Spanish “New Money” Privilege – Is It As Good As It Looks?

The latest amendment to the Spanish Insolvency Act (Ley 22/2003, de 9 de julio, Concursal) passed by the Spanish parliament on October 10, 2011 (Ley 38/2011, de 10 de octubre, de reforma de la Ley 22/2003, de 9 de julio, Concursal), provides new options in insolvency proceedings for debtors, creditors and professional investors.
 
This amendment results from the general understanding that the Spanish insolvency system needed to provide new alternatives to market operators to enhance the reorganisation of companies and, more importantly, maximise the value of debtors’ estates and increase recovery rates of Spanish insolvency proceedings (which, traditionally, have been consistently low).
 
The relevant amendments made by the Spanish insolvency reform include the introduction of the “new money” or “fresh money” privilege for the first time in Spanish insolvency law history.  The Spanish Insolvency Act introduces this privilege to all new financing provided in the context of refinancing agreements within prepetition ring-fenced restructuring frameworks (and, therefore, subject to certain formal and material requirements under the Spanish Insolvency Act).
 
However, as is often the case, all that glitters is not gold, as the Spanish legislator has not yet included a comprehensive post-petition financing regulation within the Spanish insolvency legal framework.  Therefore, the Spanish Insolvency Act still does not have a legal regime that provides incentives for post-petition financing and that facilitates debtors’ access to liquidity through a streamlined procedure at the early stages of insolvency proceedings (such as the “debtor-in-possession” financing under the US Bankruptcy Code).
 
Prepetition Stage
 
The Spanish insolvency reform enhances out-of-court restructurings to ensure the viability of Spanish companies that suffer from situations of financial distress, without them having to go through the difficulty of insolvency proceedings.
 
In this scenario, any “new money” or cash injection granted to debtors through prepetition refinancing agreements (rescue financing) would benefit from a privilege that consists of considering 50% of the credit claim as an administrative expense (crédito contra la masa) and the remaining 50% as a general secured claim (privilegio general).
 
Regarding administrative expenses, under the Spanish Insolvency Act, these expenses benefit from an administrative super priority over any other insolvency prepetition claims (crédito concursal), except over insolvency claims secured with in rem securities.  Further, this privilege (which amounts to 50% of the credit claim resulting from the rescue financing) could be characterised as a “payment waterfall privilege,” where administrative expenses are paid as they become due and not upon emergence from insolvency, as is the case with insolvency prepetition claims.  For creditors to benefit from this “payment waterfall privilege,” it is advisable to contractually implement and include specific repayment mechanisms in refinancing agreements that enable creditors to be repaid on an ongoing basis within insolvency proceedings.   
 
Regarding the remaining 50%, as referred above, the credit claim is considered a general secured claim (privilegio general), junior to any administrative expenses and secured claims, but senior to general ordinary unsecured creditors. 
 
Notwithstanding the above, the “new money” privilege would not apply in cases where the rescue financing is made available through cash injections from inside parties (personas especialmente relacionadas) through (i) share capital increase transactions, (ii) facility agreements, or (iii) acts with analogous purposes.
 
The way the Spanish legislator has structured this privilege (50% administrative expense, 50% general secured claim) has been criticised by certain sectors of the Spanish legal community.  For instance, Spanish practitioners criticised this privilege as being ineffective and providing insufficient incentives to lenders to provide rescue financing in the context of companies facing financial distress.  We still, however, do not have a clear picture of how this privilege is playing out in the refinancing structures that have been carried out since the reform, and it is still too early to determine whether this “new money” privilege has passed or failed the “market test.”
 
Post-petition Stage
 
As mentioned, unlike in other jurisdictions (e.g., the US Bankruptcy Code), the Spanish Insolvency Act does not regulate the possibility of (i) acceding to timely and not too burdensome financing mechanisms within insolvency proceedings during the common phase (fase común), or (ii) putting the post-petition lenders ahead or at the same level of preexisting liens (priming lien).  The reform has not yet addressed this issue; it has only gone as far as to clarify aspects of exit financing privileges that were subject to case law and academic debate. 
 
