A NEW ROYAL DECREE-LAW FOR THE RATIONALIZATION OF THE FINANCIAL SYSTEM HAS BEEN APPROVED
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1 7 February 2012 A NEW ROYAL DECREE-LAW FOR THE RATIONALIZATION OF THE FINANCIAL SYSTEM HAS BEEN APPROVED Following the approval since 2008 of several regulations in order to shore up, restructure and strengthen the Spanish financial system, which included the regulation which created the Fund for the orderly restructuring of the Spanish financial system (the FROB ), the Spanish Council of Ministers approved a new Royal Decree-law 2/2012 ( RDL 2/2012 ), which entered into force on 4 February, aiming to complete the rationalization of the Spanish financial system by correcting the several deficiencies still persisting. RDL 2/2012 s main objectives are (i) to strengthen and rationalize the balance sheets of Spanish financial institutions, reassessing their big exposure to real estate risk, (ii) to give incentives to new integration processes among Spanish financial institutions, and (iii) to reinforce new corporate governance rules for financial institutions which have received financial support from the FROB. MEASURES TO STRENGTHEN AND RATIONALIZE THE BALANCE SHEETS OF SPANISH FINANCIAL INSTITUTIONS Financial institutions are required to comply with the following requirements contained in RDL 2/2012 before 31 December For such purposes, they will have to present a plan to the Bank of Spain before 31 March RDL 2/2012 includes new requirements for Spanish financial institutions to constitute a provision in connection with the real estate loans (the Loans ) as well as the plots of land and real estate assets (received as a consequence of the foreclosure of mortgages or arrangements with the underlying debtor) (the Real Estate Assets ) held by them. The new provision requirements are as follows (the risk associated with the Loans and the Real Estate Assets is categorized pursuant to the rules set forth in Circular 4/2004, from the Bank of Spain): A one off generic provision for Loans classified as normal ( riesgo normal ) of 7% of their outstanding nominal amount A NEW ROYAL DECREE-LAW FOR THE RATIONALIZATION OF THE FINANCIAL SYSTEM HAS BEEN APPROVED 1
2 on 31 December This provision can only be used by the relevant entity for the subsequent constitution of specific provisions (in the amounts described below) in the event of deterioration of the risk on the relevant Loans (and their correspondent reclassification) or in the event of assignment of Real Estate Assets to the financial institution in payment of the debt owed under the Loan. Specific on-going provisions (the relevant percentages are calculated over the outstanding nominal amount on 31 December 2011 or on a subsequent date in the event of refinancing): For Loans classified as doubtful ( riesgo dudoso ) relating to real estate assets already completed, a minimum coverage of 25%. For Loans classified as sub-standard ( riesgo subestándar ), secured through a mortgage and relating to real estate assets already completed, a minimum coverage of 20% (the coverage increases up to a minimum of 24% if they are not secured through a mortgage). For Loans classified as doubtful ( riesgo dudoso ) or sub-standard ( riesgo subestándar ) granted for the acquisition of plots of land or to build real estate assets still under construction, the coverage will be as follows: A minimum coverage of 60% (both for doubtful and sub-standard risk), where the financing has been granted for the acquisition of plots of land. A minimum coverage of 50% (both for doubtful and sub-standard risk), where the financing has been granted for the construction of real estate assets and the building work has stopped. A minimum coverage of 50% (for doubtful risk) or 24% (for sub-standard risk), where the financing has been granted for the construction of real estate assets and the building work is on-going. For Real Estate Assets already finished, the coverage will be as follows: A NEW ROYAL DECREE-LAW FOR THE RATIONALIZATION OF THE FINANCIAL SYSTEM HAS BEEN APPROVED 2
3 A minimum coverage of 25%, where they have been held by the financial institution for less than 12 months. A minimum coverage of 30%, where they have been held by the financial institution between 12 and 24 months. A minimum coverage of 40%, where they have been held by the financial institution between 24 and 36 months. A minimum coverage of 50%, where they have been held by the financial institution for more than 36 months. For Real Estate Assets still under construction, a minimum coverage of 50%, irrespective of the period they have been held by the financial institution. For plots of land to be used for the construction of real estate assets, a minimum coverage of 60%, irrespective of the period they have been held by the financial institution. Consolidated groups of financial institutions and financial institutions not integrated in a consolidated group are required to reinforce their core capital ( capital principal ) (as defined pursuant to Royal Decreelaw 2/2011) in connection with the Loans and the Real Estate Assets held by them: This reinforcement is conceived as an extra requirement of core capital ( capital principal ) to be met by these entities (in addition to the general requirements set forth by Royal Decree-law 2/2011). These extra requirements are as follows (the amounts dedicated to create the corresponding provisions for these Loans and Real Estate Assets, as provided above, will be deducted in order to determine the relevant amount): In relation to Loans classified as doubtful ( riesgo dudoso ) or sub-standard ( riesgo subestándar ) granted for the acquisition of plots of land, an additional amount of core capital equal to 80% of their outstanding amount. In relation to Loans classified as doubtful ( riesgo dudoso ) or sub-standard ( riesgo subestándar ) relating to real estate assets still under construction A NEW ROYAL DECREE-LAW FOR THE RATIONALIZATION OF THE FINANCIAL SYSTEM HAS BEEN APPROVED 3
