Spanish loan to-own: capital increases in exchange of debt

According to Section&nbsp,295 of the Spanish Companies Act («SCA»), the share capital of a company can be increased by issuing new shares or by increasing the par value of the existing ones. In both cases the capital can be increased through monetary or in kind contributions, including the set-off of credits that any creditor may hold against the company. Up until recent times the conversion of debt into equity was made through a capital increase through set-off (i.e. the debt was extinguished by set-off against a certain number of shares in the debtor). For the reasons explained below this process has proven technically difficult in various Spanish restructurings, particularly when –within a syndicated financing– some members wish to equityse and some do not and individual acceleration is not allowed under the terms of the finance documents. The other option that has been used (not without some serious scholarly discussion) has been to increase the capital through contribution in kind, where the asset contributed is the debt against the company itself. In this case the debt is extinguished automatically by confusion (since debtor and creditor would become the same person) but it is not a set-off that is taking place, but rather an actual transfer of the debt of all or part of the creditors to the debtor-company. Below we are including some brief analysis on these and thereafter some of the practical differences between one approach and the other.