Summary note: Royal Decree-Law on measures on refinancing and restructuring of corporate debt

Background and rationale Since 2010, non-financial corporations have reduced their indebtedness to 130% of GDP. However, such level is still high and above the average of the Eurozone (c. 97% of GDP). Given the high level of debt of non-financial corporations, the deleveraging process must proceed further. An orderly deleveraging process will contribute to the flow of credit to dynamic and solvent activities. Moreover, in a low inflation environment, measures to promote and facilitate the deleveraging of the economy become even more important. Against this background, it is essential to further strengthen the corporate insolvency regime to support early debt restructurings and debt refinancings of viable companies and to overcome existing shortcomings that make the deleveraging of the highly indebted companies more challenging. Shortcomings in the 2003 Insolvency Regime Although originally designed to facilitate restructuring of viable firms, in practice under the 2003 Insolvency Regime most proceedings end in the liquidation of the company after lengthy and costly court proceedings. Comprehensive and effective restructurings are feasible before formal insolvency proceedings begin, through refinancing agreements between the debtor and a majority of creditors. The right to annulling agreements constitutes an obstacle in refinancing processes. The 2003 Insolvency Law allows the revocation of any agreement that has been reached in the 2 years prior to the initiation of insolvency proceedings and that is deemed to have been detrimental to the company. Secondly, under the current regime, individual refinancing agreements are difficult to reach, since they require the approval of a relevant majority of creditors. The Insolvency Law aims to facilitate refinancings through collective agreements, which are far more complex and more difficult to reach. The objective of the Royal Decree is to provide adequate incentives for early rescue of viable firms. The reform seeks to promote debt refinancing agreements as an instrument to facilitate the use of deferral of payments, debt releases and debt for equity swaps.

Summary of key measures of the Royal Decree 1. Individual Refinancing Agreements The Royal Decree-Law enables individual refinancing agreements with one or more creditors, provided the agreement improves the net worth of the company and without requiring endorsement by a majority of the creditors. Individual refinancing agreements may only be terminated by a judge, upon request by the insolvency administrators. 2. Collective refinancing agreements without court approval The requirement of a report by an independent expert is eliminated and is replaced by a certificate of an external auditor verifying that the collective refinancing agreement is endorsed by creditors representing 60% of total liabilities. Collective refinancing agreements cannot be revoked or annulled when the company enters into insolvency proceedings, (unless the agreement failed to comply with the essential requirements). In order to foster the capitalization of liabilities in collective agreements, if debtors refuse the agreement without reasonable cause, the resulting insolvency proceeding will be deemed as negligent. This reasonable cause will be declared by independent experts. 3. Collective refinancing agreements with court approval a) Streamlining the role of courts when approving collective refinancing agreements. In order to approve the agreement, the judge will only have to examine its formal requirements and confirm that the relevant majority is met. Likewise, once a collective refinancing agreement is approved by court, it cannot be revoked when the company enters into a bankruptcy proceeding. b) The requirement of a report by an independent expert is eliminated and is substituted by a certificate of an external auditor which verifies that the relevant majority has been met c) The majority required for collective agreements with court approval is lowered from 55% to 51%. d) Collective refinancing agreements approved by court will be extended to non-participating or dissenting creditors, under different terms. e) Secured creditors can be affected by refinancing agreements under certain terms. f) Debt to equity swaps. Refinancing agreements can include debt to equity swaps. The simple majority of shareholders must give their consent. Non-

participating or dissenting creditors will be offered the choice to enter the swap operation or a debt release. If debtors refuse the agreement without reasonable cause, the resulting insolvency proceeding will be deemed as negligent. This reasonable cause will be declared by independent experts.

4. Common measures applicable to refinancing agreements, with and without court approval: Interruption of the enforcement of guarantees during the negotiation of refinancing agreements In order for negotiations to succeed, the enforcement of guarantees on assets essential for the stability and continuity of the professional activities of the company is interrupted. The interruption will not last more than four months.

All fresh money to have super senior consideration (in the event of liquidation). The extension of the super senior treatment to 100% of any fresh money (from 50% currently) will contribute to the success of refinancing agreements, since it will facilitate the raising of new funds.

5. Improvement of the treatment of bank loan loss provisions Bank of Spain will be empowered to improve the treatment given to any outstanding debts following the approval of a refinancing agreement.