Spanish Workout

State-aid loans Reign in Spain; Funding Epiphany for Naviera and Telepizza

9fin

By Chris Haffenden | Editor | chris@9fin.com

How Government state-aid loans are incorporated into restructurings will be a key theme for 2021. Arguably, it is not a simple question of payment waterfalls and voting rights as politics will inevitably be present. Even if these loans are unsecured, companies may be loath to push governments into accepting  write-downs. 

For example, Europcar keeps €285m of state-guaranteed loans in place under its restructuring deal. The German Government is more proactive and willing to take equity stakes than many of its European peers. TUI this week received EC approval for Germany’s €1.25bn contribution to its recapitalisation, and Lufthansa received significant state support in 2020.  

Over the past couple of weeks events in Spain piqued our interest at 9fin with a number of companies seeking to use State-Guarantees and rescue fund loans as part of their restructuring plans. 

To avoid the Workout becoming a Novela, given the plethora of updates since our last publication on 18 December, we are publishing a Spanish version first, with a Friday edition to follow. 

To save jobs and mitigate the economic effects of Covid-19 Spain has used the Instituto de Credito Oficial (ICO) to aid the granting of new loans to meet salaries, invoices and boost cash flows. Standby Letters of Credit provide up to 70% of Government guarantees for large companies with a maximum tenor of five years with margins between 20bps and 120bps. Only transactions over €50m require prior approval from ICO. Loans are subject to meeting criteria of the lending banks. As at end-November, €84bn of the €100bn of covid-related ICO funds had been disbursed, with €10.5bn of a new €40bn facility for financing investments being activated.  

Naviera Armas, the troubled Spanish Ferry Operator has already received support from ICO – with €45m disbursed in late September. It has also applied for a Sociedad Estatal de Participaciones Estatales (SEPI) loan – the rescue fund to support the solvency of strategic companies – for reportedly a sum of between €100m and €120m. 

Naviera should easily qualify for the rescue fund to support the solvency of strategic companies but as this could take several months, in October it turned to bondholders to fund an urgent liquidity need. 

Under key terms of a restructuring agreement announced on 30 December, the Armas family owners will retain the majority of voting shares in return for contributing €40m of new equity. Bondholders have already advanced €35m of a €100m bridge facility and will convert €240m of their notes into equity with the remainder to be exchanged for new 2026 notes. The drawing of the remaining €65m under the bridge is conditional on key financial stakeholders “entering into a comprehensive long-form lock-up agreement, which should conclude by the end of this month. 

As reported, Bondholders had demanded a capital structure overhaul in return for providing funds. Under the existing notes structural and collateral protection is poor, said sources previously, citing cash and asset leakage after the acquisition of Transmediterranea in 2017, funded by the issue of €300m of 2024 FRNs. 

Under the key terms the restructuring agreement agreed with an ad hoc noteholder group representing 72% of the FRNs, post the debt/equity swap the controlling shareholders will hold 51% of the A voting shares and 35% of the B (economic) shares. But the family can have a route back to a majority as their B stake can increase to 50% if noteholders recover par plus ongoing accrued.

Advisors to the company and the noteholders are now working towards long-form documentation. This will include aligning the interests of stakeholders “through a collective and enhanced governance structure for the group.” 

Conversely, Telepizza took a different funding route, going to ICO and its shareholders, rather than engage with bondholders. It has finally secured the additional funds which bondholders were waiting for since it disclosed a new money need of around €100m in April. 

In total, there is €72m of incoming funds, comprising a €40m ICO loan and a €42m shareholder injection (with €20m upfront). Cash balances had fallen to €34m at end November with coupon payments of around €10m due in January. 

Banco Santander and ICO will finance the €40m loan, under ICO’s special COVID-19 funding lines. The five-year facility, issued by Food Delivery Brands SA, will have an interest rate of 3.75% and ‘minimal amortisation.’ The loan will have an unspecified minimum liquidity covenant. A €10m Term Loan raised at the start of the pandemic will be rolled into the new facility as part of the €40m. Conditions to drawing include, among others, confirmation of ICO state guarantee and the upfront funding of €20m from shareholders, expected to be fulfilled by the end of January 2021. 