4 (other than those classified as sub-standard ( riesgo subestándar ) where the building work is on-going), an additional amount of core capital equal to 65% of their outstanding amount. In relation to plots of land to be used for the construction of real estate assets, an additional amount of core capital equal to 80% of their book value. In relation to Real Estate Assets still under construction, an additional amount of core capital equal to 65% of their book value. The Spanish Minister of Economy and Competitiveness ( Ministro de Economía y Competitividad ) is authorized to amend the coverage percentages and the core capital requirements described above; the Bank of Spain is also authorized to amend such coverage percentages from 31 December 2012 onwards and to accommodate Circular 4/2004 to the rules set forth herein. Those entities having issued mandatory convertible preferred securities ( participaciones preferentes ) or mandatory convertible bonds prior to the entry into force of RDL 2/2012 will be allowed to include in their plan to the Bank of Spain the request to defer payment of the relevant remuneration / interest for no more than 12 months in the event that, as a consequence of their compliance with the provisioning and core capital ( capital principal ) requirements described above, they no longer have enough distributable profits or reserves to satisfy the relevant remuneration or there is an equity deficit in the issuing entity or in its parent company. In any case, payment of the deferred remuneration can only be made, once the relevant term has elapsed, if the financial institution has sufficient distributable profits or reserves and such equity deficit no longer exists. INCENTIVES FOR NEW INTEGRATION PROCESSES AMONG SPANISH FINANCIAL INSTITUTIONS RDL 2/2012 gives incentives for new integration processes among Spanish financial institutions by granting an extension to comply with the provisioning and core capital ( capital principal ) requirements described above to those financial institutions participating in integration processes during Therefore, such financial institutions will need to comply with such requirements within 12 months after the integration process has been authorized by the Minister of Economy and Competitiveness. Such A NEW ROYAL DECREE-LAW FOR THE RATIONALIZATION OF THE FINANCIAL SYSTEM HAS BEEN APPROVED 4
5 authorization needs to be granted in one month after the authorization request has been presented by the relevant financial institution (which, in turn, has to present it before 31 May 2012 this term does not apply to the sale of financial institutions where the FROB is the main shareholder). In order to benefit from this extra time, the integration processes need to comply with the following features: The integration needs to increase the assets of the biggest entity participating in the process by at least a 20% (exceptionally this amount can be smaller but never below 10%). The integration process needs to be carried out pursuant to a corporate restructuring (e.g. through a merger, spin-off, global assignment of assets and liabilities, etc.) or the sale by the FROB of its stake in the share capital of a financial institution. The entities participating in the process will need to improve their corporate governance rules. The integration project will detail how the integration process will increase the credit available for Spanish families and small and medium sized enterprises and will need to include a detailed plan of disinvestment of risky real estate assets by the participating entities, in both cases for the next three years to the date when the integration is completed. The resulting entity needs to be financially viable. The General Shareholders Meetings or General Assemblies of the participating entities will need to approve the integration agreement before 30 September 2012 and the integration will need to be concluded no later than 1 January CHANGES IN RELATION TO THE FROB RDL 2/2012 maintains the ability of the FROB in recapitalization processes ( planes de recapitalización ) under article 9 of Royal Decree-law 9/2009 (i.e. processes under which the Bank of Spain has not intervened the relevant financial institution and removed its Board of Directors) to invest in newly issued ordinary shares of the financial institution and establishes the obligation of the FROB to disinvest in the maximum period of 3 years (previously 5 years). The FROB can give financial support to the disinvestment process. The FROB is once again authorised to subscribe instruments that are convertible into newly issued ordinary shares of financial institutions in integration processes ( procesos de integración ) under article 10 of A NEW ROYAL DECREE-LAW FOR THE RATIONALIZATION OF THE FINANCIAL SYSTEM HAS BEEN APPROVED 5
6 Royal Decree-law 9/2009. These convertible instruments, which will form part of the core capital ( capital principal ) and the common equity ( recursos propios básicos ) of the relevant entity, can be either convertible preferred securities ( participaciones preferentes ) or convertible bonds. Pursuant to the legal regime in force between 14 July 2010 and 19 February 2011, within the framework of integration processes among financial institutions, the FROB could subscribe convertible preferred securities ( participaciones preferentes ). However, after 20 February 2011 this faculty had been limited to the subscription of preferred securities convertible into equity contributions of credit cooperatives, with the amendment made through Royal Decree-law 2/2011 The FROB s resources are increased in 6bn. CHANGES TO THE LEGAL REGIME FOR SPANISH SAVINGS BANKS ( CAJAS DE AHORRO ) Savings banks which conduct their banking business through another entity (to which they have contributed all its banking business) will (i) no longer need to have a Control Commission ( Comisión de Control ) and (ii) cannot dedicate more than 10% of their profits ( excedentes de libre disposición ) to objects