During 2019, Spain recorded higher growth rates than those recorded in the euro area as a whole (i.e., 2 per cent in Spain compared to 1.2 per cent in the eurozone). Moreover, pre-covid-19 projections of both the European Central Bank and the Spanish Central Bank forecasted that the expansionary trend would continue, albeit at a slower pace, over the three next years.2 There was abundant liquidity in the market and this was reflected in all areas of the economy, including M&A activity and leveraged finance transactions, where the private equity sector continued to be very active. Some of the busiest sectors were energy and infrastructure, media, entertainment industry and retail, with some significant transactions carried out during 2019 (such as the acquisition of 30–40 per cent of CEPSA by The Carlyle Group, Areas by PAI Partners, Eolia Renovables by Alberta Investment and Teleppiza by KKR).
Unfortunately, Spain, like any other country in Europe, is currently deeply affected by the global spread of covid-19. The measures taken to deal with the health crisis (including the closure of a substantial part of the economy and the confinement of the population), have led to an abrupt fall in GDP. The magnitude of the impact of covid-19 on the Spanish economy and the pace of recovery is still uncertain, as they will ultimately depend on the measures deployed at national, European and global levels to deal with the crisis as well as on whether or not there will be further outbreaks.
The Spanish banking sector, which met regulatory capital requirements and was in a comfortable liquidity position prior to the outbreak, should be able to better withstand increased default rates caused as a consequence of the covid-19 pandemic and should play a leading part in lending to the real economy. Yet, the banking sector is still exposed to certain structural risks (e.g., regulatory pressures, increased competition, low margins, etc.), which will pose big challenges for them. This, together with the global economic crisis created by the covid-19 pandemic (in particular, liquidity needs of companies and the expected increase of default rates by borrowers), may lead to further consolidation and measures to reduce costs and improve capitalisation.
Although the non-performing loans (NPL) ratio for Spanish banks had declined to close to the EU average in 2019–2020, this ratio is expected to climb again in the near future, and Spanish banks will likely remain active in selling loan portfolios and distressed real estate assets in the medium term. Higher costs of financing will not facilitate the transfer of large NPL portfolios (like the €1.7 billion Atlas Portfolio recently sold by Banco Santander), but it is expected that a considerable number of mid-size portfolios (mainly unsecured) will be launched into the market after summer 2020, with an increase in the offer of secured portfolios in 2021.
Large restructuring transactions will certainly play an important role during 2020, but such increase may not be accompanied by leveraged loans to finance M&A activity, which is expected to be limited to deals related to core sectors (such as energy, telecom and infrastructure) or sectors less exposed to the effects of covid-19 (such as digital and IT businesses). In the meantime, we are seeing a considerable number of urgent liquidity facilities (using the state-backed funding referred to below) granted to companies whose businesses have been seriously affected by the covid-19 crisis, while stronger borrowers have taken the opportunity to refinance their long-term debts and prepare for the impact of this crisis.
II LEGAL AND REGULATORY DEVELOPMENTS
Extensive new regulation has been put in place both at national and European levels to try to mitigate the impact of the covid-19 crisis on the real economy and the financial sector.
At the European level, the European Union (EU) has approved large-scale financial asset purchases, has adopted various measures to boost bank lending and has eased the requirements to provide state aid. In addition, the Single Supervisory Mechanism has decided to allow credit institutions to operate temporarily with certain capital and liquidity ratios below the required levels.
At the national level, and in line with the objective of increasing market liquidity, the government approved, among others, a €100 billion state-backed guarantee scheme to cover loans and credits granted by Spanish financial institutions after 14 March 2020 (i.e., the date on which the state of emergency was declared in Spain) for the purposes of financing companies' and entrepreneurs' working capital needs (including financial and tax payment obligations). This scheme shall comply with the requirements set forth in the European Temporary Framework for State aid measures to support the economy in the current covid-19 outbreak (the Temporary Framework). Among others, the guaranteed loans or credits cannot exceed the amounts set forth in the Temporary Framework, cannot have a term longer than five years, and depending on the type of borrower and whether the loan or credit constitutes a loan renewal or a new loan, the state guarantee covers between 60 and 80 per cent of the principal amount. A lot of entrepreneurs, small and medium-sized enterprises (SMEs) and large companies have requested this financing, which suggests that this state-backed funding scheme will be ultimately used in full.3 A procedure has been set up so that a public financial agency reviews the files of each of the loans and credits exceeding €50 million granted by the institutions to verify the fulfilment of the eligibility requirements and therefore the effectivity and amount of the state guarantee. Loans for a lower amount will be verified once granted to avoid slowing down the process.