Under the Insolvency Act, post-petition financing is subject to the general rules for the administration of the debtors’ estates, and does not benefit from specific incentives.  Therefore, any financing transactions during the common phase would be treated as an administrative expense (with no available “priming lien” and, therefore, with no possibility of constituting first ranking in rem securities over encumbered assets) and would be subject to insolvency administrators’ (administración concursal) authorisation.  If, in addition, the applicable financing transaction entails the granting of liens or encumbrances over any of the debtors’ (free or unencumbered) assets, these transactions would be subject to the insolvency court’s authorization.
 
Although the Spanish Insolvency Act does not address post-petition financing generally, it has expressly clarified the regime applicable to the financing of viability plans that support reorganisations (or, in other words, exit financing).  Under the Spanish Insolvency Act, credit claims resulting from exit financing granted in connection with composition agreements (convenio) would be considered fully as an administrative expense, benefitting from the privileges mentioned (priority over any other prepetition insolvency claims). 
 
Although it sets the correct path by introducing the “fresh money” privilege and clarifying the legal regime applicable to exit financing, we believe that further incentives should be provided to prepetition rescue financing.  Also, post-petition financing should be introduced in Spain (mirroring other systems such as the US Bankruptcy Code) by including a streamlined procedure to obtain financing within an insolvency proceeding and introducing the incentives and privileges necessary to make financing attractive to potential post-petition lenders.  We only hope that the Spanish legislator finally reaches the same conclusion.
 
With almost a century of professional practice and an excellent reputation, Cuatrecasas, Gonçalves Pereira provides legal advice in all areas of business law, including advice relating to financial restructuring processes, advising both debtors and creditors on issues including preliminary analysis of debt to be restructured and the options in a financial distress situation.  The firm participates in all stages of Spanish and cross-border complex deals involving reorganisations, restructurings, workouts, liquidations and distressed acquisitions.  For more information, visit www.cuatrecasas.com.
 
Iñigo Rubio is a partner at Cuatrecasas, Gonçalves Pereira's London office.
Mr. Rubio specialises in advising on the financing of infrastructure projects (public private partnerships and private finance initiatives) and real estate projects, whether simple, syndicated or structured (e.g., sale-and-leaseback and off-balance sheet transactions).  He also has ample experience in corporate and asset finance, and debt restructuring transactions, having participated in several of the most important and complex refinancing processes in recent years.  Since joining Cuatrecasas, Gonçalves Pereira in 2000, Mr.  Rubio developed most of his career in the firm’s Madrid office before transferring to the London office in January 2010.
 
Mr. Rubio can be contacted on +442073820400 or by email at inigo.rubio@cuatrecasas.com
 
Ignacio Buil Aldana is a senior associate at Cuatrecasas, Gonçalves Pereira's Madrid office.
Mr.Buil Aldana has extensive experience in debt restructuring transactions (both judicial and out-of-court), bankruptcy proceedings and restructuring agreements.  Mr. Buil Aldana represents debtors and creditors and advises financial institutions and private equity funds in refinancing transactions.  Additionally, he has participated in several national and international financing transactions.  He was an associate in the New York office of a leading American law firm where he represented several debtors in their chapter 11 reorganisations.
 
Mr. Buil Aldana can be contacted on +34915247603 or by email at ignacio.buil@cuatrecasas.com.
 
Alicia Galindo Aragoncillo is an associate at Cuatrecasas, Gonçalves Pereira's Madrid office.  Mrs. Galindo has experience in domestic and foreign financial transactions consisting of structured and financial facilities, sale and lease-back transactions, asset finance transactions, restructuring of debt and project finance transactions. 
 
Mrs. Galindo can be contacted on +34915247622 or by email at alicia.galindo@cuatrecasas.com