3 September 2012


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.



The information contained in this Newsletter is of a general nature and does not constitute legal advice