The government has also approved a legal three-month4 moratorium for principal and interest under certain categories of mortgage and consumer loans owed by particularly vulnerable individuals who have been negatively affected by the crisis. The moratorium needs to be requested by the eligible borrower (although it automatically applies upon such request) and also implies a standstill (i.e., a prohibition on acceleration) during the term of the moratorium. In combination with the legal moratorium, the main associations comprising the Spanish credit institutions have approved a private moratorium that would benefit a larger scope of borrowers and loans and that could be extended up to twelve months (for mortgage loans) and six months (for consumer loans). Although these moratoria should not apply to corporate loans, they are expected to have a significant impact on Spanish banks. The European Banking Authority has clarified that loans subject to the legal and private moratoria should not generally be considered as defaulted or more risky loans for accounting and prudential purposes.
The crisis has accelerated the approval of the reform of the Spanish legal framework applicable to foreign investments. As distinct from the moratorium or the €100 billion state guarantee line, this new legal framework will be applicable beyond the end of the state of emergency. Although further regulations are expected to complete and clarify the regime, a prior authorisation by the Spanish Council of Ministers will be required in case a foreign investor intends to undertake an eligible investment in an eligible business. In short, 'foreign investors' are investors that are non-EU and non-European Free Trade Association (EFTA) residents;5 'eligible investments' are investments that involve the acquisition of at least 10 per cent of the share capital of a Spanish target or any other transaction that enables effective participation in the management or control of a Spanish company; and 'eligible businesses' are businesses that conduct specified activities that are considered to have an impact on public security, public order or public health (e.g., critical infrastructure, critical technologies, media).6 This screening mechanism may complicate the completion of restructuring transactions that involve debt capitalisations, when creditors that are 'foreign investors' are to acquire an eligible investment in a distressed group that (either partially or fully) dedicates to an 'eligible business'.
Temporary amendments to the Spanish Insolvency Law have been adopted to mitigate directors' duties in relation to distressed companies and promote new money coming from sponsors or parties 'specially related to the borrower'. Among others, debtors are not obliged to file for insolvency until 31 December 2020, the obligation to liquidate companies which net worth is lower than 50 per cent of the share capital due to losses will not apply in respect of losses generated during 2020 and credits and loans granted by specially related parties will not be subject to equitable subordination and will instead be classified as ordinary (unsecured) claims in insolvency proceedings opened within two years from the declaration of the state of emergency (i.e., until 14 March 2022). Other measures have been adopted to promote out-of-court restructurings. In addition, The General Codifying Commission has finally completed the task of drafting a consolidated Spanish Insolvency Act, which has been approved by Royal Legislative-Decree 1/2020, of 5 May. Although the task entrusted to the Commission was the harmonisation of the existing insolvency laws into a single act, certain rules have been clarified and new rules have been inserted that will modify in practice certain important insolvency institutions such as (1) the debtor communication triggering a standstill for the insolvency declaration; (2) refinancing agreements with or without cram-down effects; and (3) insolvency declaration following a refinancing transaction. Finally, on 23 May 2019, Decree-Law 9/2019 was passed in Catalonia to lift some restrictions that previously applied to the creation of Catalonian law governed 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 removing a historical restriction that had little justification) and further flexibility is included in relation to the enforcement of pledges. Decree-Law 9/2019 was not ratified by the Catalonian parliament and was thus rendered ineffective on 26 June 2019. Finally, Law 5/2020, of 29 April, has reintroduced the same provisions as those included in Decree-Law 9/2019.
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 Spanish General Accepted Accounting Principles (which, in turn, follow 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. As an exception to the rule, stamp duty levied on lenders upon the execution or amendment of mortgage loans is not deductible for Spanish corporation tax purposes.
