Blog: Snapshot: regulation of bank loan facilities in Spain – Lexology

Regulation

Capital and liquidity requirements

Describe how capital and liquidity requirements impact the structure of bank loan facilities, including the availability of related facilities.

Since Spain is a member of the European Union, capital and liquidity requirements (and limits to large exposures) are governed by the Capital Requirements Directive V (Directive (EU) 2019/878 of the European Parliament and of the Council of 20 May 2019 (CRD V)) and the Capital Requirements Regulation II (Regulation (EU) 2019/876 of the European Parliament and of the Council of 20 May 2019 amending the Capital Requirements Regulation (CRR II)). On the matters that the CRR I left to national discretion, the Bank of Spain, by mid-2014, issued a supplementary regulation, which was completed in 2016 by means of Circular 2/2016 of 2 February. The Bank of Spain has recently amended Circular 2/2016 by Circular 5/2021, which entered into force on 12 January 2022 and completes the adaptation to Spanish legislation of CRD V.

On 27 June 2019, the CRD V, amending the CRD IV (in respect of exempted entities, financial holding companies, mixed financial holding companies, remuneration, supervisory measures and powers and capital conservation measures) and the CRR II (in respect of the leverage ratio, the net stable funding ratio, requirements for own funds and eligible liabilities, counterparty credit risk, market risk, exposures to central counterparties, exposures to collective investment undertakings, large exposures, reporting and disclosure requirements) entered into force, although the CRR II provisions, subject to certain exceptions, will apply from 28 June 2021.

The prudential regulation of credit institutions aims to ensure that they operate with sufficient resources to be able to assume the risks that derive from their financial activity, thus contributing to the stability of the financial system. These solvency requirements are applicable to consolidated groups of Spanish credit institutions and to individual credit institutions of Spanish nationality that are not integrated into a consolidated group.

The Bank of Spain ensures that the resources and the liquidity maintained by the credit institutions guarantee a solid management of its risk. In addition, it collaborates with authorities entrusted with similar functions in other countries and may communicate information regarding the management, administration and ownership of these entities, in addition to factors that may influence the systemic risk posed by the entity because of its lack of control of solvency and liquidity. The Bank of Spain may require credit institutions to immediately adopt the necessary measures to adhere to liquidity and equity obligations or impose the obligation to have a minimum number of liquid assets to manage the potential outflows of funds derived from liabilities and commitments. Accordingly, depending on the risks arising from certain bank loan facilities, Spanish banks may be required to hold more capital to cover or mitigate risks by asking for satisfactory collateral.

When Spanish bank loan facilities are based on the forms published by the Loan Market Association, provisions of ‘increased costs’ allow lenders to demand borrowers to reimburse them for any additional costs incurred as a result of the implementation of capital requirements regulations. Borrowers may negotiate that those reimbursement obligations be subject to the relevant lender accrediting that the reimbursement is sought on a general basis from other borrowers in similar bank loan facilities.

Disclosure requirements

For public company debtors, are there disclosure requirements applicable to bank loan facilities?

There are no specific mandatory disclosure requirements other than in connection with regular financial reporting obligations or in the context of a capital market transaction (securities prospectus) of the public company; if a public company enters into a bank loan facility or into a restructuring or debt refinancing and such information may have an impact on the market value of the shares of the relevant public company, it shall disclose the information to the market, in compliance with its general obligation to notify the market of any price-sensitive information.

Use of loan proceeds

How is the use of bank loan proceeds by the debtor regulated? What liability could investors be exposed to if the debtor uses the proceeds contrary to regulations? Can investors mitigate their liability?

The use of bank loan proceeds is agreed and specified in the bank loan documentation. If a borrower uses the proceeds of financing for any purpose other than that set out in the bank loan documentation, this would result in an event of default, allowing the lenders to accelerate any outstanding loans and terminate unused commitments (and, if necessary, to enforce any available collateral).

