Debt Restructuring

What Is Debt Restructuring?

Debt restructuring is the set of financial and legal measures that allow a company to modify the terms of its obligations towards financial creditors, suppliers, or the tax authorities, when the existing debt structure is unsustainable given the company’s current or projected cash generation. The aim is to restore the balance between the company’s repayment capacity and the weight of its debt, preserving the operating business and employment.

Restructuring can be purely financial (renegotiation of maturity dates and rates with lenders) or may include operational measures (cost adjustments, asset sales, change of shareholders) when the cause of distress is not purely financial but also operational.

Restructuring Tools in Spain

Out-of-court:

• Bilateral renegotiation with each creditor: the most flexible solution, but requiring unanimous agreement of all material creditors.
• Homologated Refinancing Agreement (ARH): agreement with financial creditors representing at least 51% of financial liabilities; once homologated by the court, its effects can be extended to dissenting creditors that are financial institutions.

Pre-insolvency (Book II of the Insolvency Act, 2022 reform):

• Restructuring plan: an instrument of European origin (Directive 2019/1023) that allows approval of a restructuring plan by creditor class majorities, with the possibility of extending the plan to dissenting minorities (cram-down) and protection against individual enforcement actions during the negotiation period.

Insolvency proceedings:

• Creditors’ arrangement (convenio de acreedores): an agreement approved within the concurso de acreedores (insolvency proceedings) that sets haircuts and grace periods for all ordinary creditors.

Indicators That Justify Starting a Restructuring

• Net debt to EBITDA ratio above 5-6x on a sustained basis
• Breach or imminent risk of breach of banking covenants
• Recurring liquidity difficulties (negative cash position in normal scenarios)
• Short-term debt maturities that cannot be refinanced at market terms

Difference from Formal Insolvency Proceedings

Out-of-court or pre-insolvency restructuring is preferable to formal insolvency because it preserves the company’s reputation, is faster, has lower direct costs, and avoids the stigma effect that formal insolvency proceedings typically cause among clients, suppliers, and employees. Formal insolvency should be a last resort when voluntary restructuring is not achievable.

Relevance for Businesses

Getting ahead of insolvency is key: the earlier the restructuring process begins, the more options are available and the more value is preserved for shareholders and creditors. Filing a communication of opening creditor negotiations (Article 604 of the Insolvency Act) provides three months of protection against compulsory insolvency petitions and against enforcement of financial security arrangements.