Last Friday, the Council of Ministers passed Royal Decree-law 24/2012
of 31 August (“RDL 24/2012”) on the restructuring and resolution
of credit entities. RDL 24/2012 was published in the Official Spanish
Gazette of 31 August, entering into force on the same date.
RDL 24/2012 has a dual purpose: to reflect Spain’s commitment under
the Memorandum of Understanding agreed with the Eurogroup and for the
Spanish banking system to implement future European regulations on the
crisis management of credit institutions currently emerging in the
European Union.
The main changes introduced by RDL 24/2012 are the following:
1.
new CRISIS MANAGEMENT framework
1.1.
Phases
RDL 24/2012 creates a new framework in Spain to deal with the banking
crisis. The framework adds new objectives to the traditional goals of
preserving financial stability and protecting depositors, including fair
burden sharing and avoiding excessive distortions in market discipline.
It also establishes the bases for the future asset management company,
the “bad bank” of the Spanish financial system.
Three phases are established, each with its respective measures,
depending on the entity’s degree of deterioration.
1.1.1. Early intervention
Early intervention measures will apply when a credit entity breaches,
or is likely to breach, solvency, liquidity, organisational structure or
internal control requirements, provided that it is foreseeable that the
entity will be able to overcome the situation by its own means
(although, exceptionally, it may receive public financial support). The
entity must prepare a recovery plan enabling it to achieve long-term
viability without public financial support. In principle, the management
of the entity remains in the hands of the entity’s current management
body during this phase.
The “early intervention” measures set out in RDL 24/2012 clearly fall
under the scope of the Bank of Spain’s supervisory functions, which
therefore plays a key role in this phase. Among the measures available,
of particular importance are the traditional power to temporarily and
provisionally replace the management body of the entity and the capacity
to exceptionally require the recapitalisation of the entity by issuing
convertible instruments which conversion or repurchase term does not
exceed two years.
1.1.2. Restructuring
An entity will be restructured if it requires public financial
support to ensure its viability but the Bank of Spain considers that
objective elements indicate that the entity will be able to repay the
support within the terms granted. In addition, the Bank of Spain may
decide to restructure an unviable entity when the resolution of which
may have systemic consequences.
Entities in this situation must prepare a restructuring plan,
including measures to ensure its long-term viability. Such measures may
include public financial support from the Fondo de Reestructuración
Ordenada Bancaria (Fund for Orderly Bank Restructuring, “FROB”),
as well as the transfer of assets and liabilities to an asset management
company (see sections 1.2.3 and 1.2.1 for further details).
In line with the new legal configuration of the FROB as the Spanish
resolution authority (see section 2), the FROB will be
responsible for determining suitable measures to implement the
restructuring plan, thus assuming, together with the Bank of Spain, a
key role in the procedure.
1.1.3. Resolution
The resolution of an unviable entity will be carried out if its
insolvency presents a concern as regards the general public interest.
Resolution will also be carried out if it benefits the public interest
and the restructuring phase is unsuccessful.
“Non-viability” is defined for the first time, and generally mirrors
European proposals. An entity is unviable if it meets the following two
conditions: (a) it falls within any of the following circumstances:
(i) it fails to comply with the solvency ratios, (ii) its outstanding
liabilities exceed its assets or (iii) it does not meet, or will be
unable to meet, its obligations as they fall due (illiquidity); and
(b) it is not reasonably foreseeable that the entity will be able to
overcome the situation by its own means.
Prior to the commencement of resolution proceedings, the Bank of
Spain has the power to adopt certain measures to mitigate or eliminate
obstacles that may arise during the resolution proceedings. Among other
powers, the Bank of Spain may, for the first time, require changes to
the entity’s legal or operational structure.
The power to initiate resolution proceedings is vested in the Bank of
Spain, which may exercise that power at its own initiative or at the
FROB’s request. As the resolution authority, the FROB will in turn draft
a resolution plan for the entity or determine the need to commence
insolvency proceedings. In addition, if the FROB does not already
control the entity’s management body, the substitution of the management
body will be agreed.
Based on the proposal for crisis directive, RDL 24/2012 establishes
that the FROB may:
- Sell the entity’s business to a third party, by selling
either its shares or all or part of its assets and liabilities,
without requiring the prior consent of the entity’s shareholders or
any other party.
