1. Legislative changes: are there any additional processes or support which have been introduced as a response to the pandemic which I may not have considered previously?
Due to the COVID-19 crisis, a number of measures have been approved to help companies.
Moratorium on rental debt
Royal Decree-Law 15/2020 provides for a moratorium on rental debt for tenants of non-residential premises who are economically vulnerable as a result of the COVID-19 crisis.
The moratorium will be automatically applied when the lessor is a company or public housing entity or a large holder (which owns more than ten urban properties, excluding garages and storage rooms, or a built area of more than 1,500 square meters), provided that a total or partial deferment or write-off has not already been voluntarily agreed between both parties.
Likewise, a moratorium can be also requested to tenants if the lessor does not comply with the requirement set out above, provided that a total or partial deferment or write-off has not already been voluntarily agreed between both parties.
Exclusively within the framework of the agreement referred to above, the parties may freely dispose of the rent deposit, which may be used to pay in whole or in part for any or all of the some monthly rental payments. The tenant must return the amount of the deposit provided within one year of the conclusion of the agreement or within the remaining period of validity of the contract, if this period is less than one year.
Moratorium on non-mortgage financing credit
Royal Decree-Law 11/2020 establishes measures leading to the temporary suspension of the contractual obligations arising from any loan or credit without mortgage guarantee that was in force on the date of entry into force of this Royal Decree-Law, when it is contracted by an individual who is in a situation of economic vulnerability. It will also apply to the guarantors and sureties of the principal debtor who are also in a situation of vulnerability).
2. Is there anything else I should look out for?
The new insolvency consolidated text was approved on 5 April, and will be in force on 1 September 2020.
3. What is the position with respect to the applicability of emergency tax measures, including
a. what they are and apply to;
b. when they are expected to be phased out on or following a return to business; and
c. whether any transitional periods are likely to apply.
Tax measures adopted in Spain are, in summary:
- extension on deadline for filing tax returns
- suspension of tax payments for small businesses
- suspension of tax proceedings
- VAT exemption for supply of healthcare materials
- introduction of tax incentives for donations made by individuals to qualifying entities
Most of these will phase out in the coming weeks.
4. Are there specific steps that businesses should take to prepare for these tax measures being phased out – for example new timing of
a. payment obligations (and therefore likely pressure on cash flow); and/or
b. filing of returns?
Companies that requested deferral of tax payments should be prepared to make these payments when the extension expires.
5. Should the impact of emergency tax measures be reconsidered by businesses – e.g. are there certain legal transactions (such as sales or reorganisations) that parties should preferably postpone or accelerate?
It is very likely that taxation on corporate tax and individual income tax will increase in the short term. It is, therefore, advisable to accelerate intragroup reorganisations, carve-outs of business units, or any other intragroup transaction that could trigger taxes in Spain.
6. Are there any additional measures proposed, in particular any that are targeted at particular sectors (e.g. aviation)?
Tax incentives for the aviation and tourism sector, among others, are being discussed – but nothing has been decided as yet.
7. Are there any sectors or interest groups that are now putting forward, or may in the near future request, special tax measures?
The hospitality sector (restaurants and hotels).
8. Which taxes might be increased to address the financial burden caused by the crisis, for example,
a. are there political commitments or policy trends that might indicate the likely focus of any tax increase in the future (e.g. to maintain low corporation tax, but to increases taxes on personal wealth)
b. measures to broaden the tax base, such as digital services taxation and a pre-emptive response to the OECD/ G20 Inclusive Framework on BEPS (“BEPS 2.0”)
Corporate income tax will likely increase, in particular regarding dividends and capital gains, as well as individual income tax.
Digital services tax will be implemented shortly in Spain.
Following OECD inclusive framework, the tax burden of digital and consumer-products businesses operating in Spain will likely increase in the short term.
9. Are there other actions that ought to be considered by businesses in your country e.g.
a. revisit past tax filings to claim carry back of losses;
b. revise or update preliminary tax assessments;
c. claim bad debt relief for VAT output tax
Business should consider reviewing their transfer pricing policy and assess how it will be affected by the COVID-19 economic downturn.
10. What do you need to consider in terms of your funding requirements for returning to business and are there any return to business financial assistance packages being made available by government?
If your business has temporarily closed, there will in a number of cases be a delay between the incurrence of costs to restart your business and the consequent receipt of income. Consider how you will finance that gap. In particular, if you have any remaining availability under any revolving credit facility, note that there will likely be a draw-stop on new funding if a default (or, occasionally, event of default) is continuing.
Spanish banks are actively financing companies that have liquidity constraints, under a state-backed program that ensures those facilities are guaranteed by the Credit Official Institute (ICO) – a kind of public bank – up to 70%. These facilities are expressly aimed at ensuring companies facing liquidity constrains can meet their payment obligations related to, for example, salaries, taxes and leases.
Additionally, we’re seeing an increasing number of cases where banks are willing to postpone principal instalments to increase the liquidity of companies.
11. How will funding a return to business, including taking on additional indebtedness, impact on your financial or other covenants?
