Partial cancellation of ICO loans, new extensions and conversion into equity loans

The Government has approved a Code of Good Practices specifying the requirements and scope of the partial cancellation of the financing guaranteed by the Government granted during the pandemic, in addition to agreeing a new extension of the maturity periods and encouraging the conversion of this financing into participating loans.

Measures approved by the Council of Ministers

Royal Decree-Law 5/2021 of 12 March on extraordinary measures to support business solvency in response to the COVID-19 pandemic provided for a set of measures aimed at strengthening the solvency of companies and the self-employed whose financial situation had deteriorated as a result of COVID-19.

Among these, Article 9 envisaged the possibility for the Government, through the Ministry of Economic Affairs and Digital Transformation, to make transfers to companies and the self-employed in order to reduce the outstanding principal of financial operations with a public guarantee (ICO, CESCE or CERSA collateral) granted as a result of the pandemic. This provision entailed a cancellation of part of the financing granted.

In order to benefit from this measure, RDL 5/2021 referred to compliance with the requirements of the Code of Good Practices for financial institutions to be approved by the Council of Ministers.

By agreement of the Council of Ministers on 11/05/2021, this Code of Good Practices was approved, which, in addition to establishing the requirements for the partial cancellation of financial operations with a public guarantee, extended the maturity of guaranteed operations and provided for the possibility of converting guaranteed loans into participative loans.

These three measures will be carried out through the procedure established in the approved Code of Good Practices and depending on compliance with the requirements contained in the annexes of the aforementioned Council of Ministers agreement.

Code of Good Practices

The Code of Good Practices may be freely adhered to by the institutions, and those that adhere undertake to:

• Reduce the outstanding principal of operations with public guarantees, in the terms foreseen.
• Consider the possibility of converting financing operations with public guarantees into participating loans.
• Extend the maturity of financing operations that have received a public guarantee.

The adhering entities undertake to analyse all operations (both those guaranteed by the government and those not guaranteed) and to try to make the terms of non-guaranteed operations more flexible.

If any of the measures envisaged are implemented, the institution also undertakes to maintain the working capital it has granted to the debtor until 31 December 2022.

It is also envisaged that institutions may not:

• make these measures conditional on the marketing of other products.
• increase the cost of operations by an amount greater than the increase (except for the variable interest rate in the case of conversion to a participating loan)

The following is a brief summary of the measures envisaged in the Code of Best Practices approved by the Council of Ministers.

Reduction of the outstanding principal of the guaranteed financing operations

Object

This measure consists of the partial cancellation of financing operations with a public guarantee or CERSA reguarantee, granted to companies and the self-employed with registered offices in Spain, between 17 March 2020 and 13 March 2021.

This aid is subject to the budgetary limit of €3 billion.

The following limits are established:

• Forgiveness of up to 50% of the guaranteed principal (including overdue and unpaid principal)
• Forgiveness of up to 75% if the drop in turnover exceeds 70%.
• If the debt contains a guarantee that has already been executed, the amount necessary to cover the execution of the guarantee will be deducted.

Beneficiaries

Only debtors who have received aid of less than 1,800,000 euros or 270,000 euros if they belong to the fisheries or agriculture sector or 225,000 euros if they belong to the primary production of agricultural products sector can benefit from this aid.

Requirements

To benefit from this measure, it is necessary:

• Reach an agreement to renegotiate all the debt (guaranteed and non-guaranteed) generated between 17/03/2020 and 11/05/2021, which the company maintains with financial institutions.
• Comply with the requirements set out in Annex IV and in the 4th additional provision of Royal Decree Law 5/2021, which are as follows:
  • That the profit and loss account for 2020 after taxes, presents a negative result.
  • That the turnover (annual turnover of VAT or equivalent) has fallen by at least 30% in 2020 compared to 2019.
  • That the debtor has not been convicted of offences against the Treasury, Social Security, crimes of frustration of execution, punishable insolvency, fraud in which the Public Treasury is affected, or been sentenced by final judgement to the loss of the possibility of obtaining public subsidies or aid or for crimes of prevarication, bribery, embezzlement of public funds, influence peddling, fraud and illegal exactions or urban planning crimes.
  • Be up to date with tax and Social Security obligations.
  • Be up to date with the payment of obligations for the reimbursement of subsidies or public aid.
  • Not to have given rise, for a reason for which they have been declared guilty, to the final termination of any contract entered into with the Administration.
  • Not to have requested the declaration of voluntary bankruptcy, not to have been declared insolvent in any proceedings, not to have been declared bankrupt, unless an agreement has become effective in this, not to be subject to judicial intervention or to have been disqualified in accordance with Law 22/2003, of 9 July, on Bankruptcy, without the period of disqualification established in the bankruptcy qualification ruling having ended.
  • Not be resident for tax purposes in a country or territory classified by regulations as a tax haven.

• In addition, beneficiaries must assume the following commitments:
  • Maintain the activity corresponding to the aid until 30 June 2022.
  • Not to distribute dividends during 2021 and 2022.
  • Not to approve increases in the remuneration of senior management for a period of two years after the application of any of the measures.

Procedure

The approved Code of Best Practices sets out the procedure for reaching a refinancing agreement containing partial debt forgiveness.

• The application must be addressed to the entity adhering to the Code of Best Practices with the largest overall position of guaranteed debt.
• A declaration of responsibility must be provided indicating the list of all the guaranteed financial operations referred to in art. 6 RDL 5/2021.
• The entity with the largest position acquires the function of coordinating and informing the other entities.
• Within one month, the coordinating institution must submit a proposal to the other institutions.
• The agreement is taken jointly and in such a way that the measures are distributed in a balanced and proportional manner among the entities.
• For the approval of the proposal:
  • Creditors representing more than 66% of the outstanding amount of guaranteed operations must vote in favour.
  • if the debtor is an SME or self-employed person and the above percentages are not reached, it would be sufficient for the three main creditors to approve it.
  • If a majority is reached, the agreement is binding for all entities adhering to the Code of Best Practices, whether or not they have approved the proposal.
  • In the case of unsecured debt: the agreement is only binding if 100% agree to the proposed measure.

