Spain Reforms Bankruptcy Law to Facilitate Restructurings

On March 7, the Spanish government reformed its bankruptcy law to encourage companies to restructure their debt and avoid liquidation. The decree is one part of an ongoing reform program intended to strengthen and stabilize the Spanish financial sector.  The reforms provide stronger incentives for lenders to accept write-offs, maturity extensions, and debt forgiveness for struggling companies. The new rules also reduce the majority of creditors needed to vote for a restructuring.  If creditors representing 60% of a company’s debt agree, they can now force all creditors of a Spanish debtor to extend the maturity of their debt by five years or convert their debt into participatory loans, a hybrid of equity and debt. Judges have discretion to reduce the voting threshold to holders of 51% of a company’s total debt. With approval of creditors representing 75% of total debt, companies can now force creditors to reduce outstanding principal, delay the repayment of loans by up to 10 years, or swap debt for equity.

The reforms also discourage stakeholders from obstructing restructurings: both creditors and shareholders can be held liable if they unreasonably withhold consent from debt-to-equity swaps.  Bankruptcy reform was one of many policy changes recommended by the International Monetary Fund when Spain sought European and international assistance amid the 2008 recession and subsequent European debt crisis. While most of the recommendations focused on the financial sector, the IMF also drew attention to Spain’s strict bankruptcy laws.

The IMF reported that Spanish insolvency process too often ended in costly liquidation rather than restructuring. Under the previous rules, approximately 95 percent of companies that entered insolvency proceedings wound up in liquidation.  A record 8,716 Spanish companies sought protection last year, a 20% increase from the year prior. Lenders have been reluctant to provide financing to the small and midsize businesses that make up a large proportion of the Spanish economy.

The Spanish government hopes that new rules will increase the proportion of successful restructurings and encourage lending. Explaining the reform, Deputy Prime Minister Soraya Saenz de Santamaria told reporters that “The aim is to prevent a liquidity problem or temporary solvency issue from forcing a company with good earnings and growth perspectives … from having to shut down.”

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