Nevertheless, tax deduction of interest for borrowers is contingent upon some limitations, namely:
- Interest from participating loans in which the lender and the borrower are members of the same group of companies is not deductible.
- Interest from 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, the seller being an entity who is also a member of the group of companies, unless the taxpayer proves that the transaction has valid economic reasons.
- Net interest that exceeds the higher of 30 per cent of operating profit or €1 million 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). Net financial expenses that have not been deducted can be carried forward with no time limit but are subject to the above thresholds of each fiscal year. Unutilised operating profit may be carried forward for five years. This earnings stripping limitation is not applicable to, inter alia, Spanish securitisation funds, credit institutions or insurance companies.
- The deductibility of interest from loans used to acquire shares is generally limited to 30 per cent of the EBIDTA of the acquiring company. 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 years, should the loan be reduced, at least proportionally, on an annual basis within the following eight years, until the debt is 30 per cent of the acquisition price. This rule is complex, and proper analysis and monitoring must be carried out by taxpayers.
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 payable by 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, the Bank of Spain);
- loan interest paid to banks and some other credit institutions, provided that the credit does not qualify as bonds or securities included in the trading portfolio of the corresponding credit institution;
- loan interest paid to Spanish securitisation funds; and
- interest paid between entities belonging to the same Spanish tax consolidation group.
Withholding tax levied on the payment of interest to taxpayers who are resident abroad is not refundable, but there are some exemptions from withholding tax:
- interest paid to EU residents are exempt, provided that the EU resident is the beneficial owner of the interest (as interpreted by European Union Court of Justice in the joined cases N Luxembourg 1 (C-115/16), X Denmark (C-118/16) and C Danmark 1 (C-119/16) and Z Denmark case (C-299/16); the 'BO Danish Cases', which have been recently adopted by the Spanish Central Economic-Administrative Court in its resolution of 8 October 2019) and does not act through a tax haven country or territory for Spanish purposes nor through a permanent establishment located in Spain or in a country or territory that is not an EU Member State; and
- interest paid to non-EU residents who are resident in a double tax convention jurisdiction may, under the applicable convention, benefit from withholding tax reductions or exemptions if they are the beneficial owner of such interest.
The granting and negotiating of loans and credits as part of the credit activity of the lender is a supply of services subject to but exempt from value added tax. No other taxes are due upon the execution of a corporate loan.
Mortgages are subject to stamp duties ranging between 0.5 per cent and 2 per cent (depending on the Spanish region where the mortgaged asset is located) on the total amount (principal, interest, default interest, penalties, 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).
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 punitive 30 per cent tax may 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:
- FATCA-defined terms;
- the obligation of providing FATCA information (that is, mainly, whether the parties are exempt from FATCA, which means that they are not non-participating FFIs); 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 do 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, because of the risk of FATCA withholding being required. Therefore, the practice in Spain does not differ substantially from that 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 empowered7 to carry out this enforcement.
Pledges are created over movable assets, and possession over 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 property 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.8
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 indefinite number 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). A 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 or public policy 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, those 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 is a security interest that secures the fulfilment of principal financial obligations. Although the meaning of this expression has been the subject of disagreement among scholars, 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 be made up of shares issued by public limited liability companies – although some scholars question whether it can include shares in non-listed companies – and credit rights arising from the balances in bank accounts.
This type of security interest may benefit from a separate enforcement procedure if the debtor becomes insolvent and, as regards pledges over shares, can be foreclosed by a private sale (not 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, breaching 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.
A guarantor cannot be obliged to pay the beneficiary of the guarantee until all the debtor's assets have been realised. This benefit for the guarantor does not apply in the following cases:
- if the guarantor has waived the benefit;
- if the guarantee is joint and several;
- if the debtor is declared insolvent; or
- if the debtor cannot be sued in Spain.
Additionally, a guarantor may raise against the creditor all the exceptions and defences corresponding to the debtor that are inherent to the debt.
First-demand guarantees, which are not regulated by law, are abstract and independent from the main obligation, creating 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 ordinary 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 a creditor can decide to assign its priority to another.
