* Spain to pass debt refinancing overhaul Friday-source
* New rules aimed at helping viable but indebted firms
* Regulator to also change rules on bank charges- source
* Banks lobbying for "bad bank' for company debts-sources (Recasts, adds detail, background)
By Carlos Ruano and Sarah White
MADRID, March 6 Spain's government is to overhaul loan refinancing rules for struggling companies, a source told Reuters on Thursday, a move it hopes will help more firms stay afloat while the economy edges out of its lengthy slump.
The new rules, to be approved on Friday, will make it easier for companies to extend maturities on bank loans, negotiate haircuts and arrange debt-for-equity swaps with creditors, said the source, who has direct knowledge of the draft decree.
The Bank of Spain would then allow lenders to classify some refinanced corporate loans as performing debt, the source said, answering a demand from Spain's banks who are under pressure to improve their capital ratios ahead of Europe-wide financial health tests.
Spain's economy is slowly recovering after two consecutive recessions, but record high bankruptcies are expected to continue this year as tens of thousands of small and mid-sized companies struggle with debt left over from the crisis.
During a long construction boom that collapsed in 2007, Spanish private debt soared to 2.3 times economic output, and the country is still in a process of deleveraging.
With unemployment stubbornly high at 26 percent, the government is keen to preserve jobs by helping viable companies.
"This is an important rule change from the point of view of the micro-economy to continue the fight against the effects of the crisis on companies," the source said. "The idea is to put an end to the effects of the credit bubble and the high leveraging, making it easier for banks to reach deals with companies that are viable but have a lot of debt."
The Bank of Spain and the economy ministry declined comment.
Spain had few tools until now to help companies cut their debt ahead of formally filing for bankruptcy, a process many smaller companies often fail to emerge from, ending up in liquidation.
"Companies get to the bankruptcy filing in extremely damaged states," said Leopoldo Pons, chairman of economists' association Refor, which estimates 65,000 medium and small Spanish companies are in danger of disappearing in the first half of this year because they cannot keep up with debt payments.
Leopoldo Pons, chairman of economists' association Refor, estimates about 15,000 mid-sized Spanish companies and 50,000 other very small entities were in danger of disappearing in the first half of this year as they struggled with debts.
Close to 10,000 Spanish companies and individuals filed for bankruptcy in 2013, official data shows.
Under the new rules, the source said, smaller creditors would no longer be able to hold up restructuring agreements through a veto. Many Spanish companies are forced into bankruptcy by one recalcitrant lender, even when most of their creditors have agreed on refinancing.
Spain's banks, which were forced by the government to take hefty provisions on rotten property loans in 2012, pushing some into state bailouts, last year had to classify more of their refinanced loans as bad debts to counter concerns they were disguising exposures to struggling companies.
They had to make an extra 5 billion euros in provisions against losses as a result.
It was not clear exactly how the Bank of Spain would now ease provisioning rules for restructured loans. Lenders are pushing for it to allow them to classify any debt linked to companies that have been through debt-for-equity swaps as "performing", which would allow them to lower provisions against those debts, two banking sources said.
"There needs to be some benefits for the banks in this," said one of the sources.
Banks are often reluctant to take stakes in companies as they have to then manage them.
The country's top lenders have even lobbied the government to create a form of "bad bank", which would allow banks to exchange loans for stakes in companies, and transfer the stakes to a fund managed by third parties.
Santander, BBVA, Bankia, Caixabank and Sabadell were among lenders who commissioned a study by investment bank N+1 and McKinsey outlining such a vehicle, two sources familiar with the plan said. The banks declined to comment.
Expansion newspaper reported on Thursday that such a vehicle could be around 30 billion euros in size, though a government source said Friday's new rules would not include the establishment of a bad bank.
A source close to the budget ministry said the new debt rules would also involve tax breaks to make debt-for-equity swaps tax neutral for banks and for the companies.
"What we are seeking to do is to make debt-for-equity swaps tax neutral and to make sure the tax side of things doesn't hold up refinancing agreements," the source said. (Additional reporting by Blanca Rodriguez; Writing by Fiona Ortiz; Editing by Julien Toyer and Toby Chopra)