The Lending and Secured Finance Review: Spain
Spain, like any other country in Europe, has been deeply affected by the global spread of covid-19. Despite the measures introduced to mitigate the impact of the covid-19 crisis on the economy, some of the most drastic actions taken to deal with the health crisis during 2020 (including the closure of a substantial part of the economy and the confinement of the population), led to a steep decline of GDP, which was particularly severe in the first semester of 2020. Since then, the Spanish economy has seen a gradual, albeit slow, recovery that has facilitated a rebound of M&A activity, a revival of the IPO market (particularly for companies operating in the renewable energy sector) and new financing deals. Even if the recovery may not be as fast as in other EU countries, Spain's GDP is projected to grow by 5 per cent in 2021 and 4 per cent in 2022.
The Spanish banking sector, which met regulatory capital requirements and was in a comfortable liquidity position prior to the outbreak, has played a leading part in lending to the real economy. Yet, the banking sector is still exposed to 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), has led to further consolidation and measures to reduce costs and improve capitalisation as demonstrated by the recent merger between Caixa Bank and Bankia.
The non-performing loans (NPL) ratio for Spanish banks, which had declined in former years, has peaked again due to this sanitary crisis, and Spanish banks are likely to reactivate the sales of loan portfolios and distressed real estate assets in the medium term. During 2020, Spanish banks launched a reasonable number of unsecured portfolios to the market, but very few secured portfolios were sold (specially portfolios of individuals, most of which could be subject to legal moratoria) and the pipeline of REO portfolios was almost dry.
Banking consolidation in Spain, as well as the impact of covid-19 on non-performing loans are expected to provide more opportunities for direct lending funds to deploy capital in the country.
Large restructuring transactions did not play the expected important role during 2020, because the legal deadline to file for insolvency was extended three times (now debtors are not obliged to file for insolvency until 31 December 2021) and the banks made available state-guaranteed financing, enabling companies to overcome the liquidity difficulties during 2021. However, companies are now facing the normalisation of activity with increasing indebtedness, and debt restructuring will be necessary during the second half of 2021 or the first months of 2022.
The high demand seen in 2020 for companies operating in booming markets, such as the infrastructure, renewables, TMT, tech and healthcare sectors, is bound to continue during 2021, with some of the most relevant acquisition finance deals closed in relation to these industries. Conversely, opportunistic M&A and finance deals are expected to continue in respect of those sectors that have been badly hit by the pandemic, such as travel, hospitality and real estate.
Legal and regulatory developments
Since the beginning of the pandemic, extensive new regulation was 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.
The European Union 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. Moreover, a long-term budget has been approved by the EU authorities, which will entail the investment of more than €1.8 trillion in the real economy of the EU Members, out of which €140 billion will be used in Spain. Although the sectors and activities that will profit from this funding are generally defined by the EU (more than half of the investments should be directed to enhance green or digitalisation projects), policy decisions as to how to distribute the funds in practice will drive the evolution of Spanish companies and economic sectors in the years to come.
At the national level, the government approved, among other things, two guarantee lines, namely (1) a €100 billion state-backed guarantee scheme to cover loans and credits for the purposes of financing companies' and entrepreneurs' working capital needs (including financial and tax payment obligations, and (2) a €40 billion state-backed guarantee scheme to cover loans and credits for the purposes of financing companies' and entrepreneurs' capital expenditures. As of April 2021, more than 90 per cent of the liquidity line had been used (while more than 85 per cent of the capex line is still available). Both lines will be available until 31 December 2021.
Except where a specific guaranteed financing transaction can fit into the narrow regulation on de minimis state aids, this scheme shall comply with the requirements (and will be subject to the size limitations) set forth in the European Temporary Framework for State aid measures to support the economy in the current covid-19 outbreak (the Temporary Framework). Initially, the liquidity financing and corresponding guarantee could not have a term longer than five years, but the Temporary Framework has allowed for a three-year extension (for a maximum maturity of eight years), plus an additional year of principal waiting period (for a total of no more than 24 months). The creditors are legally obliged to accept the extension of the maturity and principal waiting period upon the debtor's request.
The government has also approved a 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). The term of the moratorium was initially set at three months (starting from the debtor's request), and the filing period initially expired on September 2020. However, a window during February and March 2021 was set up in order for debtors to request moratoria for a maximum term of nine months (including any moratoria they enjoyed during 2020); therefore, many debtors are currently benefiting from the payment holiday and the standstill, and it remains to be seen how these loans perform once the extended moratoria expire.2 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 €140 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;3 '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).4 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 2021, 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). The Restructuring and Insolvency Directive is yet to be transposed in Spain. Meanwhile, certain measures have been adopted to promote out-of-court restructurings. In particular, 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.
Except for the codification of the Spanish insolvency regime, all of the main legislative activity in the past year has focused on trying to deal with the deterioration of the economy and the balance sheet of Spanish companies amid the pandemic. Going forward, however, important reforms of the Spanish legal framework are expected to take place as part of the Spanish government's commitments in the context of the financing that will be injected by the EU recovery funds. These developments are still to be crystallised, but should enhance, inter alia, competitiveness, digitalisation and liberalisation of the Spanish industry and main economic sectors.