Pursuant to the Spanish Insolvency Act, in the context of bankruptcy proceedings, credit rights secured by security interests will benefit from a special privilege up to the value of the collateral. The creditor is generally considered an ordinary creditor in respect of the excess.9
Notwithstanding this, classifying a bankruptcy credit as subordinated credit would entail extinguishing any security granted in the creditor's favour (and, as a result, any special privilege to which the creditor may be entitled). Under Spanish law, subordination can be triggered by operation of law or from a contract.
Contractual subordination in Spain is in line with international practice. The contractual provisions in this regard are similar to those of other jurisdictions.
Spanish insolvency law refers to a category of subordinated claims, which entails the subordination, by operation of law, of certain claims to the prior payment by the insolvent debtor of all ordinary claims. 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 holding a stake of 10 per cent or more in the insolvent entity (or 5 per cent if the insolvent entity is a listed company) when their credit right arose, formal directors or shadow directors, and companies of the insolvent entity's group. Note, however, that to promote financing coming from specially related parties, a temporary exception to this rule has been approved for insolvency proceedings commenced within two years following the declaration of the state of emergency in Spain as a consequence of the covid-19 pandemic (i.e., until 14 March 2022) as further explained in Section II.
There is also a rebuttable presumption that any person who acquired a credit against the insolvent debtor from any of those related parties within two years of the commencement of the bankruptcy proceedings is also 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 other hand, 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 easy to prove that providing security or guarantees in the context of a group financing is in the best interests of a company. Any analysis of this circumstance is ultimately factual.
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 always been more suspicious about 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 in respect of acquisitions. Breaching this prohibition could entail both liability for directors and the nullity of the transaction in which the financial assistance was provided.
How acquisition finance transactions have been structured to comply with the restrictions on financial assistance (other than creating separate debt tranches) is to implement a debt push-down through a forward merger. From 2009 onwards, 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, 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 legal holder 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 the creditor of the secured facility.
Furthermore, the validity and enforceability of any parallel debt governed by Spanish law is uncertain, because under Spanish law, contracts and obligations are only valid and enforceable if they are based on a valid and legitimate reason (causa, which is the Spanish version of the English law concept of 'consideration').
In view of the above, lenders will need to 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 loans and enforce security is usually an act of last resort once all other alternatives such as debt restructuring have failed. However, courts have traditionally been reluctant to uphold loan acceleration and subsequent enforcement of security if the default is not deemed material.
The recent Real Estate Credit Agreements Law includes a detailed and mandatory regulation for the acceleration clauses if there is a payment default of a mortgage loan by consumers.
Thus, to accelerate the mortgage loan, the following requirements must be met:
- the borrower is in default;
- the lender requests the payment from the borrower and grants him or her a minimum term of one month to make the relevant payment; and
- the instalments amount to at least 3 per cent of the principal or 12 monthly instalments, if the payment default occurs in the first half of the mortgage loan; or 7 per cent of the principal or 15 monthly instalments, if the payment default occurs in the second half of the mortgage loan.
These rules also apply to mortgage loan agreements signed prior to the entry into force of the Real Estate Credit Agreements Law that include an acceleration clause, unless the borrower claims that applying the relevant acceleration clause is more favourable or the relevant acceleration clause was triggered prior to the entry into force of the Real Estate Credit Agreements Law (regardless of whether, as a result, enforcement proceedings were initiated, or whether the proceedings are suspended).
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 towards the borrower); or
- assigning the contractual position under the agreement to any third party, and thus the relevant rights and obligations.
Hence, 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 against 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. Following certain amendments to legislation in the autonomous regions of Catalonia, Navarre and Valencia, a notice must be served to the debtor (and, if applicable, to the relevant mortgagor) to inform it 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 in 2019, require that a notice must 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,10 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 process). 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 security interests 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
- financing institutions.
In practice, this constitutes an additional restriction to 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 for evidencing title to claim the assigned indebtedness and to 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 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 had gradually decreased, as explained in Section I, Spanish institutions will again accumulate higher volumes of NPLs because of the covid-19 crisis, and will continue to be very active in setting competitive processes to sell large portfolios of NPLs, whether secured or unsecured, which have attracted large investment funds and have also brought out an ancillary industry comprising management servicing companies (servicers) specialising 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.
