Loan Focus: Spain
Lawyers, fund managers and bankers all indicate they are seeing an uptick in activity due to a surge of interest in, among other things, Spanish distressed loans. Many expect the Spanish distressed markets will continue to expand as lenders try to improve their leverage and take advantage of higher asking prices in the face of greater appetite from investors. The following is a brief overview of some of the legal issues investors may want to consider before investing in Spanish distressed loans.
The transfer of loans in Spain is governed primarily by Articles 1526 to 1537 of the Spanish Civil Code (the "Code"). Market participants must bear in mind, however, that other statutory provisions may impose additional requirements and/or limitations on the transfer of Spanish loans. An important example is the Insolvency Act. Once a borrower has entered into insolvency proceedings the Insolvency Act's provisions may, among other things, limit the post-filing voting rights of lenders and the priority of loans purchased in the post-filing period.
Novation or Assignment
Spanish syndicated facility agreements are often governed by English law which typically provides lenders with the ability to transfer interests in loans either by novation or assignment. A novation is commonly defined as a three-way contract which extinguishes a pre-existing contract and replaces it with another contract in which a third-party takes up rights and obligations which duplicate those of one of the parties to the original contract. An assignment, on the other hand, only involves the transfer of an interest or benefit from one person to another while the obligations remain with the original parties.
Though Spanish facility agreements are capable of being governed by the laws of another jurisdiction such as England, the validity and legal effect of Spanish security interests are governed by lex rei sitae (i.e., the law of the country where the assets are located). It is here, in the context of security interests, that the distinction between a novation and an assignment becomes a critical consideration for the prospective purchaser of secured Spanish loans.
Security interests created under an English law governed facility are usually made in favor of a security trustee who is empowered to enforce the lending group's security rights. Because the trustee holds actual title to the security, a lender's transfer of an interest in secured loans by either novation or assignment will not impact the trustee's rights in the security. Spanish law does not recognize the concept of a security trustee. Security interests under Spanish law are accessory and, as such, must be held either by the secured creditors themselves or through an agent. If a security agent is appointed, it will hold the security in the name of and on behalf of any and all lenders who empower it to do so pursuant to a properly executed power of attorney granted in its favor. Since the security is held by or in the name of the lender, a transfer of Spanish loans by novation will have the effect of extinguishing the original debt as well as the related security interest held by the seller and replacing it with a new unsecured debt. A transfer by assignment, on the other hand, will not extinguish the existing security interest since the original debt is not extinguished.
Thus, a transfer by novation of secured Spanish loans, unlike an assignment, has the effect of discharging the original debt and related security interest unless and until the security interest is renewed before a notary. The process of renewing a Spanish security interest can be costly and may not even be possible if either the borrower or any of the other lenders objects. Accordingly, it is strongly recommended that a prospective purchaser first determine how a transfer will be implemented before entering into an agreement to purchase distressed Spanish loans.
Though not required, Spanish loans should be transferred by means of a public deed of assignment granted before a Spanish notary public as there are distinct benefits to the purchaser including the ability of the purchaser to (i) evidence ownership of the loans vis-a-vis third-parties and (ii) enforce its rights directly against the borrower.
An interest in Spanish loans can be assigned without the consent of the borrower unless (i) the credit agreement requires such consent or (ii) the loans to be assigned have not been fully drawn (i.e., the lender is obligated to make further payments to the borrower under the credit agreement). If the loan to be assigned includes an unfunded component, the consent of the borrower is required. Thus, market participants need to make sure the trade confirmation is clear as to the nature of the loans to be assigned.
Notice to the borrower of a loan assignment is not required under Spanish law though it may be required by the governing credit documents. Regardless of the requirements set forth in the underlying credit documents, it is good practice for the purchaser of loans to notify the borrower as soon as an assignment has been effected. If the borrower is not given such notice, the purchaser may be precluded from asserting certain rights against the borrower. For example, a purchaser will have no rights against the borrower in the event it makes an interest payment to the seller that rightly belongs to the purchaser absent the giving of notice. While the purchaser would typically have recourse to recover such amounts from the seller under the Loan Market Association Standard Terms and Conditions for Par and Distressed Trade Transactions (Bank Debt/Claims), it is an unnecessary risk that can be avoided by the provision of notice. Once notified, subsequent payments made by the borrower to the seller will not release the borrower from any obligations owed to the purchaser as the new lender under the credit agreement.
Article 1528 of the Code, in pertinent part, provides that "the sale or transfer of a credit facility involves all ancillary rights, such as those relating to deposits, mortgages, pledges or security interests." Accordingly, the assignment of an interest in Spanish loans will also include the assignment of any related security interests. A purchaser of loans will, nevertheless, need to comply with certain formalities in order to preserve an enforceable security interest. Specifically, the transfer of a loan secured by an in rem right (e.g., pledge (prenda), real estate mortgage (hipoteca inmobiliaria), chattel mortgage (hipoteca mobiliaria) or pledge without transfer of possession (prenda sin desplazamiento)) will need to be formalized in a public document granted before a notary public if the prior interest was similarly formalized. Moreover, depending on the nature of the security the transferred interest may also need to be registered. For example, a real estate mortgage needs to be registered in the Registro de la Propriedad while chattel mortgages and pledges without transfer of possession need to be registered in the Registro de Hipoteca Mobiliaria y Prenda sin Desplazamiento. Pledges of shares or receivables do not need to be registered but may require that notice be given to the applicable obligor(s).
If a purchaser of loans is a tax resident of a European Union Member State, interest payments received under the applicable credit agreement will be exempt from taxation by Spanish authorities. If, on the other hand, the purchaser is a tax resident of a foreign (non-EU) state, interest payments made under the credit agreement will be subject to taxation by Spanish Authorities unless a double-taxation treaty is in effect for the tax residence of the purchaser. In either event, the purchaser will need to offer documentation supporting the asserted tax residence.
While loan transfers are not subject to VAT, they may be subject to a stamp duty tax where the loans are secured with a registered guarantee or a guarantee that may be registered (e.g., pledge, mortgage, etc.). In such a situation a stamp duty tax ranging from 0.5% to 1% of the total amount secured will be assessed. Since this amount can be large, market participants need to be mindful of the potential tax implications of purchasing secured Spanish loans.
Credits In Litigation
Market participants must be especially careful when purchasing credits in litigation (créditos litigiosos). Under Spanish law, a credit is deemed to be in litigation from the time the plaintiff submits a formal response to a claim filed with the court where the action pertains to the existence of the credit. The credit shall be deemed to remain in litigation until such time as the court shall have issued a final order (sentencia judicial firme) with respect to the claim. Article 1535 of the Code allows the borrower to cancel a loan transferred while the credit is in litigation provided: (i) the loan was transferred to a third-party other than the parties to the litigation and (ii) the right to cancel is exercised within nine (9) days from the date the purchaser demands repayment from the borrower. In order to cancel the credit, the borrower need only pay the purchaser the purchase price along with any interest and costs incurred by the purchaser.
 See Article 1878, Spanish Civil Code.
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