The legislation, introduced in September 2022, aims to facilitate the sale of business units and streamline often lengthy restructuring processes by essentially giving creditors more powers. One of its key innovations was the possibility for debt holders to unilaterally present a plan in court, without this implying an insolvency proceeding or the suspension of payments.

The transformative potential of the new legal framework had already been demonstrated, at a smaller scale, in the restructuring of Vigo-based frozen food retailer Xeldist Congelados last December. The court-sanctioned plan was critical in allowing the struggling company to receive fresh capital and save jobs.

Now, a larger case is going through court, with the commercial tribunal in Barcelona expected to make a decision on the restructuring plan submitted by creditors of Spanish steelmaker Celsa in the coming weeks.

The proposal seeks to reduce the debt by €1.29 billion and extend the maturity of the remaining debt to five years, while giving the control of the company to creditors, comprised by a group of investment funds and banks. The plan was submitted last September, shortly after Spain passed the new law.

New chapter for credit investors in Spain

The emergence of non-consensual restructurings opens a new chapter for creditors, including investment funds that are active or interested in the distressed space in Spain.

As recent cases are proving, debtors no longer have the upper hand in the insolvency process. Lenders can now impose a debt restructuring plan onto another class of creditors and on the shareholders if their proposal is approved by the court, pushing for a resolution even if there is disagreement.

A more flexible restructuring regime can pave the way for more debt-for-equity swap transactions, whereby creditors take over control of the company by converting debt obligations into shares in the post-restructured entity. Typically in such situations, creditors-turned-shareholders will aim to deleverage the business, define and implement an operational restructuring plan and return to a position of financial health so they can realise value through a subsequent sale.

While the new law opens new possibilities for creditor ownership, it will also present these financial stakeholders with large and complex business challenges. Companies emerging from a formal restructuring process are often confronted with serious operational issues ranging from declining profitability and revenues, a squeeze on working capital to unsustainable running costs, all of which require a specialised skillset to be addressed.

Therefore, creditors must consider the technical know-how and expertise needed to support the fast turnaround of the business, including through the hiring of external advisors and deployment of interim management services.

Overall, the new and more flexible framework may encourage more private funds to invest in restructuring situations in Spain. In fact, “loan-to-own” strategies seem to be already gaining momentum in consensual cases, such as Telepizza and Pronovias, two companies previously owned by private equity funds that went through restructuring. In both cases, bondholders became majority shareholders after writing down part of the companies’ debt.

Even if a debt-for-equity swap solution might not look attractive for traditional lenders such as banks, it may be the only one that maximises their interests as creditors. They also have the option to sell their debt in the secondary debt markets to distressed debt funds and others who are more open to access the equity as a mechanism to maximise value.

Clarification of certain aspects of the law may be needed

As the new regime gains traction in Spanish courts, market participants are set to get more clarity on the major successes of the framework as well as its potential problems.

One aspect that may need to be clarified through amendments to the law is the handling of control of company after the restructuring plan is formally approved. This is critical to avoid that the business value is further eroded in the period between homologation and the actual “take control” by the new owners.

Reform aligns Spanish law with EU directive

Spain’s insolvency reform came after the European Union member states were asked to improve their restructuring toolkits to bring them in line with a European directive.

It was an opportunity to change the realities of filing for insolvency proceedings in Spain, where historically 90% of cases ended in liquidation. By introducing a pre-insolvency proceeding in the framework, creditors and debtors have the chance to act at an earlier stage, increasing the likelihood of a successful restructuring.

This means companies struggling financially are more likely to remain in business, and that creditors’ chance of repayment are higher. As discussed, creditors have also gained greater power, as they can now impose the restructuring plan on dissident classes of creditors or shareholders. The introduction of a restructuring expert to assist with the process is another innovation of the law.

The more balanced approach, with creditors playing a greater role in restructurings, may help the country cope with an expected surge in corporate distress in the coming months as the macroeconomic backdrop continues to worsen.

In the third quarter of 2022, seasonally adjusted bankruptcy declarations in Spain rose by 25.5% compared with the previous quarters, according to Eurostat. This was followed by a 6.8% increase in the fourth quarter and a 2.6% decline in the first quarter of this year. In addition, the number of zombie companies – those unable to generate enough cash to cover their debt costs – continues to increase, with over 48,000 firms considered to be in such state as of June 2023, according to Informa D&B.

A&M. Leadership. Action. Results.

A&M’s Restructuring & Turnaround practice in Spain has the expertise to help creditors and debtors capitalise on the innovations brought about by the new insolvency law. With over 20 years of restructuring and transformation expertise across different industries and jurisdictions, our team understands the nuances of the new mechanisms and can help stakeholders navigate them in a timely manner to achieve a successful restructuring.

For more information or if you have any questions about this article, please contact our team of experts.

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