Spain’s Economy Minister, Nadia Calvino, has reported that Spain will maintain its economic growth forecast at 6.5 per cent for 2021, as originally set in April 2021. This represents the highest growth forecast among the main economies of the Euro Area.
Calvino stated that “All indicators and forecasts signal a strong recovery in the second half of the year”, with the economy likely to expand 7 per cent in 2022, when it is expected to reach pre-pandemic levels.
If growth is sustained over the summer period, Spain could see February 2020 employment levels during the autumn of 2021. The Spanish government expects unemployment to remain at 15 per cent in 2021 and 14 per cent in 2022. Quarterly unemployment stood at a rate of 13.8 per cent in late 2019, before the pandemic hit.
The government also maintained the budget deficit at 8.4 per cent in 2021 and 5 per cent in 2021. Budget Minister Maria Jesus Montero said Spain’s debt ceiling will be a record EUR 196.14 bn for 2022, slightly higher than this year.
IMPACT OF COVID-19 ON THE DEBT MARKET
The Spanish National Securities Market Commission (CNMV) has reported that Spain’s financial market stress indicator stood at a low level below 0.27 in the second quarter of 2021 and remained relatively stable. The majority of individual segments have remained fairly stable during the second quarter with the Spanish equities markets also rising but gaining less than other international indices.
Following the end of Spain’s second state of emergency 9 May 2021, certain COVID-19-related measures have continued including the following:
- Insolvency moratorium: The obligation on insolvent debtors to file for insolvency remains suspended until 31 December 2021.
- Foreign investment: An extension has been granted until 31 December 2021 in respect of the requirement to seek prior authorization for non-EU direct investments involving the acquisition of 10 per cent or more of the capital or controlling interest in a Spanish company operating in specific strategic sectors.
- ICO-backed debt: The period to apply for public guarantees within the scope of the two existing guarantee facilities has been extended until 1 December 2021. A set of measures have also been approved enabling the renegotiation of financing with a public guarantee.
- Company recapitalization funds: The period to request the support of the EUR 10bn solvency fund for strategic companies managed by the state-owned Industrial Holding Company (SEPI) has been extended until 31 December 2021. A EUR 1bn recapitalization fund has also been created for medium-sized enterprises affected by COVID-19 which will be managed by the Spanish Development Finance Institution (COFIDES).
The Spanish distressed market has been affected by the uncertainty surrounding appraisals of real estate, leading to unsecured debt transactions dominating the first half of the year. However, investors are now strongly turning towards secured debt, and there will likely be a significant increase in secured debt transactions in the second half of 2021 owing to the adverse effects of the COVID-19 crisis on business and consumers. Cross prices will determine the volume of those transactions.
We appreciate the assistance of Beatriz Causapé, finance partner at the Spanish law firm Cuatrecasas, with the following discussion on Spanish law, regulation and practice. In addition, we thank the collaboration of Borja Álvarez, principal associate of the litigation group at Cuatrecasas.
SPANISH LEGAL SYSTEM
The Spanish system of governance is based on parliamentary representation. The head of the Spanish state, King Felipe VI, represents the unity and continuity of the state’s institutions.
The Spanish legal system is a civil law system which is largely based on comprehensive legal codes and Roman Laws. The structure of the Spanish legal system is divided between its legislature (the Parliament - Cortes Generales), executive (the Government composed of the President, the vice-president and the ministers) and judiciary (independent, irremovable judges and magistrates who are only subject to the rule of law).
KEY POINTS FOR TRADERS
- No banking licence required
- Transfer by assignment is commonplace (novation is problematic)
- Participation agreements are used although not yet judicially tested
- Trusts are not a recognised legal concept
- Security agents cannot act as trustees for all lenders
- Non-resident lenders subject to a 19 per cent withholding tax, subject to exceptions
- Loan transfers are not subject to stamp duty unless they are registrable transactions
- No legal requirement to notify the borrower of a loan transfer
BANKING LICENCE REQUIREMENTS
There is no licensing requirement for lending in Spain. However, certain banking activities (such as taking deposits) may require authorisation from the Bank of Spain (“BoS”), the National Securities Market Commission or the Spanish Economy Minister.
Creditors who grant and/or carry out servicing activities for certain mortgage loans (where debtors are individuals), are required to register with the BoS. Buyers of such performing loans may be obliged to file for registration to act in Spain.
