Spain revamps debt rules to help struggling companies

MADRID, March 7 Fri Mar 7, 2014 11:50am EST

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MADRID, March 7 (Reuters) - Spain's government on Friday approved new rules to help struggling companies cut debt and avoid bankruptcy as the country heads into economic recovery with weak job growth.

The overhaul is designed to ease loan refinancings by making it harder for small creditors to veto deals. It also creates a mechanism for creditors to write off part of a borrower's debt.

"The aim is to prevent a liquidity problem or temporary solvency issue from forcing a company with good earnings and growth perspectives ... from having to shut down," Deputy Prime Minister Soraya Saenz de Santamaria said at a news conference following a cabinet meeting.

Spain's economy is emerging from two recessions, but record high bankruptcies are expected to continue as tens of thousands of small companies struggle with debt left over from the crisis.

Unemployment is also stubbornly high at 26 percent of the workforce, and the government is trying to keep employers afloat.

Spain had few tools to help companies cut their debts ahead of a formal bankruptcy process through the courts. Once firms enter that process, they usually can try and renegotiate or write off loans, but many are in such bad shape by that stage that they end up being liquidated.

The overhaul aims to get debt restructurings going before companies are completely on the brink.

One key clause in the new rules, which have been passed as a Royal Decree, will allow companies to cut debts if 75 percent of creditors agree to take losses, or what is known as a "haircut". Dissenting creditors would also be forced into such a deal.

As part of the restructuring options, creditors can also agree to convert debt into a company's equity if 75 percent of the lenders agree.

In order to make the rules more attractive for banks, which would face losses from these types of agreements, the government has also asked the Bank of Spain to changes the norms around the provisions they have to make against bad debts.

That would allow them to classify some refinanced loans as performing ones once debts have been restructured, lowering the charges they put up against soured deals.

Spain's top banks have backed the idea of creating some form of "bad bank" to house stakes in companies they might take over, and which would be managed by third parties.

But the government has distanced itself from the plan. A source from the Economy Ministry said on Friday that the new debt rules, which encourage debt-for-equity swaps, might allow banks to create such a vehicle, but added it was a private sector initiative.

"Creditors are free to do what they want with their stakes in companies, after these rules go through," the source said. "There are no obstacles to such a plan...but it's not something that we will give state funding or guarantees to." (Reporting by Sarah White and Blanca Rodriguez; Editing by Fiona Ortiz/Jeremy Gaunt)

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