Extension of guarantees and coverages

Object

It consists of the extension of the maturity of the financing granted during the pandemic that has received public guarantee, up to a maximum of 10 or 8 years from the initial formalisation (in the case of financing of less than 1,800,000 euros), depending on the total amount received.

Entities are obliged to grant this extension if the legal requirements are met.

Beneficiaries

All natural or legal persons who have received this type of financing and who meet the established requirements may benefit from this measure.

Requirements

To benefit from this measure, it is necessary:

• Submit the application before 15/10/2021.
• The guaranteed operation must not be in default (unpaid for more than 90 days) or any of the other financing granted by the entity to the same customer.
• That the debtor does not appear in arrears in the CIRBE.
• That the financial institution has not notified the guarantor of any non-payment of the operation at the date of the application.
• That the debtor is not in bankruptcy proceedings.
• That the financing is prior to 12/05/2021.
• That the debtor complies with the limits established in EU state aid regulations.
• That the debtor has not been convicted of offences against the Inland Revenue, Social Security, frustration of execution, punishable insolvency, and extortion in which the Public Treasury is affected.
• Turnover (annual VAT turnover or equivalent) has fallen by at least 30% in 2020 compared to 2019. If the drop is less than 30%, they can benefit from the extension if the entity agrees.
• Be up to date with tax and social security obligations.
• Be up to date with the payment of obligations for the reimbursement of subsidies or public aid.
• Not to have given rise, for a reason for which it has been declared guilty, to the final termination of any contract entered into with the Administration.
• Not to be resident for tax purposes in a country or territory classified by regulations as a tax haven.

In addition, beneficiaries must assume the following commitments:

• Maintain the activity corresponding to the aid until 30 June 2022.
• Not to distribute dividends during 2021 and 2022.
• Not to approve increases in the remuneration of senior management for a period of two years from the application of any of the measures.

Procedure

The debtor must apply to the financial institution before 15/10/2021.

The entities will have a maximum of 45 calendar days to resolve the debtor’s request.

Conversion of guaranteed financing into participating loans

Object

This consists of converting the financing guaranteed by the Government (through ICO, CESCE or CERSA) into participative loans, with the financial institutions maintaining the Government’s guarantee.

Beneficiaries

Only those debtors who have received aid for an amount of less than 1,800,000 or 270,000 if it is in the fisheries or agriculture sector or 225,000 if it belongs to the primary production of agricultural products sector can benefit

Requirements

• Submit the application before 15/10/2021.
• The guaranteed operation must not be in arrears (unpaid for more than 90 days) or any of the other financing granted by the entity to the same customer.
• That the debtor does not appear in arrears in the CIRBE.
• That the financial institution has not notified the guarantor of any non-payment of the operation at the date of the application.
• That the debtor is not in bankruptcy proceedings.
• That the financing is prior to 12/05/2021.
• That the debtor complies with the limits established in EU state aid regulations.
• That the debtor has not been convicted of offences against the Inland Revenue, Social Security, frustration of execution, punishable insolvency, and extortion in which the Public Treasury is affected.
• That the turnover (annual turnover of VAT or equivalent) has fallen by at least 30% in 2020 compared to 2019.
• That the profit and loss account for 2020 after taxes shows a negative result.

In addition, beneficiaries must undertake the following commitments:

• Maintain the activity corresponding to the aid until 30 June 2022.
• Not to distribute dividends during 2021 and 2022.
• Not to approve increases in the remuneration of senior management for a period of two years after the application of any of the measures.

Procedure

For this type of measure, the same procedure is followed as for the reduction of the outstanding principal of the guaranteed financing operations, with the following particularities:

• The agreement of the creditor(s) representing more than 50% of the outstanding amount of the debtor’s guaranteed transactions shall be sufficient for the decision to be binding on all creditors adhering to the decision (with regard exclusively to the guaranteed financing).
• If the debtor is an SME or a self-employed person and the above percentages are not reached, it would be sufficient for the renegotiation agreement to be binding on all institutions if the decision is taken by the two participating creditors with the largest share in the debtor’s outstanding guaranteed debt.

Institutions will have a maximum of 45 calendar days to resolve the debtor’s request.

Conclusion

The partial write-off of financing granted to companies that were affected by COVID-19 and that had the guarantee provided by the government is a necessary measure to help companies that would be viable if they had not been affected by the measures adopted to fight the COVID-19 pandemic and that have been forced to access this type of financing in order to survive during the pandemic. This measure was eagerly awaited by all operators and the government has finally given the green light for institutions to make substantial partial write-offs, which may even reach 75%.

However, the government has left the final decision on whether or not to grant these write-offs and the scope (within the approved limits) of these write-offs in the hands of the institutions’ risk departments. We will have to wait and see what criteria the banks will follow to grant or not the write-offs they request.

On the other hand, we should bear in mind that, apart from secured debt, a large part of companies’ financial debt is unsecured debt. The refinancing agreement procedure envisaged in the Code of Best Practices will mainly affect secured debt, but unsecured debt is less likely to be affected.

At the same time, there is another procedure provided for in the Insolvency Act that regulates Refinancing Agreements and affects all financial debt (secured and unsecured), in which different effects and majorities are envisaged to those of the Code of Best Practices that has now been approved. It will be essential to carry out a correct analysis of each company’s banking pool in order to decide on one or the other procedure.

The legal department of AddVANTE is at your disposal for any queries you may have in this regard.