Feeling Groovy: Recent Past, Present and Potential Future of Spanish Financing

After recovering from what seemed to be a near-death experience, Spain is now the ray of hope in the European market (even after two general elections, 315 days of a caretaker administration, and a €100 billion bailout from the EU to restructure the country’s financial sector).
 
The 180-degree turn-around in economic perspectives has clearly passed on to the financing sector. The new trends seen in 2016’s Spanish financing sector coexist with the restructuring of several types of indebtedness (which, due to the unexpected gravity of the crisis, had become difficult to digest): acquisition financings based on significantly leveraged M&A deals both domestic and abroad (following the European pattern of those years), real estate related deals and project financings concerning infrastructures and renewables (which had boosted in 2007 due to the feed-in tariff granted to electricity produced from renewable energy sources).
 
The first restructuring milestone consisted of unifying the terms for all indebtedness and extending the security package to all lenders alike: Eroski in 2009, Reyal Urbis and Celsa in 2010, Cementos Portland Valderrivas in 2012, FCC in 2014, etc. Most of them included a safety-net in the form of a partial conversion into participative loans which is considered equity for accounting purposes. However, the scope was generally limited to extending maturity and hardening the covenants and restrictions. By way of exception, Metrovacesa’s refinancing included a pioneering debt-for-equity swap which allowed the lenders to take control of the company in order to prevent it from becoming bankrupt like its competitor, Martinsa-Fadesa.
 
The main reason for such a limited level of alterations implemented in the restructuring processes was the scarcity of the tools available to undergo more significant changes: the Spanish Insolvency Law enacted in 2003 during the golden era of the country’s economy, was based on the idea that any restructuring had to be court-led, and the little case law available was insufficient to fill its interpretative gaps. Even though the Spanish Insolvency Law was amended in 2009 to shield refinancing agreements (and related security packages) as a safe-harbour against claw-back actions, the unanimity required to amend any contractual term and the fear that courts could overturn any refinancing to the extent it hindered the rights of dissenting lenders, made it impossible to implement further amendments to the agreements. This led to some debtors fleeing to more favourable jurisdictions, particularly the UK for its schemes of arrangement (e.g., La Seda de Barcelona, Metrovacesa or Cortefiel).
 
This situation led to the introduction, quite diffidently in 2011 but vigorously in 2014, of a cram-down mechanism allowing for a variety of amendments to be imposed on holders of any financial liability, regardless of the security held. Dissenting creditors were left with no choice other than to allege a “disproportionate sacrifice”, an undefined concept which the courts have consistently interpreted in favour of the restructuring (e.g., Celsa, Copisa, Eroski, San José and just a few weeks ago, FCC). Some restructurings (for instance Isolux and Abengoa) are still underway, but many believe 2016 was the last year for any significant adjustments to the financial indebtedness of large Spanish companies.
 
In parallel, the real estate market has had to severely adjust to the new situation, as the land (of which there had been a shortage due to the market bubble) plummeted in value. This left sponsors with little incentive to honour payments which led to several companies entering insolvency or their assets being foreclosed. As a consequence, banks had enormous portfolios of NPLs and REOs which burdened their financial accounts. The number of deals involving these types of assets in the past few years has been staggering (including very active sellers such as Banco Santander, Sabadell, Caixabank, Bankinter or Spain’s bad bank SAREB, and purchasers such as Goldman Sachs, Blackstone, TPG, Cerberus, Oaktree, Lindorff or Bain Capital).
 
As for the restructuring of renewable project financings (c. €50bn debt), the uncertainty of long-term remuneration (due to the constant changes in the feed-in tariff regulation) and the occasionally insufficient equity funding of sponsors (which was very diverse, ranging from big market players to individual investors being advised by private bankers), prevented a full restructuring of the sector which could have stimulated foreign investments. Lenders could only make adjustments to the amortisation schedule and the financial covenants by limiting distributions to sponsors, and in most cases toughening the “change in law” provisions. The market started to lose small investors in benefit of big sponsors. The implementation in June 2014 of the framework outlined in the new Law in the Electricity Sector (reducing subsidies retroactively as from July 2013 and ensuring an envisaged rate of return of 7.5% over the regulatory life) has helped to appease the nerves of all parties. The recent announcement of the expected update of the remuneration provides grounds to believe that the market is now stabilised.
 
This background was not at all times aligned with economic perspectives. Decisive banking and fiscal reforms, coupled with supportive monetary policy from the ECB, led to an emergence from the recession in mid-2013 and the rise of exports and international competitiveness. From the third quarter of 2014, financiers (other than distress funds who had been pretty active in the Spanish distressed market throughout the crisis) began their journey back to investing in Spain looking for direct lending transactions. However, most deals ended up being aborted due to the banks’ decision to refinance without intermediaries (partially based on the decrease of the financing costs as from 2014), resulting in transactions involving new lending still being the exception.
 
Without doubt, 2016 has brought winds of change to this gloomy setting. The low interest rates, a largely consolidated banking sector and the economic stability gained in 2015 has led to banks offering investors attractive deals involving new money. Acquisition of midsized companies which withstood the crisis with low leverage ratios were suddenly on the radar of PE houses, institutional investors and large family offices. Similarly, current investors who during previous years had preferred subsistence over profitability were now looking to cash in their investment; thus over the past year, recaps have been boosted (far exceeding all recaps done during the past five years). These trends affect all sectors alike, although at different intensities: real estate (particularly hotels, retail parks and shopping centres) and renewable energy (particularly wind and solar PV farms) have benefited the most.
 
Separately, large companies have awoken from the nightmare and are now looking to refinance their indebtedness in the hope of obtaining better terms. Consequently, the bond market, both investment grade and high yield, has enlarged. Finally, London Market Association forms are increasingly penetrating the market, which has several benefits for borrowers: negotiations are abridged (reducing opportunity costs and advisors fees) and lenders are more keen to accept standardised carve outs and exceptions.
 
We cannot ascertain what 2017 will bring, but the trends show an increase in more conservative (in terms of leverage ratio and risk diversity), more sophisticated (with different funding sources and focused on expanding international presence) deals with both new and old players that have resisted the financial crisis and even benefited from it. Time will tell if the predictions will be fulfilled, but in the meantime, Spain is once again feeling groovy.

Ángel Pérez, partner
T. +34 91 587 09 11
angel.perez@uria.com
 
Ángel Pérez López joined Uría Menéndez in 2000 and is currently the head of the Banking and Finance Practice Area of the Madrid office.

Ángel focuses his practice on corporate, acquisition and project finance, working on some of the most important financing and restructuring deals that have taken place in Spain in recent years. He has also participated in several sales and acquisitions of non-performing loans, real estate assets and property management platforms.

In the 2015 edition of Iberian Lawyer he was named one of the top 40 lawyers under the age of 40 in Spain and Portugal.
 
José-Félix Zaldívar, associate
T. +34 91 586 06 12
josefelix.zaldivar@uria.com
 
José-Félix Zaldívar is a lawyer in Uría Menéndez’s Madrid office. He joined the firm in 2010 and was based in São Paulo’s office (Brazil) between January and December 2013.

In his professional practice, José-Félix focuses mainly on financing, restructuring, mergers and acquisitions and general commercial law. He has advised on some of the largest and most innovative financing and restructuring transactions in Spain in recent years and has extensive experience of cross-border financing transactions.
He is experienced in advising Spanish and foreign clients on an ongoing basis (including large corporations, financial institutions, and industrial companies from various sectors).