Consumer protection regulation must be observed when dealing with consumer loans.
METHOD OF TRANSFER
Loans are typically transferred by way of assignment. A transfer is usually effected using a Spanish law assignment which transfers the assignor’s rights and obligations in the loan to the assignee. Notably, transfer by novation is not commonplace in Spain.
Novation will result in the original agreement being extinguished and a new contract being formed. A transfer by novation therefore carries a risk of releasing the existing security or guarantees.
Participation agreements are valid in Spain, although participation agreements subject to Spanish law have not yet been tested by the Spanish courts and there is a risk that the courts may consider them to be legal assignments, rather than back-to-back funding arrangements, in respect of traded debt. However, these agreements are becoming more frequent in the Spanish market.
SECURITY AND TRUSTS/AGENCY
Trusts are not a recognised legal concept in Spain. In addition, Spain is a civil law jurisdiction which does not recognise, in general terms, the difference between legal and beneficial ownership.
Security interests are generally granted in favour of all lenders and not only to the security agent, so that lenders have a direct claim upon enforcement of security or an eventual insolvency of the relevant security provider. Security is accessory to the debt in Spain. Prospective lenders acquiring a loan by way of assignment will therefore take the benefit of any existing security arrangements (and guarantees) by operation of law (although some additional formalities such as notarisation of the assignment or its registration may be convenient or even necessary depending on the type of security).
Unlike in some common law jurisdictions, the security agent is not able to act on behalf of all lenders as a trustee. Although the market is exploring alternative solutions, lenders under a Spanish syndicated loan always accept the security interest before a Spanish notary in order to take the benefit of such security. Notwithstanding the above, the appointment of a security agent for the Spanish security is a common feature of cross-border syndicated transactions. In such cases, it is common to grant the Spanish security to the security agent only, indicating that such security agent acts in the name and on behalf of the relevant lenders from time to time, based on an appointment in this capacity in the underlying secured documents (financing agreement or intercreditor agreement). Such appointment may have to be complemented by the lenders granting special powers of attorney to the security agent and/or notarial deeds of ratification of the security before an eventual enforcement or insolvency scenario, to mitigate the risks of the lenders not being recognised as secured creditors in the absence of being signatories to the security documents.
Lenders should be aware that where an existing security is registered (as is the case for mortgages and non-possessory pledges) the assignment of any security arrangements will also need to be registered in order for the new lender to enforce the security directly. Re-registration typically triggers stamp duty taxes. Where security has not been re-registered, enforcement may only be available via the security agent, which can be problematic in Spain.
Parallel debt structures have not yet been tested by the Spanish courts and there is a risk that the courts may consider that the debt owed to the security agent did not have lawful cause (“causa licit”) because it did not arise from any funds actually extended by such security agent. To avoid additional issues, even if the Spanish security is granted to the security agent only and not to all lenders directly, the secured obligation should be the main payment obligation arising from the financing agreement, rather than the parallel debt created thereunder.
In addition, it should be noted that funds cannot benefit from floating mortgages in Spain, and particular care needs to be taken in the review of mortgage backed loans.
TAX AND STAMP DUTY CONSIDERATIONS
Interest paid to non-resident lenders is generally subject to a 19 per cent withholding tax unless (i) the rate is reduced by virtue of a tax treaty between Spain and the jurisdiction of the non-resident lender or (ii) the interest is paid to a resident in another EU Member State, provided that such non-resident lender, being the beneficial owner of the interest, does not operate in Spain through a permanent establishment and is not resident in a “tax haven” (for the purposes of Royal Decree 1080/1991 of 5th July).
The transfer of a loan is generally not subject to stamp duty where the transfer is not a registrable transaction.
However, where the security for the loan is real estate (or any other type of security that is registered with a Spanish public registry) a stamp duty will be applicable on the notarial deed formalising the transfer.
The tax base is the maximum guaranteed amount of the loan.The tax rate may vary across different regions in Spain, ranging from 0.5 per cent to 3 per cent.
In general, save in instances where loans are transferred between individuals, loan transfers are subject to VAT rather than any transfer tax. However, loan trading is typically treated as exempt from VAT under Act 37/1992 of 18th December.