- Transfer the asset and liabilities to a bridge bank,
which will be a credit entity partly controlled by the FROB and
whose purpose is carrying out the activities of the entity under
resolution and the management of all or part of its assets in order to
sell them —or to sell the bridge bank’s shares—to a third party within
a maximum period of five years.
- Transfer the assets and liabilities to an asset management
company in which the FROB holds a stake in order to maximise its
value.
- Provide public financial support: see section
1.2.3.
In contrast to the proposal for crisis directive, the use of the
bail in as a means of resolution is not envisaged. Nevertheless, it
could be argued that the effect at least on the subordinated instruments
is equivalent to that of the power to manage liabilities (see
section 1.2.2).
1.2.
Additional restructuring and resolution aspects
1.2.1. The joint management of the system’s
deteriorated assets: creation of the asset management company
The FROB may, with the nature of an administrative act, order the
entity in a resolution/restructuring situation to transfer its “legacy”
assets (which may be transferred along with liabilities) to an asset
management company. In addition, in compliance with the Memorandum of
Understanding, all entities in which the FROB currently holds a majority
stake, as well as entities involved in restructuring or resolution
proceedings as a consequence of the evaluation taking place, are
compelled to transfer these assets.
A privileged transfer framework is envisaged under which, among other
aspects, neither third party consent nor the fulfilment of the
proceeding requirements set out in the legislation on structural changes
in companies are needed. In addition, the transferred business may not
be subject to rescission in insolvency proceedings (rescisión
concursal) and the acquiring company is not required to launch a
tender offer.
On the other hand, in relation to the coexistence of this regime and
that of Royal Decree-law 18/2012, the contribution of these “legacy”
assets to the asset management company will allow credit entities to
comply with the requirements to transfer foreclosed real estate assets
or real estate assets received as payment of debts to the entities
created ad hoc under Royal Decree-law 18/2012 (to the extent
that, once the “legacy” assets have been determined, they coincide in
whole or part). The shares of those companies incorporated ad hoc
to comply with Royal Decree-law 18/2012 may be included among the assets
contributed to the asset management company.
It is important to point out that the regulatory development of the
types of assets to be transferred and the legal framework governing the
asset management company remain pending. The company will be
incorporated as a sociedad anónima with a finite duration under
the name “Sociedad de Gestión de Activos Procedentes de la
Reestructuración Bancaria, S.A.”.
1.2.2. Towards a better burden sharing of the
restructuring and resolution costs: the management of liabilities
The measures for hybrid instrument management set out in RDL 24/2012
can be divided into two main groups: (a) voluntary management measures
that entities must include in their restructuring and resolution plans
in order to ensure fair burden sharing; and (b) measures that the FROB
may impose and which will be binding on both the entity itself and the
security holders. As a general principle, the exercise of these powers
must respect the insolvency ranking of these instruments.
(a) Voluntary management actions
The measures may include: (i) exchange offers for equity instruments;
(ii) pure repurchase offers or for its reinvestment in equity
instruments or other banking products; (iii) reduction of the nominal
value of the securities; or (iv) early redemption below par value. In
addition, amendments to the terms of the affected issues may be added to
these measures.
As previously indicated, these measures are subject to the voluntary
acceptance by the holders of the securities and, in particular, those
discussed in (iii) and (iv) require investors’ prior consent in order to
amend their terms.
(b) Management actions imposed by the FROB
To ensure more effective burden sharing of costs, or to preserve and
restore the entity’s financial position, the FROB may, with the nature
an administrative act, make arrangements for the entities involved in
restructuring or resolution proceedings, including: (i) the
postponement, suspension, resolution or amendment of certain rights,
obligations, terms and conditions of all or some of the entity’s issues;
(ii) the obligation of the entity to repurchase the affected securities,
and of the investors to sell them, at the price determined by the FROB,
which may not exceed the market price (it may be stipulated that the
price be reinvested in equity instruments); or (iii) any other
management action that the entity may have taken voluntarily.
The adoption of these measures and their execution cannot be
considered a breach of contract or early termination of any other
obligations (cross-default clauses) that the entity has with third
parties. The power to unilaterally impose losses on the creditors by an
administrative authority outside the insolvency proceedings is one of
the main novelties of RDL 24/2012.
