Bad times for refinancing (insolvency)

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After several parliamentary vicissitudes, the BOE of October 11, 2011 published Law 38/2011, of October 10, on the reform of the Insolvency Law.

The first thing that draws attention is that some precepts of this Law came into force the day after its publication in the BOE, that is, on October 12, 2011, which coincided with the Pilar festivity. Among the sections that came into force immediately highlights those called by the legislator “pre-insolvency institutes” consisting of refinancing agreements .

One of the main novelties introduced by the reform of the Bankruptcy Law is the possibility that the Judge approves the refinancing agreements if a series of requirements are met, among which it is worth mentioning that the agreement is signed by creditors representing 3 / 5 of the debtor’s liability at the time of signing the agreement and, on the other hand, that said creditors represent at least 75% of the liabilities held by financial institutions. In addition, the reform foresees that the agreement can only imply a wait of a maximum of 3 years. In case of homologation, the effects of such waiting extend to dissident financial institutions whose credits are not endowed with a real guarantee. On the other hand, non-financial creditors that have not subscribed to the refinancing agreement will not be affected by the homologation.

In view of the large number of requirements that these agreements require, the question that immediately arises is whether its achievement is actually viable. According to the statistics, since the introduction of refinancing agreements by Royal Decree-Law 3/2009, from March 27 to September 2011, only a total of 90 have been signed, which shows that it is an instrument that only results useful for large companies, but that will not serve for small and medium enterprises can get over their economic situation. These have no choice but to go to the contest and get, if they have good luck and tenacity, an early agreement, which only requires the favorable vote of 50% of the ordinary creditors of the contest.

In fact, it is an open secret that during the parliamentary procedure there has been an unwritten pact between the two main political parties in the country not to introduce amendments to the regulation of refinancing agreements, as it is a reform designed exclusively for three or four large companies that are currently under restructuring processes. This explains the great precipitation of the entry into force of the reform of these agreements.

Insolvency

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In this way, it is noted – as we already denounced in our blog on October 28, 2010 – that the Spanish legislator has not dared to introduce pre-insolvency schemes along the lines of the Scheme of Arrengement ; the Preventive Concordat or the Sauvegarde Procedure , which are extended to all types of creditors and which, in practice, work very effectively. Finally, in relation to one of the most serious problems of any company in competition, that of the post-contest financing, the reform has privileged the “fresh money” or fresh money, by foreseeing, on the one hand, that 50% of the new cash receipts granted in the framework of a refinancing agreement are credits against the estate, which must be paid when due, and the remaining 50% is credit with general privilege. In addition, in the event of liquidation of the insolvent company for breach of the agreement, the loans granted to the bankrupt within the framework of said agreement will also be considered credits against the estate, for which they must be paid, in principle, in full.

However, the practice shows that, in many cases, the assets of the insolvent company are completely insufficient to pay the loans against the estate and, in this case, the reform alters the order of payment of said credits, giving preferential treatment to the salary credits and to the judicial expenses of the contest, above the other credits against the mass. In this way, it will continue to be very complicated for the companies in competition to obtain the necessary financing to be able to continue with their activity, and more taking into account the current state of the credit market, in which the access to the debt is reducing and becoming more expensive. due to the high interest rates that the states pay to finance themselves and the deleveraging of the banks due to the new capital requirements imposed by the government authorities.