New legislation affecting the restructuring of ICO –guaranteed loans– basic principles

15 March 2021

A Royal Decree Law (the “RDL”) was published on 13th March which includes a number of issues which may affect current and future debt restructuring processes in Spain, among others dealing with how to restructure ICO-guaranteed debt. Most of the particulars are to be defined by the Cabinet of Ministers (“CoM”) so we will need to wait to understand them in detail but below you will see some basic principles. Please note that the below is not comprehensive and we have only included those issues which are particularly relevant in sizeable transactions.

1. Among other things, the RDL tries to facilitate the restructuring of companies to which prior ICO-guaranteed loans have been granted.

2. In order to do so it introduces four different concepts which are to be further developed by the CoM:

a. Extensions: the guarantees given by ICO may be extended within the framework of restructuring processes. Pending the details of the CoM this seems to indicate that in the event the financing entities agree to an extension of the ICO-guaranteed debt, the guarantee itself will be extended without the need of further consent from ICO. It’s unclear at this point whether this will only apply to the ICO guarantees granted to consenting lenders or also in events where the extension is done through an homologation. The terms and conditions of such extensions are also to be defined.

b. Conversion into PPL: the RDL indicates that the ICO guarantee will be maintained in the event the underlying guaranteed facility is converted into a Profit Participating Loan (“PPL”). This provision intends to facilitate the banks agreeing to subordinate their position to PPL status by maintaining the ICO guarantee.

c. Direct Transfers: on certain cases to be defined by the CoM the Government will be able to directly transfer funds (through the banks) to Spanish companies in the framework of restructuring process so long as such funds are used to repay ICO-guaranteed loans. This provision seems to anticipate a process whereby the ICO-guaranteed loans are to be replaced with direct subsidies made by the Government. For these purposes, a new line (initially of 3 billion euro) for the restructuring of COVID financial debt has been approved in the national budget.

d. Reduction of principal: the RDL introduces the concept of a reduction of the principal of the ICO-guaranteed loans in circumstances where the direct transfers described in c) above are made. Although not clearly defined how it will work, the RDL indicates that any such reductions should also be assumed by the banks in terms to be defined by the CoM.

3. The granting of any of the above measures will be subject to certain requirements and conditions, which shall be further developed by the CoM. Also, for the application of these measures, a Code of Good Practice will be approved to which the ICO lenders may voluntarily adhere. The purpose of the Code will be to facilitate a coordinated and efficient approach to support viable companies with temporary solvency problems.

4. Finally there are a number of issues the market already expected, such as the extension to December 31st of the obligation to file for insolvency and other related procedural measures.

The information above is not yet conclusive on the requirements and process to restructure the ICO-guaranteed loans but it does seem to set the framework and the options that would be available, pending further development.