In addition, banks and other regulated lenders have a duty to prevent money laundering and terrorist financing. Royal Decree 84/2015 of 13 February establishes that banks must set up adequate bodies and proceedings for internal control purposes to prevent and avoid any transaction that may trigger anti-money laundering provisions.

Spanish banks’ common practice is to include specific language covering anti-corruption, anti-money laundering, prevention of terrorist financing, sanctions rules, and the relevant representations and obligations imposed on the borrowers.

Cross-border lending

Are there regulations that limit an investor’s ability to extend credit to debtors organised or operating in particular jurisdictions? What liability are investors exposed to if they lend to such debtors? Can the investors mitigate their liability?

Spanish regulations on money laundering (Law 10/2010 of 28 April on the prevention on money laundering and terrorist financing, and Royal Decree 304/2014 of 5 May on the regulation on the prevention of money laundering and terrorist financing) establish enhanced due diligence measures for subject parties (Obliged Subjects), especially with regard to business relationships and transactions with clients in countries, territories or jurisdictions deemed risky, or that involve transfers of funds from or to those countries. In those cases, the relevant parties will apply enhanced due diligence measures (including, in any case, on those countries for which the Financial Action Task Force (FATF) requires the application of enhanced due diligence measures). Obliged Subjects will consider as risky jurisdictions countries, territories or jurisdictions:

  • that do not have appropriate systems for the prevention of money laundering and terrorist financing;
  • that are subject to sanctions, embargoes or similar measures adopted by the European Union, the United Nations or other international organisations;
  • that are experiencing significant levels of corruption or other criminal activities;
  • where the funding or support of terrorist activity is promoted;
  • that are known to be significant offshore areas; and
  • that are considered as tax havens.

 

To be able to identify these risky jurisdictions, the Obliged Subjects must resort to credible sources, such as the mutual evaluation reports of the FATF or FATF-style regional bodies or reports from other international organisations.

The Executive Service of the Commission for the Prevention of Money Laundering and Monetary Offences (SEPBLAC) is the Spanish financial intelligence unit that controls the application of anti-money laundering and terrorist financing prevention rules in accordance with FATF standards (to which banks are subject). It holds supervisory capacity of its own and may exercise disciplinary powers in its field. In reference to liability, the offences can be classified as very serious, serious and minor.

An investor can adopt measures to mitigate its liability, including relevant due diligence and monitoring obligations, and, when applicable, informing the SEPBLAC of any fact or transaction, including the mere attempt in respect of which, after the special examination mentioned above, there is evidence or certainty of a money laundering or terrorist financing risk in the transaction. The obliged subjects should not execute any risky transaction, but in the event that abstention is not possible or may impede the investigation, they may execute the transaction and immediately thereafter notify the SEPBLAC.

Debtor’s leverage profile

Are there limitations on an investor’s ability to extend credit to a debtor based on the debtor’s leverage profile?

Limitations may apply to the investor’s ability to extend credit to a debtor if it is a regulated entity subject to specific supervision requirements (analysis should be done on a case-by-case basis).

Law 22/2014 of 26 June, on the regulation, supervision and solvency of financial institutions, was amended by means of the Royal Decree-Law 22/2018, of 14 December, establishing macro-prudential tools. The Bank of Spain can require credit institutions to limit their exposure to certain sectors of economic activity if it deems that exposure may involve an element of systemic risk, as well as set limits and conditions on bank lending.

In addition, on 16 November 2017, the European Central Bank (ECB) guidance on leveraged transactions became applicable. The guidance seeks to facilitate the identification of leveraged transactions by means of an overarching definition encompassing all business units and geographical areas to give a bank’s senior management a comprehensive overview of the bank’s leveraged lending activities, and it outlines expectations regarding the risk management and reporting requirements for leveraged transactions. Although the guidance is non-binding, the supervisory expectations expressed in the guidance should be implemented in line with the size and risk profile of banks’ leveraged transaction activities relative to their assets, earnings and capital, and although the ECB has announced that it will apply the principle of proportionality, the ECB will monitor leveraged lending activities and may ask selected banks to regularly report their exposures to leveraged transactions as well as the evolution and riskiness of these exposures.

