Distressed foreign debt funds and international investors ( vehicles specializing in the purchase of debt with a higher risk of default) probe the Spanish banks and the Official Credit Institute (ICO) to be able to buy state-backed loans granted to large companies during the worst moments of the pandemic.
The reform of the Bankruptcy Law prevents a company with solvency problems from refinancing an ICO credit, unless it has the approval of the Tax Agency. A green light that, according to bankruptcy experts, will delay any restructuring procedure.
The State enabled in March 2020, in full confinement, a line of up to 100,000 million to provide liquidity to companies, SMEs and the self-employed in full closure of the economy. The bank, under the umbrella of this line, granted loans for 122,375 million euros, of which up to 80% is guaranteed by the ICO. However, the funds focus on the loans granted to large companies , which amount to almost 37,000 million euros, of which 24,600 million are backed by the Administration.
According to the sources consulted by elEconomista.es , both the funds, through advisors specialized in restructuring, as well as the bank, are making these approaches with the ICO to negotiate possible debt purchases, but, yes, at a discount.
However, from the ICO they assure that they have not had meetings with investment funds. However, these sources indicate that these vehicles are offering the possibility of assuming the risk by subrogating the guaranteed debt and accessing the existing debt in processes that are intuitively complicated but that would allow substituting the public guarantee and alleviating the State’s indebtedness.
Likewise, thanks to these operations, the restructuring of those large companies that may approach or be in a situation of insolvency would be facilitated. The solution for the funds to be made with this type of credit would be to securitize part of the risk guaranteed by the ICO.
At the moment, these loans are on the banks’ balance sheets, so they are the only ones who can sell them. However, the second derivative will come into play when collateralized loans begin to default. Thereafter, they will go to the balance of the ICO. Although it is still early days, it would be possible for the Administration – to reduce risk – to sell these failed loans to third parties . An alternative that is still far from the imaginary of the State, but that could become a reality in a couple of years, according to the sources consulted.
One of the questions that the market is asking is what will be the role of the international investor and the opportunistic funds that are already studying these opportunities in depth in restructuring processes. The Administration closed the door to the banks being able to sell guaranteed credit portfolios en masse, although with exceptions depending on the case.
Buyers profile
There is a wide profile of investors interested in buying loans, most of them located in London. From debt funds and direct lending (alternative financing for companies), to distressed funds , willing to buy loans that have already defaulted and to which the bank has to give out with greater discounts , but on which the vehicles, for Therefore, they demand higher returns by assuming greater risk. On the other hand, non-performing loans could also arouse the interest of insurers that may replace the State guarantee with an insurance product.
Bad loans could also pique interest from insurers
The experts consulted recall that one of the main novelties of the Bankruptcy Law refers to the regulation of debt restructuring plans guaranteed by the ICO. The difficulty of refinancing this type of credit and the preliminary uncertainty about the application of the new Law means that experts anticipate that there will not be a significant increase in restructuring until 2023.
In addition to the question of whether the Tax Agency will be able to approve the necessary modifications to these loans – with the agility that a process as complex and dynamic as a restructuring requires – there are also numerous doubts about the formation of classes and, specifically, , if the ICO debt will be distinguished in a subclass from others of a similar rank. If this is not the case, the question arises as to what will happen to the votes and strategies within the Restructuring Plan of those creditors that finance borrowers with guaranteed and unsecured debt.
In the scope of the Law, another of the great challenges will be the treatment of the loans guaranteed by ICO in a restructuring. Its future practical application is already generating some controversy, beyond the fact that additional provision 8 of the Law establishes the basic rules. There is no doubt that the solution will necessarily be determined by the understanding between the ICO and the creditors guaranteed by it, but doubts arise in relation to multiple aspects .
ICO guarantees are not, by law, public credit, but the sources consulted remind us that, in those cases where the investor or financier wants to grant new money for the continuity of the business, he must first know how he will obtain superseniority status.(with greater preference) if the ICO requires to be treated in the same way as the most senior debt existing in the debtor as a condition to maintain the guarantee.