FORMALITIES, NOTARY REQUIREMENTS AND ENFORCEABILITY
There is no legal requirement to notify the borrower (or guarantor) that a loan has been transferred in order for the transfer to be effective as between the transferor and transferee. However, where a borrower has not been notified of the transfer, any payments made to the transferor by the borrower will be deemed valid for the purposes of satisfying its obligations under the applicable loan agreement.
However, consumer regulations imposed in certain autonomous regions set out requirements to notify the borrower (mainly but not limited to secured debt). In some cases, disclosure of the part of the price allocated to the borrower’s debt is also required.
Where there are multiple debtors under a credit agreement, the following notification rules apply: (i) in the case of “joint” debtors each debtor must be notified separately; and (ii) where debtors are “joint and several”, any of the debtors may be notified in order for valid notice to have been given.
Other than as may be expressly provided in the loan documentation, there are no additional borrower consent requirements under Spanish law.
Where a credit agreement expressly refers to notarisation as a requirement, the notary fees will be split between the Seller and the Buyer. If there is no mention of it in the credit agreement, the Buyer will pay all notary fees (term 18.3 LMA Standard Terms and Conditions).
Spanish law prohibits creditors from having an automatic right to keep property given as security or collateral if the debtor fails to pay, except in certain specific cases (i.e., when the collateral is cash or other liquid instrument). As a result, foreclosure must take place through a public sale of the secured property, normally through a formal auction procedure.
It remains unclear whether funds can benefit from the expedited enforcement process available under the Financial Collateral Directive (Royal Decree-Law 5/2005).
Following the resolutions of the Court of Justice of the European Union of 2019-2020, there is abundant relevant Spanish case law regarding finance litigation e.g. with respect to the abusiveness of interest-floor and early maturity clauses, the interest rate applicable to revolving cards and the transparency of the interest rate clauses linked to the Spanish Mortgage Rate Index (IRPH) for savings banks.
On the other hand, both the state and the autonomous regions continue to actively reinforce consumer protection through regulations that mainly affect financial products, services and housing, adding greater complexity to consumer debt transactions. Especially vulnerable situations are a particular focus of the consumer protection regulations in Spain and new developments are expected in this regard. The Royal Decree-Law 1/2021 of 19 January 2021, which seeks to create a legal framework regime for “vulnerable consumers”, is a notable example of such development.
SPANISH ARBITRATION AWARDS
In recent years, Spain has seen a notable increase in finance litigation transactions.
These encompass not only operations to finance legal costs associated with processing a court or arbitration claim, but also sale and assignment transactions, the subject of which may consist of portfolios of claims (including civil, construction, arbitration, tax and/or administrative claims) or a “single-name” claim (high profile cases).
The common denominator in these sale and assignment transactions is the funder’s interest in the eventual proceeds stemming from the relevant claims and the seller’s and assignee’s respective interest in monetizing the claim. A number of Spanish listed companies, such as Acciona, Telefónica, OHL, Iberdrola and Abengoa, have assessed the opportunities offered by these types of transactions and expect this trend to continue in the future.
In addition, the avalanche of investment arbitration cases brought against the Kingdom of Spain as a result of changes adopted in the renewable regulatory framework continue to be a source of finance litigation-related transactions. Investment opportunities move from third-party funding structures to transactions to monetize awards already rendered against Spain. Currently, the number of Energy Charter Treaty (ECT) awards that have ordered Spain to compensate damages to renewable investors is reported to be worth over EUR 4.5bn. Awards have been issued in respect of the following cases; Antin, RREEF, NextEra, 9REN, InfraRed, Cube, OperaFund, SolEs, BayWa, Watkins Holdings, with many other arbitration claims are to be decided in the next few years.
It is highly advisable to seek specialized legal assistance from Spanish counsel to assess the opportunities linked to these transactions. The analysis of several legal matters may be vital to ensure the investment’s success:
- Risk of contentious credits under article 1535 of the Spanish Civil Code - under certain conditions, where a debt is the subject of litigation and the claim against the debtor is sold to a third party, the debtor may be entitled to cancel the debt by paying the purchase price for which the claim has been sold, along with any litigation costs incurred by the purchaser and any interest payable on the purchase price.
- Legal due diligence to assess the prospects of the relevant claim, including expected timings of monetization of claims.
- Analysis of available structure alternatives and related contract drafting.
