Until 2008, banks and savings banks (“cajas de ahorro”) controlled the Spanish debt market. Spain was historically a bank-driven economy with a limited presence of alternative lenders and a small debt capital market, compared to the United States or England.
The 2008 financial crisis and subsequent collapse of several Spanish financial institutions, coupled with the shrinking supply of loans, proved fertile ground for alternative lenders – and the bank loan gap was seized upon by lenders direct.
Between 2010 and 2014, direct lending grew slower than expected, due to, among other things, quantitative easing (QE) and associated monetary policy and (cheaper) bank financing.
However, alongside wider global growth, direct lending has seen a steady development in the Spanish market from 2014 – and it is certainly booming today, with collaboration between banks and debt funds in the area of direct lending, mezzanine and holdco debt, growth, special situations and rescue financing giving direct lending a strong (and growing) market share.
International debt funds first asked whether direct lending triggered bank licensing requirements in Spain.
In essence, there is no Spanish regulatory framework for direct alternative financing. Money lending is not a regulated activity in Spain and direct lenders do not need a license making Spain an easily accessible market.
However, direct lenders may not be able to avail themselves of certain security instruments (such as financial guarantees and floating mortgages (“hipotecas de máximo”), which required sophisticated lending advice to provide solutions. creative workarounds, which are frequently used by direct lenders today.
Spanish and English law
International lenders may use English law and the English courts as the governing law and applicable forum for loan agreements for Spanish borrowers. The English influence is so strong that financing documentation based on LMA forms has also become a cornerstone of financing transactions subject to Spanish law. This convergence has enabled sponsors and direct lenders to easily translate commonly understood terms and has resulted in significant transactional efficiency, also helping to increase and diversify the nature of direct lenders in the Spanish market.
Strong and enforceable collateral is a top concern for any financier. As Spanish practice has shown, Spanish borrowers often grant full guarantees in favor of their lenders and Spain represents a safe jurisdiction for direct lenders.
The interests of creditors will be sufficiently covered by extensive Spanish guarantees whose enforceability through judicial and extrajudicial procedures is widely recognized by law and the use of LMA documentation will further strengthen the protection of lenders, in particular through the access to the English law restructuring toolbox.
In the event of the limits of the Spanish framework and to accelerate the recovery of lenders in the event of default by the borrower, lenders may also choose to set up complementary structures. Well-known double Luxcos allowing a single point of enforcement in an equally well-known forum can improve the overall security package; this approach is not uncommon in direct lending operations under Spanish law, giving access to the appropriation of shares as financial collateral. Other security-enhancing structures are also used, such as dematerialization of Spanish stocks, call options and warrants.
In any case, security enhancement mechanisms generally do not work as a substitute for Spanish security interests. Even though a Luxcos dual security setup offers lenders a potentially faster execution route and a well-known forum, strong Spanish security interests are still advised to effectively capture key assets and ensure priority secured status on those assets.
The formal insolvency of a Spanish borrower entails certain legal risks, such as the suspension of legal proceedings and the potential recovery of security granted by the insolvent debtor.
However, these dynamics have led to an outpouring of legal engineering and creativity in finding strategies and workarounds. For example, the dual structure of Luxcos mentioned above has proven to be a good workaround to ensure a more predictable outcome in the event of insolvency, facilitating early intervention rights and, as a new controlling shareholder , the management of the debtor’s recovery without any time-related decrease. value.
Direct lenders hold a strong position in Spain given the attractiveness and accessibility of the Spanish market. Spanish law allows for strong and enforceable securities which, together with instruments and structures (often involving English language documentation and other creditor-friendly jurisdictional aspects), enhance the protection of lenders and help maximize risk de-risking. Spanish insolvencies.
Financing in Spain has been available to direct lenders for some time, but the market is seeing an increase in its importance, matching the wider global landscape. As a jurisdiction that has yet to see the growth seen in the US or UK, it is only a matter of time before the Spanish direct lending market invests more. This investment will likely lead to even greater improvements in the Spanish legal framework to facilitate capital inflows and business growth.
While international investors seeking to enter the Spanish market should be aware of the legal issues that need to be dealt with appropriately, they should also be aware that experienced advisers – particularly those familiar with cross-border financing issues – can effectively structure and document local Spanish direct transactions. loan transactions.
Aymen Mahmoud is Partner and Co-Head of the Finance, Restructuring and Special Situations Group and Giulia Venanzoni is Senior Partner at global law firm McDermott Will & Emery in London. Ander Valverde is partner and Mateo García Fuentes is legal counsel at the Pérez-Llorca law firm in Madrid.