If your business has temporarily closed, consider how to approach the effect that this will have on the ability of your business to comply with any maintenance financial covenants.
In a number of cases, lenders were receptive to a covenant waiver for the March and June testing dates, though we are seeing more lenders giving more flexibility on terms of covenants tests, covering the whole 2020 exercise.
Consider whether a wavier, or indeed full covenant reset, will be needed for future test dates – and then also consider when would be an appropriate time to try to determine what those reset covenants should be.
Particular considerations include:
- (of course) the decrease in revenue/EBITDA over the lockdown period;
- any likely tapered increase in revenue/EBITDA as lockdown restrictions are relaxed;
- costs for restarting the business; and
- payment of any deferred payments (i.e. rental payments, business rates, taxes, social security).
12. Are there any remedies such as equity cure or margin ratchets that you should be checking on to provide liquidity to prevent a default or improve their financial position?
In some circumstances, it may not be possible to agree a waiver or amendment to your maintenance financial covenants, so it may be prudent now to review any equity cure rights in your credit agreement.
Debt buybacks are also being contemplated when the equity cure might not be available or when the debt is trading at a large discount (bonds, mainly).
13. What practicalities do you need to consider in relation to audit requirements?
Although Spanish companies might have until the end of the first semester to approve their annual accounts, consider the deadlines for delivering your lenders your audited financial statements and the practicalities of your auditors being able to carry out their audit. Consider whether there will be sufficient time and access for the auditors to gather sufficient, appropriate evidence and finalise their report before the deadline.
Consider checking with the auditors whether any particularity shall be taken into account when assessing on the accounting treatment of the impact of the COVID-19 outbreak on the company´s activity. This might also be relevant for the purposes of the calculation of covenants.
14. What is the process if I need any amendments made or waivers given under my loan documentation (including in respect of financial covenants)?
Consider what proportion of your lenders need to consent to the requested amendment or waiver. Amendments to financial covenants generally require consent of majority lenders (typically 66.6% or 2/3).
When requesting from lenders a waiver in relation to covenants tests, consider discussing the margin that shall apply during the period when the covenants have been waived.
Although the default position is to apply the highest margin automatically, we are seeing some cases where there is some room to negotiate this or look for alternatives, such as to convert into PIK the part of the margin that is increased as a result of setting the highest margin.
Consider whether the permissions in your credit agreement allow you sufficient flexibility to operate as you restart your business in the changed economic environment. As always, lenders will be significantly more receptive to a well thought-out and reasoned request supported by appropriate evidence/forecasts.
Likewise, lenders will be more receptive to waiver requests where any plans presented to them regarding when the business will be restarted take into account the current plan for the reopening of the economy prepared by the government, especially when it comes to dates and restrictions.
15. Dealing with creditors, including amendments and waivers – Bonds
a. If I can’t comply with the terms of my bond covenants who do I need to notify?
If a default has occurred or is likely to occur, communication with bondholders will often be required through a combination of
- public announcements filed on the exchange where the bonds are listed and the issuer's website; and
- simultaneous notice to the trustee or fiscal agent (as determined by the governing document of the bonds).
Most high-yield eurobonds do not have financial covenants, material adverse effect defaults or cross-defaults to other indebtedness (in the latter case, unless and until there has been an acceleration of the other indebtedness above a threshold amount).
Investment grade bonds, and other bonds that are not high-yield bonds, may include material adverse effect, change of control and cross-default provisions.
Key default concerns in the near term for bonds, whether they are investment grade, high-yield or other bonds that are not high-yield bonds, are likely to be:
- inability to file necessary reports (which may include accounting certifications that may not be made);
- failure to report timely any material developments (if the bond documentation requires such reporting); and
- inability to pay interest or principal.
b. If I need to ask for a waiver or amendment to the terms of bonds issued by my business what steps do I need to take?
Governing documents for bonds will usually have a detailed waiver and amendment procedure spelled out. It should be expected that consent from bondholders representing a majority of principal amount outstanding will be required for amendments to non-economic terms (such as ability to incur additional debt), but that economic terms (e.g. maturity, interest rate, interest payment dates currency) will require 90% to 100%, depending on bond documentation.
Changes to collateral security arrangements may also require super majority consent. The relevant thresholds for bondholder consent will be contained in the trust deed or the indenture of the bonds.
As a matter of first instance, an issuer should have counsel review the amendments and waivers section of the bond documentation, and seek advice of counsel on prudent public communications under applicable securities laws and regulations.
c. What is the process for contacting bondholders and holding meetings to agree changes in the terms of my bond documents?
Bonds are held in electronic form via the clearing systems and usually through a custodian who holds the beneficial interest for these bonds on behalf of the end investors. The bonds are also freely traded in the OTC market.
As such, issuers of listed and cleared eurobonds do not generally know who their holders are. To obtain bondholder consent to an amendment, a consent solicitation process will be required. An issuer will typically enlist the aid of a financial advisor and information agent to run a disciplined written consent process via the trustee or fiscal agent.
Bondholder meetings, if required, will be governed by a combination of the bonds' governing documents, the rules of the relevant clearing systems, and local statutory provisions.