature of the debtors) to allow purchasers to acquire groups of hotels, offices or shopping centres by enforcing the relevant mortgages.
Moreover, the financial crisis left a significant number of debtors (both individuals and small and medium-sized enterprises (SMEs)) unable to repay their debts to the banks, thus impairing the banks' default rates and causing them to significantly increase their reserves. Although the volume of NPLs has gradually decreased, Spanish financial institutions still hold high volumes of NPLs and continue be very active in launching competitive processes to sell large portfolios of NPLs, whether secured or unsecured. These have attracted interest from large investment funds and have also led to the creation of an ancillary industry comprising servicers who specialise in credit claims and foreclosed asset management.
As a notable development in this market, the General Directorate of Registries and Notaries has clarified that the assignee of a mortgage loan has the right to request the issuance of a new copy with enforcement effects of the loan, provided that the relevant assignee, among other things, has not previously requested this type of copy for the same loan. This clarification has been welcomed and will significantly facilitate one of the key negotiation points in this type of transaction. Not having these copies could prevent the assignee of the loan from acceding to an expedited enforcement process. Before this consultation, it was unclear whether notaries were able to issue second copies with enforcement effects when the previous copies were unavailable or had been lost by the assignors. Assignors were reluctant to assume strong commitments regarding the delivery of original documentation and the risk of not having all the copies with enforcement effects, particularly for mortgage portfolios that were not enforced, could lead to a decrease of the price paid by the assignee and lengthy discussions that can now be avoided.
VII OUTLOOK AND CONCLUSIONS
The continuous growth of the Spanish economy, coupled with banks cutting costs aggressively in the search for deals, has resulted in an increase in lending activity. Overall, banks have enjoyed continued profitability, with the exception of a one-off factor related to the resolution of Banco Popular.8 Restructuring transactions are bound to decrease, while project finance, M&A deals and leveraged loans are increasing. The financial sector is still highly dependent on lending; however, companies are increasingly issuing bonds or using alternative financing sources.
Spanish institutions, as any other EU institutions, are facing increasing challenges in 2019 owing to low interest rates, increasing regulations and the existence of other sources of financing, which are becoming real competitors to traditional bank lending, not only for large multinational Spanish companies but also for SMEs. Banks will have to monitor very closely the effects that these challenges may have on their businesses and activities, and manage their response to innovation and new competition simultaneously with the completion of their own reorganisation processes, focusing on their traditional business and continuing with the divestment of their non-core assets. Competitive processes for the sale of single names, NPLs and real estate portfolios are expected to continue during the second half of 2019, particularly following the format of large-scale deals.
The way that Spanish banks handle the current challenges and adapt to new regulatory requirements will determine lending and secured finance volumes for 2019. Banks will need to anticipate and manage potential risks and identify new opportunities that may arise in the near future.
1 Ángel Pérez López, Pedro Ravina Martín and Blanca Arlabán Gabeiras are partners at Uría Menéndez Abogados, SLP. The authors thank David López Pombo (partner) and Borja Contreras (principal associate) for their contribution to this chapter in their respective areas of practice.
2 According to the European Economic Forecast published by the European Commission in May 2019, the performance of the Spanish economy is set to continue in 2019 and 2020 with GDP growth of 2.1 per cent and 1.9 per cent respectively, while GDP growth is expected to be 1.9 per cent and 1.5 per cent in the eurozone.
4 The power of attorney will need to be notarised and, where appropriate, apostilled or legalised.
5 These costs include stamp duty (described in Section III), notarial fees and land registrar fees. The calculation base for these costs is the total amount secured by the mortgage.
6 In the context of bankruptcy proceedings affecting Spanish companies, creditors will be divided into two categories: bankruptcy creditors and creditors against the insolvency estate. The list of creditors against the insolvency estate is closed and includes expenses incurred in the proceedings and essential basic expenses for the debtor to continue in business (e.g., salaries, utilities), and these creditors will be paid before any uncharged assets are distributed to the bankruptcy creditors. The claims of bankruptcy creditors may be classified as privileged, ordinary and subordinated. Privileged claims may, in turn, be deemed specially or generally privileged.
7 See Section III. Spanish tax authorities have recently issued two binding resolutions stating that the total amount secured should be understood as the outstanding amount of the facility as of the effective date of the assignment and not as its mortgage liability, as was the case beforehand. This may have an impact on transactions in which mortgage-secured facilities have been partially repaid by the debtors and on past transactions (the assignees may consider requesting a refund of any excess stamp duty paid).
8 Statement by the staff of the European Commission and the European Central Bank following the ninth post-programme surveillance visit to Spain.