1.2.3. The need for public support: the
instruments of financial support
Depending on whether the proceedings involve a restructuring or
resolution, the FROB may take, among others, the following financial
support measures in relation to the affected entity or its group, a
third party acquirer, a bridge bank or an asset management company: (a)
the granting of guaranties; (b) the concession of financing; (c) the
acquisition of assets or liabilities; or (d) recapitalisation measures.
Recapitalisation measures may consist of the FROB subscribing equity
instruments or convertible obligations in equity instruments which the
entity must redeem or repurchase within a maximum of five years (instead
of two, as in the early intervention phase).
1.2.4. The participation of the Deposit
Guarantee Fund in the management of the crisis
On the recommendations of the International Monetary Fund, the role
of the Deposit Guarantee Fund (DGF) has been clarified. Its role will
now be limited to guarantee deposits. However, taking into account the
principle of minimal capital impact, it may participate in resolution
proceedings by granting financial support in exceptional cases.
2.
Reform of the Frob´s governance and its new resolution powers
Another relevant aspect of RDL 24/2012 is the reform of the FROB’s
governance. In compliance with the Memorandum of Understanding, it was
decided to separate the FROB from credit entities, which were part of
its management in representation of the DGF, in order to avoid potential
conflicts of interest.
On the other hand, the FROB has become the national resolution
authority and, for these purposes, it has been conferred an unrivalled
set of commercial and administrative powers under Spanish law:
(a) Commercial faculties: apart from exercising the powers
that commercial law grants the management body (when the FROB acts as
such) or to the shareholders (when the FROB acts as such), the FROB will
exercise the faculties that correspond to the general meeting in cases
where the general meeting obstructs the restructuring or the resolution,
or when necessary for urgent reasons.
(b) Administrative faculties: a broad list of administrative
faculties has been conferred, the most relevant of which are: (i)
ordering the transfer of equity instruments or other instruments
convertible into equity, whoever the owners may be, as well as the
entity’s assets and liabilities; (ii) carrying out capital increases and
reductions, and issuing and redeeming obligations, including the
possibility of suppressing pre-emptive rights; and (iii) ordering the
transfer of securities deposited in one entity to another.
To counterbalance these broad powers, various provisions are created
with the purpose of protecting the rights of shareholders and creditors.
Accordingly, two basic principles have been established as regards
resolution proceedings: (i) losses must be allocated according to the
insolvency ranking of credits; and (ii) no creditor may be paid less
than the amount that they would have received had the entity been
wound-up under the framework of bankruptcy proceedings. It is also
mandatory to carry out an economic assessment of the entity prior to the
adoption of any resolution or restructuring measures.
3.
Other noteworthy changes
RDL 24/2012 introduces significant changes in addition to the
introduction of the resolution framework. The majority of the changes
were commitments in the Memorandum of Understanding. Among others, the
following are of particular importance:
- Restrictions on the commercialisation of qualifying
instruments: in line with what was previously announced, RDL
24/2012 imposes additional requirements on the commercialisation of
preferred shares, convertible instruments and subordinated financings
among clients or retail investors. In these cases, at least 50% of the
issue must be subscribed for exclusively by at least 50 professional
clients and the unitary nominal value of the preferred shares or
convertible instruments issued by unlisted entities must be at least
EUR 100,000 (EUR 25,000 for the remaining issues).
- Core capital: the core capital ratio is homogenized,
setting it at 9% for all entities. The definition of core capital (capital
principal) has been amended in order to be more consistent with
the definition of the European Banking Authority (recommendation
EBA/REC/2011/1 of 8 December 2011,
see our newsletter dated 12 December 2011). The main
novelty of the amendment is the increase in deductions that the
entities must apply to their core capital.
- Ongoing restructuring processes: entities which had
received financial support from the FROB at the time of entry into
force of RDL 24/2012 will be subject to the restructuring proceedings
of RDL 24/2012, without prejudice to the fact that financial support
received will continue to be governed by law applicable at the time of
its issuance. Likewise, entities under restructuring proceedings
pursuant to article 7 of Royal Decree-law 9/2009 will be subject to
resolution proceedings.
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