Spain's Insolvency Law Shifts Power to Creditors

Spain's insolvency law, introduced in September 2022, is beginning to significantly alter the dynamics between creditors and debtors in corporate restructurings. The legislation aims to streamline lengthy processes and facilitate the sale of business units by granting creditors greater leverage.

A key innovation allows debt holders to unilaterally present a plan in court without triggering an automatic insolvency proceeding or payment suspension. This empowers creditors to push for resolutions even in the absence of full consensus.

The law's potential was demonstrated in the December 2022 restructuring of frozen food retailer Xeldist Congelados, where a court-sanctioned plan helped the company secure capital and preserve jobs. A larger case involving steelmaker Celsa is currently before a Barcelona court, where creditors have submitted a restructuring proposal.

This proposal seeks to reduce Celsa's debt by €1.29 billion, extend maturities, and transfer control to a group of investment funds and banks. The reform opens new avenues for credit investors in Spain, particularly for 'loan-to-own' strategies where creditors convert debt into equity. This shift aligns with EU directives aimed at improving restructuring frameworks across member states and reducing high liquidation rates.

While empowering creditors, the law also presents operational challenges for restructured companies. These entities often face profitability and working capital issues, requiring specialized expertise and potentially external advisors or interim management services to ensure a successful turnaround. Market participants await further clarity on specific aspects of the law's application.