The homologation of refinancing agreements

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Before explaining what the refinancing agreements are, we will talk about reintegration actions.

The LC established the mechanism of reintegration on certain actions prior to the ruling of the Bankruptcy Procedure. To activate the reintegration, two requirements need to be met: time and damage. The law allows the termination of the acts formalized within two years prior to the ruling of the Bankruptcy Procedure. To do so, these acts must have been detrimental to the assets of the debtor.

Given that refinancing agreements are an instrument to avoid the Bankruptcy Procedure, it is therefore necessary to protect them from potential termination if the debtor ends up entering the Bankruptcy Procedure. The LC especially protects these agreements. This protection is based on compliance with legal requirements established for this type of agreement. We will discuss these requirements later.

Therefore, refinancing agreements may not be terminated provided that they meet certain requirements.

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Requirements of Non-Cancellable Refinancing Agreements

The requirements that refinancing agreements must meet in order not to be terminated are divided into two categories. On the one hand there are the agreements that meet the requirements of Article 71bis.1 and on the other hand there are the agreements that meet the requirements of Article 71bis.2. Neither category of agreements can be terminated if they meet the conditions stated in the LC.

The main difference between the signing of one agreement and another is the possibility that it can be judicially homologated. Only refinancing agreements that meet the requirements established in Article 71bis.1 of the LC may be judicially homologated.

Refinancing agreements. Article 71 bis.1:

Refinancing arrangements, as regulated in Article 71bis.1, must meet the following requirements:

• These agreements must involve an extension of credit or a modification or extinction of obligations. In any case, they must respond to a viability plan that allows the continuity of the economic activity.
• That they have been signed by creditors representing at least 3/5 of the debtor’s liabilities. In the case of syndicated agreements, at least 75% of the liabilities affected by the syndicate must be voted in favour.
• That the company’s auditor issues a certificate on the sufficiency of the liabilities to adopt the agreement. If the debtor does not have an auditor, the auditor must be appointed for this purpose by the commercial register of the debtor’s domicile.
• That the agreement has been formalized in a public instrument.

Refinancing agreements. Article 71bis.2:

Refinancing arrangements under Article 71bis.2 shall comply with the following conditions:

• Refinancing arrangements should increase the proportion of assets over liabilities.
• The resulting current assets should be higher or the same as the current liabilities.
• The value of guarantees given to creditors should not exceed 9/10 of the value of the debt. Nor may it exceed the proportion of guarantees on the debt that were previously existing.
• The interest rate on the resulting debt must not exceed by more than 1/3 the rate prior to the agreement.
• That the agreement is formalized in a public instrument, formally expressing the reasons that justify the agreed acts.

The agreements signed under the conditions of article 71bis.1 require unanimity of creditors, in the terms indicated. The agreements regulated in article 71bis.2 can be signed individually or jointly.

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Effects of the Bankruptcy Procedure Declaration on Contracts

The most decisive effects of the declaration of the concussion for the continuity of the bankrupt are those that fall on the contracts.

Homologation of refinancing agreements

As we mentioned before, the main difference between a refinancing agreement with the requirements of Article 71bis.1 or 71bis.2 is the judicial homologation. The 4th Additional Provision of the LC regulates the approval of refinancing agreements. Only those agreements that meet the conditions of Article 71bis.1 may be approved. One of the requirements for adopting the refinancing agreement of Article 71bis.1 was the subscription of 3/5 of the liabilities. No distinction is made between financial and non-financial liabilities. However, judicial approval requires that the agreement be signed by at least 51% of the financial liabilities.

The purpose of judicial homologation is to extend the effects of the refinancing agreement to financial creditors who have not participated in the agreement or who have not voted in favour of it. Such creditors may be affected by the agreement, unless their creditors are secured by a security right.

The effects of the extension change depending on the percentage of financial creditors who have signed the agreement. Below we distinguish the situations that can occur:

The refinancing agreement approved for 60% of the financial liabilities (or 65% for creditors with special privilege). The effects are:

• Waits (both principal and interest) not exceeding 5 years.
• The conversion of debt into equity loans also for a period not exceeding 5 years.

Refinancing agreement approved for 75% of the financial liabilities (or 85% for creditors with special privilege). The effects are:

• Waits than 5 years, but less than 10 years.
• Reduction of the debt.
• The conversion of debt into stocks or shares of the debtor company.
• The conversion of debt into equity loans.
• The assignment of assets in payment of debt.

The value of the security right for financial liabilities in a refinancing agreement

The homologation of refinancing agreements implies the extension of the effects of the agreement to dissenting creditors. However, these effects do not extend to security right backed credits in which the creditors have not signed into the agreement.

Nevertheless, the 4th Additional Provision limits the value of the security rights for the effects of the refinancing agreement. The credits secured with security rights may be affected in part by the refinancing agreement reached. For this purpose, the LC sets out how the value of the security right should be calculated. This value will be the result of deducting the outstanding debts from the 9/10 of the fair value of the asset. This result may not be less than zero or more than the value of the credit. The excess over this value will be affected by the agreement reached, in accordance with the majorities obtained.

This provision also establishes what the fair value of each asset is or how it should be calculated.

• Listed securities: the fair value will be the weighted average price at which these securities would have been traded in the last quarter. A certificate issued by the market management company will be required.
• Real estate: the fair value will be the appraisal value issued by an approved entity.
• For assets other than those mentioned above, the fair value will be that established by an independent expert.

No appraisal will be required, if one issued by an independent expert is available. Provided that it has been done in the six months prior to the start of negotiations.

Other effects of the refinancing agreements. The communication of 5 bis.

The LC establishes a protection mechanism for the debtor who is negotiating a refinancing agreement. Specifically, it states that as soon as the debtor informs the Judge that negotiations have begun, no enforcements may be initiated. It is a protection prior to the signing of the agreement.

The communication we are referring to is included in article 5bis of the LC. Automatically, from the presentation of this communication, the debtor will obtain a period of three months to negotiate with the creditors.

In this period of time:

• No judicial or extrajudicial enforcements can be initiated on assets that are necessary for the continuity of the debtor’s economic activity. Enforcements that are in progress shall be suspended.
• The singular enforcements promoted by the financial creditors on other assets of the debtor will be suspended. In this case, 51% of the financial creditors are required to have supported the negotiations.
• The necessary Bankruptcy Procedure of the debtor may not be instituted.

If the negotiations do not result in a refinancing agreement, the debtor must apply for the Bankruptcy Procedure. The LC sets a 3-month deadline for negotiating and reaching an agreement. After this period, the debtor has an additional month to apply for the Bankruptcy Procedure.

Conclusion

Refinancing agreements are mechanisms to avoid the ruling of the Bankruptcy Procedure. These agreements must be protected from termination in a potential Bankruptcy Procedure due to the temporary moment in which they are reached. The LC establishes the impossibility of terminating these agreements, provided that certain requirements are met. The agreements approved may extend their effects to financial creditors who have not signed them.

The homologation of the agreements will be judicially agreed by means of a ruling. All effects will be extended as soon as they are published in the BOE. Once the homologation has been requested, the debtor cannot request a new one until one year has passed since the first one.

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