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, e.g., 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 from a seller who is also a member of the same group of companies, or to make equity contributions to entities who are already part of the same group of companies, unless the taxpayer proves that the transaction has valid economic reasons;
- the earning stripping rule: 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 (LBO interest-barrier) is generally limited to 30 per cent of the EBIDTA of the acquiring company, even if the entity is merged or makes a tax group with the acquired entity or other entities in the following four years. 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;
- additional limitations to the deductibility for tax purposes of certain interest expenses have recently entered into force, with effect for periods that commenced on or after 1 January 2020 and had not ended before 11 March 2021, as a result of the transposition into national Law of Directive (EU) 2016/1164 as amended by Directive (EU) 2017/952 (ATAD II). Very simply stated, these limitations apply, under certain conditions, to cross-border payments that determine 'hybrid mismatches' (i.e., situations of deduction-without-inclusion, double no-inclusion or double deduction of expenses, including imported 'hybrid mismatches') between associated entities or in the context of an structured arrangement (e.g., an arrangement involving a hybrid mismatch, where the mismatch is priced into the terms of the arrangement or an arrangement that has been designed to produce a hybrid mismatch). These rules are complex and the Spanish tax authorities have not, to date, issued any official interpretation or criteria on the matter. Therefore, their potential application should be properly analysed on a case-by-case basis; and
- the Spanish tax authorities have challenged the deductibility of financial expenses derived from financing incurred in order to, for example, distribute a dividend/share premium (dividend recaps) or acquire treasury stock for its redemption. Although, in a particular case (Cupire Padesa), the position of the Spanish tax authorities was ruled out, at least three more cases have been brought to the Supreme Court concerning to the deductibility of financial expenses incurred in this sort of indebtedness. Therefore, proper monitoring should be made in this vein.
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 Spain-resident 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 or EEE (with an effective exchange-of-tax information with Spain, such as from Norway or Iceland) residents should be 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 (C-299/16); the 'Interest-BO Danish Cases', which were 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.
In these cases, the non-Spanish resident lender must evidence to the Spanish tax authorities or the withholding tax agent (generally, the debtor) the application of this exemption and its status as, for example, tax resident in an EU Member State.
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 0.25 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 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.
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 empowered5 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.6
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), and, therefore, this constitutes an implicit restriction for trading the loans secured with floating mortgages (see Section VI). 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 not unanimous, 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. A Spanish financial collateral security interest offers a reasonably quick and safe enforcement that can compete with other security structures such as double Luxcos.
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.7
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.
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).
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, Valencia and Andalusia, 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 Andalusia in 2019 and 2020 respectively, 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, particularly in the case of Castilla La-Mancha. Similar legislation was also in place in the autonomous region of Extremadura; however, in its recent resolution 72/2021 of 18 March 2021, the plenum of the Spanish Supreme Court declared void the precepts of the law upon which the serving of these notices became mandatory. It is still too soon to anticipate the effects that this landmark case will have on the remaining autonomous legislation or if other cases will follow this same line of interpretation.
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,8 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 2008 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 often grouped together (according to the type of security attached to them or the nature of the debtors) to launch to the market big NPL portfolios that captured the investors' attention during the past decade, converting Spain into one of the main European markets for non-performing assets, and facilitating the development of an ancillary industry (servicers, notary publics, lawyers, etc.) with a high degree of specialisation in the recovery process and asset management.
Although Spanish banks had made a great effort to reduce the volume of NPAs, the covid-19 crisis will probably foster a new boom of NPA sales. During 2020, the deal flow for unsecured NPL portfolios maintained the usual patterns, but the pipeline of secured NPL deals significantly decreased and REO portfolio sales almost disappeared. The reasons for this decrease could be: (1) the higher impact that secured NPL and REO sales have on the banks' P&L accounts; (2) the impact of the legal and sectorial moratoria, extending the maturity of the loans; (3) the four months during which Spanish courts were closed, extending the term to gain possession over the collateral; and (4) the reputational risk of foreclosures during a pandemic crisis. Therefore, during 2020 we have only seen some SMEs secured NPL portfolio sales and some transfers of secured PL portfolios (mainly reperforming loans) transferred through securitisation structures (and remaining the bank as lender of record). This trend will probably continue during 2021, with a number of SMEs secured portfolios and PL portfolios launched to the market, and an expected increase in individual secured NPL portfolios after the end of the third quarter.
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 benefiting 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.
Finally, Law 5/2019 on real estate credit agreements established that real estate lenders are those entities (other than banks) that are engaged in the activity of regularly granting (or intermediating in the origination of) mortgage loans over residential assets or real estate related loans to consumers, and these real estate lenders should register with the Bank of Spain. The Bank of Spain published a Q&A document that included an expansive interpretation of the concept of real estate lenders, which could potentially include the acquirers of secured NPL portfolios. If this interpretation is followed by Land Registries, the registration of mortgages in favour of the acquirer of the NPL portfolio could be rejected until the acquirer is not registered as real estate lender with the Bank of Spain. Although this is an area where there should be developments shortly (especially when the European Directive on credit servicers is finally approved and implemented in Spain), an important portion of the land registrars are currently taking the position that, in order for the transfer of the mortgage loans to be registered in favour of the acquirer, the servicer in charge of the enforcement of the NPL must be recorded at the registry of companies involved in the mortgage loan market created by Law 2/2009.
There are currently no other issues of note.
Outlook and conclusions
The covid-19 pandemic has materially affected the Spanish economy. Some sectors have been 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. In contrast, other sectors such as energy, telecoms, 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 2021.
Spanish financial institutions, as well as other EU financial institutions, are still facing other historical challenges in 2021 owing to, among other things, 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 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 still expected to grow. Likewise, as measures implemented to deal with the economic crisis generated by the covid-19 pandemic are lifted, volumes of restructuring transactions are expected to increase. In the event 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.
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) for his contributions to the tax section of this chapter.
2 There are rumours that the moratorium could be further extended by the government.
3 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).
4 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.
5 Powers of attorney for this purpose will need to be notarised and, where appropriate, apostilled or legalised.
6 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.
7 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.
8 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).