The new Spanish insolvency legislation to be implemented in September promises to have a more creditor-friendly view, similar to other European jurisdictions, which should provide the legal certainties necessary for the Spanish securitization markets to grow.

Until now, the securitization of Spanish assets was traditionally hindered by insolvency legislation that allowed courts leading the bankruptcy proceedings to retroactively date the bankruptcy prior to the date the proceeding was commenced. This time lag between the retroaction date to the date of the actual bankruptcy proceeding (referred to as the "Retroaction Period" under Spanish law) has typically prevented the rating agencies from issuing a stand-alone triple-A rating to a Spanish securitization, unless transactions were adequately structured to circumvent the legislation.

"Moreover, pursuant to Article 878.2 of the Spanish Commercial Code 1885, any act of administration or disposal carried out by a bankrupt party within the Retroaction Period is deemed to be null and void," explained sources at law firm Clifford Chance. "Although the Spanish Supreme Court has been often reluctant to apply Article 878.2 in accordance with its literal terms, and has ruled in a significant number of judgments that agreements entered into during the Retroaction Period can only be set aside if they amount to a fraudulent preference or are detrimental to the other creditors of the bankrupt party, case law on this matter is not unanimous. [There is always] the risk that any sale of assets by the originator to the relevant securitization SPV made within the Retroaction Period could be nullified by the relevant court."

Under this scenario, the originator would have access to the assets securitized in a deal and the SPV would be required to pay back to the originator any proceeds generated by the assets. At the same time, the SPV would be entitled to recover the purchase price it had paid for the assets from the bankruptcy estate as an unsecured creditor.

A history of change

Spanish legislators recognized the obstacles these laws placed on securitization structures and have, in the past, approved legislation providing safe harbors for certain securitization structures that have partially alleviated the problem. Under the royal decree 926/1998, sales of receivables or loan claims to Spanish securitization vehicles called fondos de titulizacion de activos cannot be voided upon the insolvency of the originator, even if made during the Retroaction Period, unless the receivers prove the existence of fraud.

This new provision only applied to securitizations where the SPV takes the form of a Spanish fondos de titulizacion de activos but did not apply to the sale of receivables to an offshore SPV. Legislators then implemented a third additional provision the following year that provided a safe harbor for SPVs incorporated under the law of foreign jurisdictions. Under this new additional provision, the sales of receivables, which have been made during the Retroaction Period as cited under article 878.2, cannot be nullified and voided by the Courts, unless the receivers prove that they amount to a fraud, explained partners at Clifford Chance. A number of transactions followed where the relevant receivables were initially sold to a foreign credit institution and then sold again by that credit institution to the relevant SPV. The additional provisions did not, however, provide an adequate safeguard for assets sold by a Spanish originator directly to a foreign SPV, which still faced insolvency provisions set by article 878.2.

Under the new legislation, which will come into effect in September, a Spanish court will no longer have the right to initiate the Retroactive Period, and will lose its ability to "back-date the effects of the declaration of bankruptcy," according to Clifford Chance sources.

"The new framework involves streamlining and unifying the insolvency procedures, creating specialized commercial bankruptcy courts, [and] more scope for business continuation (like a U.S. Chapter 11) versus mandatory liquidation," said analysts at Merrill Lynch.

Analysts also highlighted that reformed insolvency laws in other jurisdictions have typically led to a period of increased personal and business insolvencies prior to implementation. While the resulting rise in these insolvencies may be temporary, Merrill Lynch believes that a longer-term structural shift in the absolute frequency of bankruptcy is likely to follow. "We do not think that Spain will be an exception, and the implementation of the new law could feed into higher levels of default in SME deals, as well as consumer-related ABS and RMBS beginning in the fourth quarter 2004 and beyond," said analysts.

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