Tweaking SEPI

The role of SEPI - the strategic enterprise support fund could change. The Ministry of Finance is mulling whether to change its criteria so it can provide funds to companies on the edge of insolvency such as Abengoa and Duro Felguera. These currently do not apply to companies that were not viable prior to the pandemic, according to a report in ok diario.

Spain received criticism for injecting €475m into Air Europa via SEPI in October, with the airline slated to be sold for €1bn to IAG in November 2019 is now expected to be sold to Air Iberia for €500m – failing to cover the €600m of SEPI and ICO loans made this year. It still requires EU approval and Ryanair has lodged its opposition.

According to the Spanish press, Maria Jesus Montero - the Finance Minister wants to change the conditions to rescue all types of companies in distress, including not just Abengoa and Duro Felguera, but potentially troubled steel producer Celsa too. 

Duro Felguera confirmed on 30 December, that it was upping its request for SEPI funds by €20m to €120m. The Spanish Construction and engineering services company previously applied for a €70m loan and €30m via a SEPI subscribed capital increase. Funds would refinance a €85m syndicated loan due 2023 and €15m of other facilities. Hopes are fading that four offers to provide investment would save the company, with none thus fair progressing into binding proposals. 

An El Espanol article provides a good explainer of its plight. Most are offers of long-term projects and investments but are subject to SEPI providing support. Without support, company directors would be forced to apply for insolvency given its negative equity position.

Abengoa’s protracted restructuring is also entering a crucial phase, with the Spanish Government wavering on approving the plan. In December, to get a deal over the line the most exposed creditors Santander, KKR and Bluemountain offered to cover a €20m shortfall and they and other stakeholders agreed to modify the restructuring plan to appease a vocal minority shareholder group. 

Non-Institutional shareholders with less than €100,000 will no longer be wiped out under the restructuring plan and at an EGM on 22 December they nominated three board members to NewCo. Despite running on a platform to oppose the plan, the appointees have now expressed their support. 

Minority shareholders have floated an alternative proposal injecting €22m via a capital increase and grabbing a much larger equity slice for shareholders but given time limitations it is unlikely to fly. 

A restructuring plan submitted in August was agreed by creditors in October. But Abengoa wasn’t over the line, with minority shareholders representing 15% of the equity up in arms and there was another hiccup in October when the municipality of Andalucía refused to provide €20m of support.  

Reportedly spooked by the tussle between stakeholders and Andalucia, the Spanish Government is wavering. It has a seat at the table via its ICO loan participation and for providing a Cesce guarantee for bonding lines. 

There is a burning platform. If the restructuring couldn’t be completed by year-end, it could lead to the liquidation of the business. As, if delayed into 2021, Abengoa could have to pay tens of millions in advance tax payments to the Spanish Treasury, according to an el Economista report.

But we were not surprised by the news of yet another short-term extension – this time to 15 January – given a number of deadlines missed and extended since late summer. Given the tax liability and need for state funds the Spanish government is likely to determine whether an insolvency filing can be avoided. . 

Under the restructuring plan, Spain’s ICO, Credit Agricole and Bankia and Santander will offer €230m of new term loans with an ICO guarantee sought and a new €126.4m Cesce-guaranteed bonding line (extendible to €300m). NM2 creditors will write-off 50% of their debt or exchange 50% into a new mandatory convertible into Abenewco 1 shares, with the remaining NM2 financing designated as a junior tranche. Supplier debt will be exchanged for a new long-dated syndicated loan issued by Abenewco 2. Abengoa SA shareholders ownership in Abengoa NewCo will reduce from 77.5% to 2.7%. 

The Spanish infrastructure and construction group had already undergone a complex restructuring in 2017. The restructuring took several years to get over the line with €177m of bondholders holding out. Former majority shareholders the Benjumea family launched a €1bn legal claim against HSBC and Santander claiming that their actions led to the failure of a €650m rescue capital increase in 2016. 

9fin is working on a primer for Spanish pre-insolvency and insolvency processes and intends to provide more information in the coming weeks on state aid loans.