Vol 3 (2006) - Issue 6

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Restrictions in the Spanish Distressed Debt Market

Throughout the past year the trading of distressed debt and companies increased dramatically. This rapid growth is the result of the interest demonstrated by US distressed debt investors (and now also by certain European investors) and the willingness of original lenders to sell their non-performing loans rather than restructure them. In addition to the London market, both the German and Italian markets have reflected active trading.
Distressed debt trading on the Spanish market has been low, due mainly to a lack of this type of asset and the approach of domestic banks to debtor insolvency. Spanish banks generally follow a traditional approach whereby the original lender restructures or reschedules the debt rather than selling it at a discount. Nonetheless,there has been incipient distressed debt trading in Spain over the last twelve months and this activity is likely to continue. For those acting in this market, certain restrictions imposed by Spanish law could be of importance.
The newly enacted Spanish Insolvency Act (Law 22/2003 of 19 July (the ‘SIA’)) which came into force on 1 September 2004 is slowly affecting the way in which insolvency proceedings are viewed in this new environment. The enactment of the SIA has caused a major change in the Spanish insolvency scene. The SIA completely reforms a legal system which, in some areas, had been in force for over a century.
With respect to debt trading, the old system was extremely flexible. Debt of an insolvent company could be traded without any limitations. Spanish courts only accepted the annulment of creditors agreements based on claims of fraud when the purpose of a debt purchase was to obtain a majority position among creditors to control the vote in a creditors meeting in order to impose an onerous creditors agreement on minority creditors. This was particularly true in cases where the purchaser was a related person or affiliate of the debtor (e.g., a controlling shareholder or a director). However, there would have been no fraud according to the Spanish courts if the controlling creditor had offered all creditors the option to purchase their credits on equal terms, regardless of whether the creditors would have sold their credits to the offeree or not.
The drafters of the SIA have taken this into account and have tried to avoid the trade of debt of an insolvent debtor. As a result, an overly restrictive SIA was implemented
thus imposing serious limitations to distressed debt trading.
The main provisions which make distressed debt trading difficult are:
1. The loss by the assignee of a claim of the right to vote in a creditors meeting to approve a creditors agreement if the assignment took place after the formal declaration of insolvency of the debtor.
2. The loss of the right to request the initiation of insolvency proceedings by the assignee of a due and payable claim purchased during the six months before the opening of the insolvency proceedings.