Spain Modifies Bankruptcy Laws to Prevent Corporate Liquidations; 65,000 Companies, 1.3 Trillion Euro Delinquencies in Play

In the name of saving jobs, the Spanish government has decided to change the rules as to whether or not a business is viable.

In bankruptcy proceedings, companies will no longer be free to decide whether they prefer to liquidate the company.

Instead, corporations will be obliged to accept debt restructuring offerings from creditors on creditor-proposed terms centered around debt-to-equity conversions.

Via translation from El Economista.

According to various judicial, legal and bankruptcy administration sources consulted by elEconomista, companies will no longer be free to decide whether they prefer to liquidate the company.

New rules favor foreign financial institutions including the vulture funds, to take over companies. The decree aims to end the massive liquidation of companies in bankruptcy.

Followup post by el Economista

The Ministry of Economy approved the bankruptcy reform legislation to save viable businesses including a provision that transforms debt into equity.

If creditors representing at least 60% of the financial liability agree, forced conversion of loans into equity may last up to five years. If creditors representing at least 75% of the financial liability agree, forced conversion of loans into equity may last ten years.

Dissenting creditors may choose a haircut equivalent to the nominal amount of the shares that would correspond subscribe or take and, where appropriate, the corresponding premium or assumption.

Judges may override the 60% threshold to as low as 51%.

1.3 Trillion Euro Delinquencies in Play

Via translation Libre Mercado discusses the number of potential forced debt-to-equity conversions.

Deputy Prime Minister Soraya Saenz de Santamaria, said that the new law completes a package of measures that are aimed at companies that, despite their high debt, "can continue to run their business while maintaining their employment."

In Spain, 90% of companies that enter bankruptcy end up in liquidation. At first, this may seem logical and even reasonable: if a company is not viable, what is best for everyone to pay the maximum of their debts, creditors save everything and these goods are reallocated to more productive tasks. The problem is that, perhaps, not every business in competition (and even more in preconcursal phase) should close.

According to the Registry of Forensic Economists (REFOR), 65,000 companies, of them 15,000 "quality" companies with the rest being microenterprises that are "at risk of death because of refinancing problems.

Debt held by businesses is equivalent to 130% of GDP, about 1.3 tillion euros. The Ministry of Economy believes that the new RDL could facilitate the refinancing of up to 10% of this amount: 130 billion euros.

Think these debt-to-equity terms will be extremely one-sided?

Addendum

Reader Bran who lives in Spain sent the following pertinent comment: "1.3 trillion is the total debt held by businesses. The article did not stipulate how much of that is delinquent, but it's at least the 10% they hope to save. Registered delinquent business debt has been rising towards 10%. If they talk of saving 10% there is a lot more at stake than the 130 billion euros they think they can save."

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com