Spain Throws Lifeline to Companies Battling to Survive Pandemic

(Bloomberg) --

Spain scrapped the threat of forced liquidation for companies that run up major losses this year as part of a series of changes announced by the government to stave off insolvencies amid the economic turmoil caused by the coronavirus.

Alongside the adjustment to bankruptcy laws, investors who put money into businesses in the wake of the Covid-19 outbreak will also benefit from higher levels of protection in the event the companies fold.

Prime Minister Pedro Sanchez took these steps last week to mitigate an economic collapse that the Bank of Spain says could lead to a contraction this year of more than 12%. By making adjustments to the way the law handles struggling companies, the government is trying to buy them time to be able to get through the crisis so that they can recover as the economy rebounds strongly in 2021.

“This will avoid shareholders and management having to take desperate measures in adverse market conditions,” said Juan Sierra, a Madrid-based managing director of investment bank PJT Partners.

It makes sense for managers not to have the “sword of Damocles” hanging over them if their company stands a chance of recovering once the lock-down ends, Oscar Franco, a partner at law firm Latham & Watkins in Spain, said.

Investor Safeguards

By boosting protection for shareholders in the event of a bankruptcy, the aim is to make them less nervous about stumping up money for a struggling company.

“Together with management, equity investors are the ones who can better estimate the impact of Covid on their businesses and they are the first ones interested in providing capital to protect their investments,” PJT's Sierra said.

While the decision to waive compulsory insolvency proceedings will relieve debtors, the measure should have been limited only to companies that become insolvent as a result of the pandemic, according to Borja de Obeso, head partner of Litigation & Regulatory practice in DLA Piper in Spain.

A generalized suspension “will create undue damage to creditors since the requests for mandatory bankruptcy will not be processed until Dec. 31,” he said.

Even if it provides some relief, it remains to be seen how effective the measures will be in avoiding mass bankruptcies and liquidations. “The liquidity needed to cover imminent cash-flow needs as well as refinancings will remain critical,” Ignacio Buil, head of Spanish lawfirm Cuatrecasas' London office, said.

Part of that funding is provided by the credit lines backed by the government, which has offered to guarantee as much as 80% of 100 billion euros ($109 billion) worth of corporate loans, mainly targeted at small and medium-sized enterprises.

While a reform aimed at encouraging shareholders to inject funds will certainly help, another key issue is how to make funding distressed companies appealing, said Buil.

“That has not been solved in our insolvency law,” he said.