A new milestone has been reached in the reform process of the Spanish Insolvency Act. On 25 May, the draft bill of the Law 9/2015, of urgent measures in insolvency proceedings, has finally been enacted as law. The new rule "validates" many of the modifications introduced by the latest Royal-Decree Laws, with some changes.

One of the main novelties in the last months had been the new calculation method of the value of the security over collateralized assets ("VofS"), now set at 90% of the fair value ("valor razonable") of the collateral at hand, once all securities ranking ahead, if any, had been deducted. This means that the mortgage liability ("responsabilidad hipotecaria") noted as secured amount in the Land Registry ("Registro de la Propiedad") loses all relevance upon the declaration of insolvency. The new rule (the "9/10 rule") has raised many concerns, especially in the distressed debt market, where some investors have considered this as a potential deal-breaker (the value of the collaterals may have sunk dramatically from the moment when the mortgage was granted, leaving de facto many debts unsecured. 

A new amendment proposed by the party in the government has casted some light on the destiny of the proceeds obtained from the foreclosure of collaterals in insolvency: secured creditors are entitled to any proceeds obtained from the sale of the relevant asset up to the original amount granted (and not to the VofS calculated pursuant to the 9/10 rule, as it was deducted from the former wording). Any surplus must be added to the insolvency estate ("masa activa del concurso").

This creates a breathing space for investors having purchased impaired debt portfolios. It still needs to be clarified whether secured creditors are entitled to credit-bid for the collateral in an auction up to the original amount granted.  We believe that this is the case in the light of the new provision (the secured creditor has precedence over any other creditors up to said amount), and that the lawmaker's intention is to limit the effects of the 9/10 rule to the calculation of voting rights in refinancing and composition agreements. This will have to be settled in the coming months through case law and scholarship.

In any case, this is good news for the distressed debt market.

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