Promociones Habitat SA, the Spanish residential homebuilder, has completed a €1.45 billion restructuring which was the first refinancing of an existing composition agreement to use the provisions in a debt/equity swap within Spain’s new company rescue laws.
In 2008 Promociones Habitat SA (Habitat)applied for voluntary bankruptcy with accumulated liabilities of 2,840 million euros. Two years later, in 2010, Mercantile Court no. 3 of Barcelona approved the composition agreement with more than 80% adhering to the proposal.
The composition agreement with which Habitat achieved the support of its creditors contemplated two alternatives:
- Firstly that the company would pay 80% of the debt (with a write off of 20%), of which 50% would be paid in eight years and the remaining 30% would be automatically converted into a participative loan.
- The second alternative proposed by the company contemplated a shorter stay of five years, but with a write off of 70%.
Recently a group of funds including Bank of America, Goldman Sachs and Centerbridge, among others, and a series of banking institutions, bought a portion of its bank debt. As the largest stakeholder in the deal, Capstone Equities Manager formed and led the credit committee, selected advisors and facilitated significant interaction with all stakeholders.
Given the impossibility of Habitat meeting the schedule of payments proposed and approved in 2010, the creditor funds asked for a renewal of the agreement which was possible due to the modification of the Bankruptcy Law by Act 9/2015 of 25 May, concerning urgent measures in the area of bankruptcy. Habitat therefore drew on the provisions of the new bankruptcy law which allows an agreement to be renegotiated with the creditors when what is previously proposed is not met, which offers a second chance to avoid the company liquidation.
In the new proposed agreement, the group of funds controlled 65% of the debts, the percentage which the law requires for approving the payment plan, where the write offs are high, between 85% and 97%.
For its part, Habitat agreed to a debt for equity swap with the idea of developing the land and particularly of making use of the Habitat platform to purchase assets and make a strong entry in the sector. The capital was therefore formed as follows:
- The funds taking 70% of the capital,
- The CEO taking 16.4%, and
- The current minority shareholdings led by Ferrovial and a group of Catalan families with the remaining 13.6%.
The creditors, a pool of 25 entities, preferred to accept a new agreement to avoid a liquidation, since in a liquidation the assets would lose their value as they would have to be auctioned. Capstone led the effort to submit the reorganization plan in April 2015, which was approved by the Spanish courts in July 2015. Shareholders endorsed the reorganization plan in September 2015. As a result, Habitat re-emerged from insolvency and is now planning future developments.
This new procedure used by Habitat is something which is now beginning to be used by large companies in the real estate area . There is talk of rescheduling the debts to reach a new agreement containing reduced limits when the previous agreement is not able to be fulfilled. This is a reformulation of the agreement which adapts to the present economic circumstances to keep the company in business over time.
This measure is included in the Bankruptcy Law, which after the reform by RD-Act 11/2014, includes the following, among other measures:
- A 60% majority is required by the ordinary creditors in cases of write offs not exceeding 50% and time extensions of no more than 5 years; or
- 75% in the case of larger write offs or longer time extensions.
This rescheduling of debts, along with other proposals of giving land in lieu of payment, is being used as a strategy by struggling real estate companies which, as in the case of Habitat, are unable to pay or fulfil existing composition agreements.
These changes affect companies which have a varied and extensive set of creditors, and using the rescheduling procedure, the creditors may receive payments without having to push the company into liquidation. Therefore, all companies in an composition agreement which is difficult to fulfil, may make this adjustment of the previously agreed terms arranged to reflect the present reality of their business and the market sector.