Securitizations of Spanish SME loans are facing trouble on two fronts: rising corporate insolvencies and new legislation on debt refinancing and restructuring.

In a recent report, Fitch Ratings said a legislative reform that went into effect March 7 could inject uncertainty into the cash-flow and recovery expectations on SME loans, as the original repayment terms can be altered.

The new law makes it easier for bank creditors and a troubled company to come to an agreement before insolvency proceedings get started. For the agreement to go into effect it must have 51% support from the financial creditors and allow the company to remain viable.  

Fitch believes this new approach would “provide incentives for highly leveraged companies to pursue and formalize restructuring plans that would not be possible or as easy otherwise.”

Under the new regime, modifications that are possible if at least 75% of financial creditors agree include extending loan maturities up to ten years, payment-in-kind arrangements, principal haircuts and debt-to-equity conversion. If 60% of creditors agree, maturities can be termed out to five years.

These same terms can apply to secured collateral provided that 80% of secured creditors agree for the more drastic batch of modifications or 60% for the maturity extension to five years.

The upshot?

“Lenders may increase pricing on new loans to account for the added uncertainty they would face if they found themselves minority creditors forced to accept a restructuring or refinancing plan they have voted against,” Fitch said.

At the same time, SME collateral in existing securitizations is likely to get hit by the tidal waves of corporate insolvencies in Spain, which hit a record in 2013.

In a recent report, Moody’s Investors Service said insolvencies are a strong predictor of SME pool performance. As a result, the agency does not expect collateral to perform any better in 2014. And while the most beleaguered loans will remain those in real estate and construction, those outside the sector will see defaults head north, according to Moody’s.

And there is more.

“The rise in SME insolvencies increases the average recovery lag on defaulting loans, which is also a credit negative for Spanish SME ABS transactions,” the agency said.

The country’s National Statistics Institute (INE) reported that Spanish corporate insolvencies hit 8,934 in 2013, up 10% from 2013 and a nine-fold leap from 2006.

The table below shows how tight the correlation is between the number of insolvencies and the performance of collateral in SME securitizations.

Insolvencies remained highest in real estate and construction sectors. But it has recently been growing fastest in other sectors — which Moody’s expects to show up in the collateral performance of deals. 

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