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Spain has been surrounded by rumours since May this year, as the country is seen as the next victim that will require a sovereign debt bail-out. Though it is not clear whether the country would go ahead with such a rescue plan, the landscape of the banking sector has been severely affected by its ailing economy....

Spain has been surrounded by rumours since May this year, as the country is seen as the next victim that will require a sovereign debt bail-out. Though it is not clear whether the country would go ahead with such a rescue plan, the landscape of the banking sector has been severely affected by its ailing economy. "The situation in Spain has been quite tough, since we have seen little liquidity in the market, the banks are not lending a huge amount of new money," says one partner.

A considerable amount of work has been focused on restructuring and refinancing recently as a result. "Since late 2007, it has been overwhelmingly restructuring work," says a banking partner. "Some refinancing, restructuring, extension of loans, new financing to provide liquidity, it's mostly related to the crisis."

Spanish savings banks reform has been producing a lot of work for firms, most of the 'Cajas' "are going through a very large restructuring process" at the moment. The purpose of the reform is to consolidate and shrink the number of entities. "There were 42 savings banks one year ago, the idea is when the process is over, there will be less than ten," says a partner.

The restructuring process comes in the form of a flotation and merger, as one lawyer explains: "Some of these savings banks are going to be privatised or going to be floated in the stock exchanges, so they're going to be transformed into banks and the shares are going to be placed with investors." While another peer adds: "There has been a concentration of merger transactions involving the savings banks."

The banking sector is also now seeking to increase its core tier-one capital ratio in order to comply with the new universal capital rules under Basel III, which aims to prevent further financial meltdown. "The banks are increasing share capital, all the time they are simply divesting non-core assets, because this is another way of increasing their core capital," says a partner, while another practitioner says: "Listed banks need to have tier-one core capital of 8%, unlisted banks 10%."

"Confidence in the Spanish market and the economy and international investors is not good nowadays," says one partner. "International confidence is not good and international investors don't invest in the Spanish market....

"Confidence in the Spanish market and the economy and international investors is not good nowadays," says one partner. "International confidence is not good and international investors don't invest in the Spanish market. So this is one of the problems."

This is the story across the capital markets, although there have been pockets of activity and practitioners are certainly not sitting on their hands.

In equity, IPOs remain few and far between, but some work has arisen from the consolidation in the savings bank sector. "Everybody in Spain is expecting now a number of IPOs from the saving banks due to the strong restrictions and requirements from the Bank of Spain," explains one practitioner. This refers to the forced merging of many of the institutions in Spain's formerly saturated small public bank sector, many of whom were hit hard by the downturn in the real estate market.

This type of work is indicative of the wider market, which has seen most transactions being done reluctantly or through necessity. "Spain has suffered a lot, we have seen obviously, but there is nothing, there isn't innovation, there is more necessity," says one partner.

On the debt side it is a similar story. "Companies have difficulties accessing the bond markets, particularly at the beginning of 2011, companies have been reluctant to issue debt," says another practitioner.

Again, activity has been born out of the savings bank mergers: "Traditionally the savings banks have not been very active in the debt capital markets, however, last year and this year, it has been active because of the merger transactions with the preference being convertibles," explains one partner.

Indeed convertible and hybrid bonds seem to be the order of the day: "Other companies, what they have done is to issue convertible bonds, so they're issuing bonds with a nice interest which would be converted into the shares of companies which issue that in the next three or five years," explains one practitioner and another agrees: "Savings banks are like the foundation, what they've done is to issue preferential convertibles into equity, which have been subscribed by the vehicle of control, the Bank of Spain." Hybrid bonds have been seen mainly due to the lack of bank liquidity, which has seen issuers looking for other sources of capital to fund their activities.

Structured finance and securitisation work remains at a relatively low ebb, due mainly to the heavy reliance many Spanish instruments had on real estate collateral. "The market has been sort of remaining dead, there are no investors willing to acquire securitisation notes with Spanish underlying risk," explains one securitisation partner. "Most of the deals in Spain have an underlying real-estate risk, they were mortgage-related transactions and the real-estate market in Spain is still questioning in terms of the valuation of the risk."

In this light it is unsurprising that the RMBS market is hardly making headlines. "They're dead in a sense you cannot convince the investors to acquire a note RMBS issued by the Spanish securitisation fund," says one partner.

"The main trend is that we have a very difficult transactional market, one of the consequences of the recession is that financing is not available as it used to be by banks because of the situation, as a result the transactional market is quiet with very few deals." The above statement sums up the key issue at the heart of the Spanish and indeed the wider European M&A slump....

"The main trend is that we have a very difficult transactional market, one of the consequences of the recession is that financing is not available as it used to be by banks because of the situation, as a result the transactional market is quiet with very few deals."

The above statement sums up the key issue at the heart of the Spanish and indeed the wider European M&A slump. The fact is that banks are not lending and though financing can be gained through the bond markets, transactions have been slow getting off the ground.

Of course there are plenty of wider factors which are also blocking the flow of transactions, as one partner says: "The global political situation affects the Spain market, Japan's earthquake and tsunami, war in Libya, questioning of nuclear power again."

