According to sources, Spain has a 1.5 trillion-euro ($2 trillion) lending market. Before the financial crisis began in 2007-2008, lending by Spanish traditional banks had reached its peak. In 2007, the lending activity of banks and saving banks (“cajas de ahorro”) to firms and households reached rates equivalent to three times the nominal growth rate of the Spanish economy. However, the Spanish banks’ stock of loans has dropped by more than 20 per cent since 2008. There are several reasons for this significant reduction. Among other reasons, the collapse of certain Spanish financial institutions, the banking restructuring undertaken by the Spanish government, the implementation and the transition to new stringent rules arising from Basel III regulations (these are rules whose own text acknowledges that they hinder bank lending and potentially increase borrowing costs), the Spanish sovereign debt crisis, the severe wholesale funding schedules that certain Spanish financial institutions have to comply with, and the unemployment rate of 26 per cent. 

Companies need finance

Spanish corporations, investors and families still need – some of them, desperately – financing in order to carry out their activities and undertake their business projects. In a traditionally heavily banked economy such as the Spanish one, the enormous lending space left by Spanish banks is increasingly being occupied by alternative providers of finance.
Most of these providers of finance are hedge funds and international investors that have been extremely active in investing in Spain during the last few years, particularly in the acquisition of distressed debt portfolios of Spanish banks and savings banks (“cajas de ahorro”).

International interest

We have recently seen an enormous amount of interest from international investors in carrying out direct lending activities in Spain. Basel III regulations have envisaged a transition calendar scheduled until 2019 in which regulated banks will have to strengthen their capital. This will lead to a reduction in the resources Spanish banks have available to lend and it is therefore likely that there will be lending opportunities for unlicenced institutions for the foreseeable future.

We have generally seen that lending transactions between unlicenced institutions and Spanish corporations have been structured as overall refinancings of the borrower’s existing banking debt which is cancelled by the new debt provided by the investor, who then agrees to extend maturities in exchange for a higher interest rate, the granting of mezzanine or subordinated financings that co-exist with senior banking debt, asset-based lending transactions, plain vanilla loans or revolving facilities that enable the borrower to meet their working capital requirements.

Direct lending by unlicenced institutions poses several legal issues from a Spanish banking regulatory law perspective, particularly in light of the European Commission’s green paper and ongoing discussions on shadow banking.In this regard, an initial question raised by international investors is whether direct lending triggers banking licencing requirements in Spain. The starting point is the concept of “reserved banking activities” which is established in Spanish banking legislation as a different concept to “typical banking activities”.

Banking activities

To make a long story short, Spanish banking legislation foresees a number of “typical banking activities” that licensed banks may carry out as part of their corporate purpose among which lending is expressly listed, but there are only a limited number of “reserved banking activities” which solely licenced banks subject to the stringent supervision of the Bank of Spain (“Banco de España”) are entitled to undertake. Therefore, the issue is whether lending constitutes a “reserved banking activity” or not. This concept mainly refers to performing maturity transformation activities: ie taking deposits or other repayable funds from the public (buying money) and applying those repayable funds to the granting of credits to households and corporations (selling money).

Carrying out an activity on an isolated basis such as lending with the lender’s own resources, (ie without raising the money from deposit-taking activities), does not in principle require a banking licence and can be carried out by non-licenced individuals and/or legal entities. The policy rationale of this approach is that when people are using their own funds (and not those received from deposits from the public) in order to offer certain financial services such as money lending, the risks that these persons will be assuming with their own funds are not of a systemic nature and should not therefore fall within the scope of the strict prudential and supervisory public regulations to which traditional banks that receive funds from the public are subject.

However, this might not be the case if the investor is a foreign institution that is licenced in a jurisdiction whose regulator requires Spanish banks or investors to obtain a licence in order to carry out lending activities in that country. On these occasions, the Bank of Spain may require foreign institutions to first obtain its permission to do banking. This request may be based on reciprocity grounds. As a consequence of this, a case-by-case analysis must be carried out with the local counsel in the investor’s jurisdiction in order to rule out any potential issues.

Lending gap

In conclusion, an enormous lending space remains where traditional Spanish licenced banks had been previously operating. This space may remain unoccupied for several years until the Spanish banks have completed their restructuring processes and have strengthened their capital structure in accordance with Basel III regulations. Spanish firms and households will continue to need cash supply. Therefore, direct lending by unlicenced institutions will continue to soar in Spain within the next few years. Foreign investors seeking to enter the Spanish lending market should bear in mind that direct lending raises a number of legal issues that must be appropriately dealt with.

Ander Valverde is a Senior Associate at Spanish law firm Pérez-Llorca (avalverde@perezllorca.com)