- Specific advice in connection with investment arbitration claims e.g. stage of the arbitration proceeding, annulment remedies, potential enforcement obstacles arising out of European Union State aid matters, legal advice on tracing sovereign assets subject to execution and prospects of enforcement and attachment of assets against the sovereign.
SCOUT24 Group (“Scout24”)
German digital company Scout24 released its financial results for the first half of 2021 on 12 August 2021, reporting a revenue increase of 14.4 per cent year over year to EUR 95.9m in the second quarter. The increase is stated to be largely driven by growth in the residential real estate business, supported by strong demand for residential properties.
The company’s reported EBITDA also rose 11.8 per cent year over year to EUR 49m from EUR 43.8m a year earlier.
The Management Board of Scout 24 confirmed its 2021 forecast of mid to high single-digit percentage revenue growth for the group, compared with 2020 revenue of EUR 353.8m. This reflects a low double-digit percentage growth in residential real estate, low single-digit percentage growth in business real estate, and a slight decline in media and other segments. The Management Board also forecast an ordinary operating EBITDA margin of up to 60 per cent.
The company’s operating expenses increased by 15.1 per cent to EUR 54m in the second quarter from EUR 46.9m a year prior. This is largely attributed to a shift in revenue mix toward high-growth products, leading to an increased cost base, and additional costs related to the newly acquired companies immoverkauf24 and Vermietet.de.
As of 30 June 2021, Scount24’s net debt stood at EUR 112.7m, down from EUR 154.6m on 31 December 2020. Cash and cash equivalents amounted to EUR 166m as of 30 June 2021 compared with EUR 177.7m at the end of 2020. Financial assets amounted to EUR 515m as of 30 June 2021 versus EUR 1.565bn as of 31 December 2020.
Finally, the total current assets of the Scout24 amounted to EUR 717m as of 30 June 2021, down from EUR 1.769bn as of 31 December 2020.
CODERE SA ("Codere")
On 5 August 2021, Moody’s completed a period review of the ratings of Spain-headquartered gaming group, Codere. It concluded that Codere's Ca corporate family rating (CFR) reflects the fact that the company continues to suffer from the fallout of the pandemic and its related restrictions to gaming facilities across Europe and Latin America. Moody’s further commented that the company's rating is currently driven by the ongoing restructuring process and Moody's recovery expectations based on the lock-up agreement terms.
On 11 May 2021, Codere’s shareholder’s ratified the restructuring agreement reached with the group’s creditors which involves the injection of up to an additional EUR 225m in the form of new bonds and the capitalization of up to EUR 367m of debt.
It is intended that the new funds will be provided through a bridge loan of EUR 100m and up to an additional EUR 125m granted through super senior bonds to be provided at the end of the restructuring process, which is expected at the beginning of the fourth quarter of the year.
Additionally, in June 2021, Codere entered into the definitive business combination agreement of Codere Online Luxembourg, S.A., Servicios de Juego Online, S.A.U. and its consolidated subsidiaries, with the publicly-traded special purpose acquisition company DD3 Acquisition Corp. II. The estimated enterprise value of the combined company is USD 350m with an implied equity market capitalization of USD 500m. The company will trade in the US Nasdaq stock market.
Codere reported its Q1 2021 results on 20 May 2021 showing an operating revenue of EUR 127.2m, a 54.3 per cent decrease, and an adjusted EBITDA of EUR 3.5m, 92.7 per cent below Q1 2020.
CELSA GROUP (“Celsa”)
Spanish steelmaker Celsa, the largest manufacturer of steel reinforcement in the UK, reached an agreement with Intersig France to increase production in the French steel market, according to a company release. The company invested EUR 60m in the site as part of its 2017-2021 strategic plan.
Under the agreement, Celsa will be able to outflow products made in France for the Belgian, Dutch and French markets. As a result, the Spanish steelmaker has said it expects to become the European leader in the manufacture of long steel products.
The deal will see Celsa’s Bayonne industrial complex reach an annual production of 550,000 tons of rolled steel products once it starts operating.
Celsa has said it anticipates that the deal will lead to an optimization of market supply, greater energy efficiency, a cut in emissions and environmental impact and an improvement in the competitiveness and reliability of steel supply in France.
Intersig, a subsidiary of Dutch group Van Merksteijn, is the largest steel wire rod producer in Europe, while Van Merksteijn is the largest independent producer of wire products for the reinforcement and fencing industry.