What work there has been has been born out of restructuring mandates and distressed acquisitions. "Spain has been going through a tough economic down turn, so the pure transactions have been significantly reduced. The type of work for the law firms in general is lots of restructuring," says one practitioner.

Because of the country's well publicised economic woes, there are distressed targets available and though Spain may be teetering, it is certainly not in as bad a state as neighbouring Portugal or indeed Greece. As a result investors may be more inclined to take a risk on an asset in the hope of future growth. "There are good opportunities for money outside Spain to invest in Spanish companies because they might find cheap transactions with good companies," explains one partner. "Basically people realise value has come down; there is opportunity to buy good things at a low price."

Linked to this is the hope that private equity may pick up as well, with not much activity having been seen for some time. "The private equity area has suffered a big slow down in the last year. At the end of the 2010, there was one or two huge transactions," says one partner. "Private equity, has been slashed for most of the year, in terms of private equity investing in new deals," says another practitioner. "Now pure M&A transactions are picking ups; new acquisitions are starting to be planned."

As in so many areas, it is the newly consolidated savings bank that are actually producing the most optimism. Investors are turning their attention to the substantial assets held by these institutions, which are being offloaded as part of the merger process. "The sources could be portfolio companies, minority real estate, which are held by these savings banks, they could attract distressed investors, because these saving banks' are in a painful financial situation," explains one partner. "They are looking for companies which are able to grow a lot in the next year even though the Spanish economy is not growing."

In general, the story in project finance in Spain has been much the same as the previous year. The keenest area of activity is renewable energy, but the sector continues to be an area of much uncertainty due to the continuing discussions over the country's feed-in tariffs....

In general, the story in project finance in Spain has been much the same as the previous year. The keenest area of activity is renewable energy, but the sector continues to be an area of much uncertainty due to the continuing discussions over the country's feed-in tariffs. "We've seen an initial slow down in project finance due to regulatory changes, a certain turmoil in relation to renewable energy," says one partner.

The main change relates to the guaranteed rate investors will get for the power produced from their projects. "It has limited the number of hours of production, and second it has further limited for the first three years – as from the date of establishment of the Royal Decree Law – the set number of hours," explains another partner. As a result firms are finding themselves providing a lot of advice to clients trying to familiarise themselves with the new regime. "We have done a lot of opinions and reports related to the activities of the new regulation from the government, this has very much affected the financing of the projects," says another projects lawyer. This uncertainty it is feared will reduce future investment in the sector. "At the end, the regulation will need to be much clearer, otherwise the lenders are going to be reluctant to put money in," says another partner.

Outside of energy, infrastructure projects remain few and far between and are often small regional initiatives. "We have seen very few really big projects in the last year, they're more small-and-medium sized projects - roads, railways, hospital, most of them sponsored by the regional government," explains one partner. "Spain is suffering a crisis right now that means the federal government here putting less money into big projects, so my expectation is that probably next year, we are not going to see many big projects," says another.

This reluctance has led to investors seeking alternative forms of financing from a variety of different sources in order to obtain the capital needed. "The general market trends, well, it is more complex now, the banks are making it more difficult because they are not financing projects, so that means the ratio has decreased," says one practitioner. "The sort of warrant that the companies need to win in the project is higher, the reality is very few projects are pure project finance projects."

Project bonds may well be one form, which may be explored. Although they are still finding their feet in Europe, Spain would seem an ideal testing ground.

As you would imagine in a country with Spain's economic woes, restructuring and insolvency work has been wide ranging and has kept practitioners extremely busy."The Spanish economy is suffering heavily from this recession, we've got our specific problems which are basically a very small growth of GDP, therefore, we see more and more companies in financial stress....

As you would imagine in a country with Spain's economic woes, restructuring and insolvency work has been wide ranging and has kept practitioners extremely busy.

"The Spanish economy is suffering heavily from this recession, we've got our specific problems which are basically a very small growth of GDP, therefore, we see more and more companies in financial stress. Financial stress for so many years increases the amount of companies which need restructuring," explains one partner.

There is still a desire from most companies to solve their problems out of court, but the inherent weakness in many – and indeed in the banks – means that insolvencies have been on the up. "Most of the companies would try to restructure out of court, in order to avoid insolvency in court, due to the fundamentals," says one partner. "These companies are very weak, the banks are not ready to restructure these companies, which means that the trend more and more is that the companies have to file for insolvency.

The new insolvency law, introduced in 2009 (Royal Decree 3/2009) has made it easier for companies to reach an agreement with creditors before full insolvency proceedings kick in, however as one would imagine critical amendments still need to be made to make it a more lean and efficient piece of legislation.

Another interesting new development, which has been seen in a number of jurisdictions across Europe, has been the increase in the use of English law governed schemes of arrangement. Again, this is born out of the desire of corporates to seek any means necessary to stay out of the courts. As the Spanish insolvency regime evolves, such foreign structures may decrease in popularity, but until the creases are ironed out, distressed companies will continue to consider all jurisdictions and tools available to them to find one that fits.