Finally, lenders should also consider the remoteness of the borrower’s insolvency since certain transactions and security interests may involve a clawback risk if they are concluded within the ‘suspect period’ determined by the court in the judgment declaring the insolvency of the borrower (usually two years before declaration of insolvency).

Interest rates

Do regulations limit the rate of interest that can be charged on bank loans?

Yes. Although parties to a bank loan agreement are free to agree the rate of interest applicable to the loan, Spanish law provides a prohibition on usury (that will ultimately depend on the circumstances and analysis on a case-by-case basis, such as an interest rate deemed substantially higher than the usual money rate at that time, or a distressed debtor accepting a disproportionate interest rate). If usury is considered to have occurred in a bank loan, the agreement would be declared null and void, and the debtor should only be obliged to repay the principal amount of the loan (no interest will have to be paid).

In addition, Law 5/2019 of 15 March, regulating real estate credit agreements and incorporating Directive 2014/17/EU of the European Parliament and of the Council of 4 February 2014 on credit agreements for consumers relating to residential immovable property into Spanish law, provides that in cases of loans or credit facilities concluded by individuals and backed by a mortgage on real estate properties for residential use:

  • the applicable interest rate may not be altered to the detriment of the borrower during the term of the contract, except by mutual written agreement;
  • in the case of floating interest rate agreements, a downward limit to the floating interest rate cannot be set out;
  • the default interest will be calculated, in any case, by adding three percentage points to the ordinary interest; and
  • that the default interest may only accrue on the principal due and payable, and may not be capitalised under any circumstances.

Currency restrictions

What limitations are there on investors funding bank loans in a currency other than the local currency?

There are no material specific limitations on investors funding bank loans in a currency other than their local currency.

In respect of the European Systemic Risk Board’s recommendation on lending in foreign currencies (ESRB/2011/1), which was issued proposing a series of measures to tackle the significant systemic risks that foreign currency lending could pose, the follow-up report (overall assessment) dated November 2013 and updated in May 2015 upgraded Spain’s overall compliance level to fully compliant, which means that actions have been taken in the jurisdiction to fully implement the recommendation.

Notwithstanding, in the case of loans or credit facilities concluded by individuals and backed by a mortgage on real estate properties for residential use, Law 5/2019 provides that the borrower, when considered as a consumer, has a right to convert loans denominated in foreign currency to an alternative currency, which may be the currency in which the borrower earns the most income or has the most assets, or a currency of the member state in which the borrower was resident on the date the loan agreement was granted or at the time the borrower requested the conversion. Only borrowers who are not considered as consumers may agree on limiting the exchange rate risk to which they are exposed instead of the right to request conversion.

Other regulations

Describe any other regulatory requirements that have an impact on the structuring or the availability of bank loan facilities.

Although lending is not a regulated activity in Spain, investors funding bank loan facilities need to be aware that not all types of creditors can benefit from some Spanish security interests (floating mortgages and financial guarantees). This may impact the structuring of the security package.

In addition, Royal Decree 11/2020 of 31 March amended Law 19/2003 of 4 July, requiring foreign investors (ie, those coming from outside the European Union, Switzerland, Norway, Iceland or Liechtenstein) to obtain a prior administrative authorisation to undertake some investments greater than 10 per cent or that allow an exercise of control over companies within certain sensitive sectors. This regime is transitional in nature; once the worst effects of the covid-19 pandemic have been overcome, it should be removed, restoring the former liberalisation regime. While in force, banks will require evidence of the issuance of the administrative authorisation to grant lending facilities in acquisition finance transactions since investments undertaken without the relevant authorisation will be null and void.

Although there are no other general regulatory requirements that would have a general impact on the structuring or the availability of bank loan facilities, we would recommend confirming, on a case-by-case basis, the potential regulatory implications before structuring any transaction.

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