Pursuant to Article 1,535 of the Spanish Civil Code, a debtor would be entitled to extinguish a loan that is assigned to a third party if the relevant loan is deemed a 'disputed claim' by paying to the assignee an amount equal to: (1) the purchase price (thus benefitting from any agreed discount); plus (2) any legal costs that the assignee may have incurred; plus (3) any interests accrued on the price as from the date on which the purchase price was paid to the assignor. The Spanish Supreme Court has recently clarified that this right shall be construed restrictively and shall not apply to sales of a portfolio of non-performing loans, and any discrepancies related to certain clauses of the loans (e.g., floor clauses, abusive clauses) shall not cause the relevant loan to be deemed a disputed claim for the purposes of Article 1,535 of the Spanish Civil Code. These clarifications will significantly help the management of large portfolios of non-performing loans by the investors, as one of the main strategies implemented by debtors was precisely to claim the exercise of this right, even if the legal requirements to do so were not met.
VII OUTLOOK AND CONCLUSIONS
The covid-19 pandemic will certainly materially affect the Spanish economy. The extent of the impact of the economic contraction on lending activity is uncertain as is the pace of recovery, which will very much depend on the measures implemented at both European and national levels to deal with the crisis. Volumes of restructuring transactions are expected to increase, while it is assumed that project finance, M&A deals and leveraged loans would decrease. Some sectors would be more affected than others, particularly some of the most labour-intensive service industries, such as accommodation and food service activities and a significant part of retail trade. On the contrary, other sectors such as energy, telecom, infrastructure, IT and digital businesses are already attracting increasing interest from investors because of their lower exposure to the consequences of the covid-19 pandemic. Deals related to these 'core sectors' are expected to continue during 2020 and 2021.
Spanish financial institutions, as well as other EU financial institutions, will have to face other historical challenges in 2020 owing to, among others, regulatory pressure (even if temporarily softened to deal with the covid-19 pandemic), the need to adapt to a growing digital environment and the existence of other sources of financing (including alternative lenders and fintech companies), 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.
The extent of the economic crisis and the way that Spanish banks handle the current challenges will determine lending and secured finance volumes for 2020 and 2021. Banks will need to anticipate and manage potential risks and identify new opportunities that may arise in the near future. Liquidity needs arising from the covid-19 pandemic are expected to grow exponentially. In case that traditional banks are not able to close the funding gap by themselves, an opportunity may arise for alternative and opportunistic lenders to enter into rescue financing, restructuring and leveraged deals. If this is the case, the way in which these deals are structured will be affected.
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 Bernier (senior associate) for their contributions to this chapter in their respective areas of practice.
2 Source: Macroeconomic projections for the Spanish Economy (2019–2022): The Banco de España's Contribution to the Eurosystem's December 2019 Joint Forecasting Exercise.
3 By 19 May 2019, four tranches of the state-backed funding scheme had been approved for a total amount of €80 billion (of which €60 billion have been allocated to SMEs and entrepreneurs and €20 billion to other companies).
4 The three-month period can be extended by the government.
5 A look-through analysis is required to be done. Even if the direct investor is EU/EFTA-domiciled, in the event that there is a beneficial owner – a 25 per cent indirect stake is in principle enough – that is a non-EU and non-EFTA resident, that would also qualify as a foreign investor for purposes of this screening mechanism. There are certain open questions as to how the fund and trust structures should be looked at. In principle, it appears that the relevant criterion will be the domicile of the managing partner or management company (if they are domiciled in the EU/EFTA and do not have a beneficial owner outside the EU/EFTA, it should not be considered as a foreign investor even if the majority of the limited partners or ultimate financial investors are non-EU and non-EFTA residents).
6 This criterion will not be necessary for eligible investments by certain categories of foreign investors, namely investors (1) directly or indirectly controlled by the government or a public body of a non-EU/EFTA country, or (2) that have already made an investment affecting national security, public order or public order in another EU Member State, or (3) subject to ongoing judicial or administrative proceedings for engaging in illegal or criminal activities. In such cases, the authorisation will be required regardless of the business of the target.
7 Powers of attorney for this purpose will need to be notarised and, where appropriate, apostilled or legalised.
8 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.
9 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.
10 See Section III. The 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 at 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).