March 2013

corporate & commercial LAW


 NEWSLETTER ON ROYAL DECREE-LAW 6/2013 OF 22 MARCH ON PROTECTING HOLDERS OF CERTAIN SAVINGS AND INVESTMENT INSTRUMENTS AND OTHER FINANCIAL MEASURES

Yesterday, 24 March 2013,  Royal Decree-Law 6/2013 of 22 March, passed by the Council of Ministers last Friday, entered into force. The main purpose of this new Royal Decree-Law is to protect holders of hybrid instruments that have been issued by credit entities “in crisis”. In essence, this protection involves, in specific cases, facilitating access to arbitration as a form of dispute resolution and providing liquidity to the shares that the holders of these instruments receive when exchanging them.


The most significant issues regulated in this Royal Decree-Law are the following:

 1. MEASURES TO PROTECT SPECIFIC INVESTORS OF HYBRID INSTRUMENTS

 1.1. Definition of criteria to facilitate the access to arbitration

 1.2. Purchase of shares resulting from the subordinated liabilities exercises

 1.3. Special protection for individuals in need of assistance

 1.4. Beneficiaries of the protection measures

 2. Creation of the Monitoring committee for hybrid capital instruments and subordinated debt

 3. tasks of the fgd

 3.1. Specification of measures to implement European financial assistance

 3.2. Financing these measures. Extraordinary levy

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1. MEASURES TO PROTECT SPECIFIC INVESTORS OF HYBRID INSTRUMENTS

Within the context of public action taken in the crisis of Spanish credit entities and, in particular, in relation to the impending subordinated liabilities exercises involving hybrid capital instruments and subordinated debt, the need to establish a legislative framework giving temporary protection to specific holders of hybrid instruments has been addressed. It is important to clarify that these measures will only apply to entities “in crisis”, according to the nuances specified below.

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1.1. Definition of criteria to facilitate the access to arbitration

In order to give investors in preference shares and subordinated debt the possibility of settling disputes involving these instruments through arbitration, the “Monitoring committee for hybrid capital instruments and subordinated debt” (the “Committee”) (see section 2) has been commissioned to define the basic criteria to determine access to this route. The criteria must be set within 20 days of 24 March. The Royal Decree-Law does not establish any additional provision in relation to the arbitration proceedings, nor does it clarify how the criteria will be applied with those of entities that already have arbitration mechanisms in place for their hybrid instruments.

The criteria must be adopted by all the entities in which the Fund for Orderly Bank Restructuring (“FROB”) “participates”; this means under the terms of reference of the Memorandum of Understanding signed by the Eurogroup: in principle, all the Group 1 entities and the Group 2 in which the FROB has a shareholding.

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1.2. Purchase of shares resulting from the subordinated liabilities exercises

The role of the Deposit Guarantee Fund for Credit Institutions (“FGD”) is also temporarily broadened to allow the acquisition of ordinary shares that are not admitted to listing on a regulated market and have been issued under a subordinated liability exercise under Law 9/2012.

The Royal Decree-Law provides that this measure applies to all the entities that are currently facing resolution or restructuring processes (i.e., Group 1 and 2 entities) and which shares are not listed on the regulated markets (and which restructuring plans do not foresee this happening in the future), and not only to the entities in which the FROB “participates”.

On the other hand, the Royal Decree-Law states that the acquisition of these illiquid shares must be done in accordance with the European Union legislation on state aid and that their acquisition price can under no circumstances exceed their market value (as determined by the independent expert who will be appointed for such purposes). Therefore, a new valuation of these shares will be determined for the purposes of their acquisition by the FGD, which could be different to the valuation used for the exchange of the hybrid instruments.

Finally, although the Royal Decree-Law refers to the subordinated liabilities exercises in general, pursuant to its preamble, it seems as if the intention is to restrict this measure to mandatory exercises (i.e., those that are binding on both the entity and its investors).

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1.3. Special protection for individuals in need of assistance

The Royal Decree-Law provides additional protection to individuals whose personal or family circumstances are particularly serious. This extra protection is twofold: (i) arbitrations to settle their disputes with entities are given priority, and (ii) the FGD will give priority to the acquisition of their illiquid shares received in the subordinated liabilities exercises.

1.4. Beneficiaries of the protection measures

The Royal Decree-Law does not clearly state whether its protection measures will benefit all the holders of hybrids or if some of them are excluded. In referring to the criteria for access to arbitration, the Royal Decree-Law refers to the possibility that “clients” may access it, which could be understood as excluding holders that are not clients of the entity (which is reasonable if the purpose of the arbitration is the commercialisation of the hybrids created by the entities). However, no similar indication is made for the FGD’s acquisition of shares, although the preamble of the Royal Decree-Law justifies this based on the difficulties that the lack of liquidity of their securities could represent for retail customers, which in turn could indicate the intention is that the FGD only grant liquidity to these type of investors.

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2. Creation of the Monitoring committee for hybrid capital instruments and subordinated debt

A monitoring committee for hybrid capital instruments and subordinated debt is created, which will analyse the factors that give rise to the judicial and extrajudicial claims relating to the commercialisation of these instruments by the entities in which the FROB “participates”. It will also make proposals regarding the commercialisation of these securities in the future and determine the criteria for claims to be submitted to arbitration (see section 1.1).

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3. tasks of the fgd

3.1. Specification of measures to implement European financial assistance

Since July 2012, one of the FGD’s tasks has been to adopt measures to facilitate the provision of European financial assistance to recapitalise Spanish credit entities. This new Royal Decree-Law has specified some of these measures, establishing that the FGD may commit its funds to (i) granting guarantees; (ii) acquiring shares and subordinated debt issued by the Sareb; and (iii) acquiring unlisted shares issued by credit entities as described in section 1.2.

In any case, the FGD will only commit to this assistance if its cost is less than all the potential payments that it would have had to assume to cover the guaranteed deposits when the restructuring and resolution processes began.

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3.2. Financing these measures. Extraordinary levy

In order to implement these measures, an extraordinary levy is imposed on the entities adhered to the FGD with the following characteristics:

- Amount: the annual contribution of 2‰ of all deposits held as at 31 December 2012 is increased (only once) by an additional 3‰.

- Payment: in two tranches: 40% must be paid before 25 January 2014, while 60% must be paid during the next seven years in accordance with the calendar to be agreed by the FGD’s management committee. However, the management committee could reduce the first tranche -offsetting it against the second- by up to 50%.

- Exemptions: the FGD’s management committee is granted the authority to approve (with a majority of 2/3) the following exemptions in relation to the first tranche: (i) 100% for entities facing restructuring or resolution processes; (ii) up to 50% for entities of “small size” (whose calculation base does not exceed EUR 5,000 million); and (iii) a deduction of up to 30% of the amounts invested by the entities, before 31 December 2013, in the acquisition of shares or subordinated debt of the Sareb. Under no circumstances can the first and second exemptions exceed 90% of the amount that the entity in question must pay.

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