different to charitable work (except with the authorization of the Bank of Spain). Likewise, these savings banks need to be converted into a special foundation ( fundación especial ) in the event they lose control over the above-mentioned entity or if their voting rights in that entity are reduced below 25%. The previous legal regime (in force between 1 January 2012 and 3 February 2012) only required this conversion where there was loss of control over such entity, and had amended the previously existing legal regime, which required the conversion where the relevant savings banks voting rights in the central entity were reduced below 50%. This is also applicable to those savings banks participating in an institutional protection scheme with other savings banks whereby all of them have contributed their banking business to the same central entity, in which case the loss of control or the reduction of the voting rights below 25% affects to the group as a whole. LIMITATION OF THE REMUNERATION OF DIRECTORS AND MANAGEMENT OF SHORED-UP ENTITIES RDL 2/2012 sets forth some limits to the remuneration to be received by the directors and management of financial institutions in which the FROB has intervened: A NEW ROYAL DECREE-LAW FOR THE RATIONALIZATION OF THE FINANCIAL SYSTEM HAS BEEN APPROVED 6
7 Financial institutions where the FROB is the main shareholder: Their directors and management cannot receive variable remuneration during Maximum fixed remuneration for executive chairmen ( presidentes ejecutivos ), chief executive officers ( consejeros delegados ) and management: 300,000. Maximum total remuneration for Board members other than the above: 50,000. Financial institutions to which the FROB has granted financial support but in which it is not the main shareholder: The variable remuneration for their directors and management will be postponed for 3 years. Maximum fixed remuneration for executive chairmen ( presidentes ejecutivos ), chief executive officers ( consejeros delegados ) and management: 600,000. Maximum total remuneration for Board members other than the above: 100,000. In the case of entities participating in an integration process described above, these limitations will only apply to the directors and management of the financial institutions which required public financial support or which were the reason for it. CHANGES IN THE LEGAL REGIME OF MANDATORY CONVERTIBLE BONDS Some of the requirements set forth by Royal Decree-law 2/2011 so that mandatory convertible bonds (issued after this Royal Decree-law entered into force) can form part of the core capital ( capital principal ) of Spanish financial institutions are amended. Therefore, their terms and conditions need to provide for their mandatory conversion (i) no later than 31 December 2018 (31 December 2014 pursuant to the previous regime) or (ii) prior to such date (a) in the event of restructuring of the financial institution or its group or (b) in the event the core capital ratio ( coeficiente de recursos propios mínimos ) is breached (the latter, following the EBA and CRD IV requirements for convertible instruments). Furthermore, the conversion ratio is no longer required to be fixed from the outset, but can be variable by fixing a maximum number of A NEW ROYAL DECREE-LAW FOR THE RATIONALIZATION OF THE FINANCIAL SYSTEM HAS BEEN APPROVED 7
8 shares to be delivered (i.e. a minimum conversion ratio) and the maximum nominal amount of the relevant shares. It is also no longer the case that they cannot include any feature preventing their consideration as a capital instrument ( instrumento de capital ) within the net assets ( patrimonio neto ) of the issuing entity. Contacts For further information please contact: Iñigo Berricano (+34) inigo.berricano@linklaters.com Ramón Ruiz de la Torre (+34) rruiztorre@linklaters.com Jorge Alegre (+34) jorge.alegre@linklaters.com Juan María Lamo (+34) juan_maria.lamo@linklaters.com Pablo Medina (+34) pablo.medina@linklaters.com This publication is intended merely to highlight issues and not to be comprehensive, nor to provide legal advice. Should you have any questions on issues reported here or on other areas of law, please contact one of your regular contacts, or contact the editors. Linklaters S.L.P.. All Rights reserved 2012 Linklaters S.L.P. is a professional limited liability company, having its registered office at Zurbarán 28, Madrid and with VAT Reg. No. B , registered with the Madrid Companies Registry in volume 20039, book 0, folio 40, section 8, sheet M Linklaters S.L.P. is affiliated with Linklaters LLP, a limited liability partnership registered in England and Wales with registered number OC It is a law firm authorised and regulated by the Solicitors Regulation Authority. The term partner in relation to Linklaters LLP is used to refer to a member of Linklaters LLP or an employee or consultant of Linklaters LLP or any of its affiliated firms or entities with equivalent standing and qualifications. A list of the names of the members of Linklaters LLP and of the non-members who are designated as partners and their professional qualifications is open to inspection at its registered office, One Silk Street, London EC2Y 8HQ or on Please refer to for important information on our regulatory position. We currently hold your contact details, which we use to send you newsletters such as this and for other marketing and business communications. We use your contact details for our own internal purposes only. This information is available to our offices worldwide and to those of our associated firms. If any of your details are incorrect or have recently changed, or if you no longer wish to receive this newsletter or other marketing communications, please let us know by ing us at marketing.database@linklaters.com. Linklaters, S.L.P. Calle Zurbarán, 28 E Madrid Telephone (+34) Facsimile (+34) Linklaters.com A NEW ROYAL DECREE-LAW FOR THE RATIONALIZATION OF THE FINANCIAL SYSTEM HAS BEEN APPROVED 8
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