Refinancing Operations, subordinated debt of the Bank

Introduction

From 1881 to 2003, we had for 122 years, a single Bankruptcy Law without practically a single modification. From 2003 to 2015, there have been no less than three modifications each year.

In March 2014, by means of Royal Decree 4/2014, the Bankruptcy Law was modified in all that affected refinancing and debt restructuring.

This Royal Decree introduced a special regime. Thus, certain refinancing agreements were protected in view of a future bankruptcy procedure. They were protected from a possible action of rescission.

One of the measures introduced by this Royal Decree was the following:

The possibility that the majority of financial creditors (75%) could drag in the dissident (financial) creditors in the measures proposed in the refinancing agreement. Consequently, they could be required, for example, to convert part of the debt into shares or holdings in the debtor company.

But what happens if, as a result of a refinancing, the creditors acquire a percentage share in the company? What are the possible future consequences of the refunded company being declared in bankruptcy procedure?

Judgment of the Supreme Court of March 4, 2016

On March 4, 2016, the Supreme Court ruled on this issue. Therefore, the credits of a company that belongs to the same group as the debtor will be subordinated credits, by association. For that purpose, at the time of the creation of the credit, control must be exercised over the debtor. To this end, it will be necessary to comply with the provisions of Article 42 of the Commercial Code.

The Spanish Bankruptcy Law in its Article 93.2 establishes that these will be persons especially related to the debtor, among others:

• The partners or shareholders, who, at the time of the birth of the credit claim, are direct or indirect holders of at least 5 percent of the share capital. For this purpose, the debtor must have securities admitted to trading on the official secondary market, or 10 percent if it does not have such securities.
• Companies that are part of the same group as the debtor company and their common shareholders. All this provided that the latter meet the same requirements for holding established in section (1) at the time the credit claim is created.
• The ruling analyses the moment at which the concept of “group of companies” provided for in section 3 of Article 93.2 of the Bankruptcy Law must be applied. The key is to determine when it is considered “a person especially related to the debtor”.

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Debt restructuring and refinancing, differences and concepts

The purpose of refinancing is to replace an existing loan with a new loan. Refinancing is carried out to obtain more favourable conditions. Restructuring is usually associated with short-term cash flow stress. The causes may be cyclical or derive from a lack of financing.

Group status for commercial purposes under Article 42 of the Commercial Code.

The question is whether the status of company in the same group must be present at the time of the declaration of the bankruptcy procedure or when the credit to be subordinated was born.   The SC has opted to follow the criterion that justifies the condition of person especially related to the debtor. For this reason, it follows the definition of group for commercial purposes set out in Article 42 of the Commercial Code.

Based on the above, the classification of the credits will be subordinated if:

• At the time of the credit´s birth with the debtor there is effective control by one of the companies of the group (regardless of possible guarantees that could give rise to a privileged credit).

However, if at the time of the credit’s birth there is no control, it is possible to successfully defend the non-linkage of companies.  Therefore, the classification criteria that correspond to the credit by its very nature could be maintained (all of the above, regardless of whether indirect control of the debtor company may be obtained at a later date).

It should be mentioned that in the ruling analysed, the financial institution defended the position followed by the Supreme Court. This institution had an indirect holding through the real estate company belonging to the group. However, it did not prove that the credits had arisen prior to the indirect control. This led to the so-called “request in principle”. (The proposition to be proved is included implicitly or explicitly in the premises).

To this effect, we believe it is necessary to emphasize two extremes, in view of possible refinancing or restructuring of debt:

1. What control of the potential debtor can be achieved through a debt refinancing (when one of the measures involves the conversion of credit into shareholdings or shares).
2. What the refinancing means for the purpose of creating new credits or maintaining existing credit.

If you have been interested in this reading, you can get more information about it in the following links:

Security rights in debt refinancing

The homologation of refinancing agreements

Jurisdictional and administrative procedures in the Bankruptcy Procedure.

The Agreement with Creditors in the Bankruptcy Procedure