Debt is not the problem; the inability to manage it is. This guide analyses the debt restructuring mechanisms available to Spanish middle-market companies, from bilateral renegotiation to court-approved restructuring plans.
Debt, in itself, is not a problem. Every company has debt — bank loans, credit lines, supplier terms, tax obligations. Debt is a tool that, when used well, enables growth, investment, and value creation.
The problem arises when debt becomes unmanageable. When maturities pile up, when debt service consumes operating cash, when creditors start losing patience. At that point, the company needs a restructuring to restore its financial viability.
This guide analyses the mechanisms available for restructuring the debt of a Spanish middle-market company — from direct renegotiation with the bank to the formal procedures provided by insolvency legislation.
Before discussing solutions, it is worth understanding how companies end up with unsustainable debt. In our experience with special situations, the patterns repeat:
Investment financed with short-term debt. The business owner finances the purchase of machinery, a warehouse, or an expansion with short-term credit lines instead of long-term loans. While the business generates cash, it works. When cash tightens, the financial structure collapses.
Unprofitable growth. The company grows in revenue but not in margin. Every euro of additional sales consumes more working capital, financed with debt. EBITDA does not grow at the same rate as debt, and the leverage ratio silently deteriorates.
Uncovered external events. The loss of a major client, a rise in raw materials, a pandemic, a regulatory change. The company did not have sufficient financial cushion to absorb the impact and takes on more debt to fill the gap.
Successive refinancings without addressing the root problem. The company refinances every two or three years, buying time but not resolving the underlying causes of deterioration. Each refinancing adds fees, increases the financial cost, and reduces room for manoeuvre until there is none left.
Not all restructurings are alike. The appropriate type depends on the severity of the situation, the nature of the debt, and the viability of the underlying business.
Operational restructuring attacks the root cause of the problem: the company is not generating enough cash. Typical measures include reducing fixed costs (closing unprofitable lines, workforce adjustment, lease renegotiation), improving working capital (reducing inventory, shortening collection periods), optimising the organisational structure, and focusing on the most profitable products and clients.
Operational restructuring is the foundation of any credible plan. If the company cannot demonstrate that it will be able to generate enough cash to service restructured debt, no creditor will accept concessions.
Financial restructuring modifies the terms of the debt to match the company’s actual cash generation capacity. The main tools are:
Standstill (maturity deferral). The amortisation schedule is frozen for an agreed period — typically between 6 and 18 months — to give the company breathing room while the operational plan is implemented.
Principal moratorium. Interest payments continue but principal payments are deferred for one or two years. This is the easiest concession to obtain from banks because it does not involve a haircut and keeps the loan as performing.
Interest rate reduction. The interest rate is renegotiated to reduce debt service. Especially relevant in high-rate environments.
Haircut (quita). Creditors accept a reduction of the principal owed. It is the hardest measure to negotiate because it implies a direct loss for the creditor, but sometimes it is the only way to restore the company’s viability.
Debt-to-equity swap. Creditors convert part of their debt into company shares. This is more common with debt funds or institutional investors than with commercial banks, who generally prefer not to become shareholders.
Fresh capital injection (new money). The entry of new capital — whether from existing shareholders or an external investor — provides immediate liquidity and demonstrates commitment to the viability plan.
In practice, most middle-market restructurings are mixed: they combine operational and financial measures. The viability plan sets out the operational improvements the company will implement, and on that basis, the financial restructuring the company needs to support the transition is negotiated.
Spanish legislation offers several mechanisms for restructuring corporate debt, from purely private to court-supervised.
The simplest and most common mechanism. The company negotiates directly with its financial creditors to modify the terms of the debt. It requires no court intervention, is confidential, and allows tailored solutions.
The limitation is that it requires agreement from all creditors involved. If there is a dissenting creditor blocking the deal, the mechanism stalls.
Regulated in the Consolidated Insolvency Act (TRLC), it allows an agreement reached with a qualified majority of creditors to be extended — approved — to dissenting creditors. It requires agreement from at least 60% or 75% of financial liabilities (depending on the measures to be imposed) and court approval.
This mechanism is especially useful when a minority creditor is blocking a reasonable agreement. Court approval forces them to accept the terms agreed by the majority.
Introduced by the 2022 Insolvency Act reform (transposing the European Restructuring Directive), this is a flexible mechanism that allows the restructuring of not only financial debt but also commercial, tax, and employment-related debt. It requires approval by classes of creditors and court confirmation.
It is the most comprehensive but also the most complex mechanism. It is appropriate for companies with multiple types of creditors and more deteriorated situations.
Originally designed for small businesses and sole traders, but usable by any debtor. The insolvency mediator convenes creditors and proposes an out-of-court agreement that may include deferrals of up to ten years and haircuts of up to 25%.
The last resort. Insolvency proceedings are the court procedure for insolvent companies that have been unable or unwilling to restructure through out-of-court channels. Although the insolvency reform has significantly improved the procedure, insolvency proceedings remain slow, costly, and stigmatising in the Spanish market.
Debt restructuring is, in essence, a negotiation. And like any negotiation, it has its rules.
Information transparency. Creditors need complete and reliable information to make decisions. Presenting a viability plan with unrealistic projections destroys credibility and prolongs the process.
Credible viability plan. It is not enough to ask for more time or lower interest rates. You must demonstrate that the company has a viable business and that the proposed measures will generate the cash needed to service restructured debt.
Equitable treatment. Creditors of the same class must receive comparable treatment. If one bank perceives that another is getting preferential treatment, it will block the deal.
Specialist advice. Debt restructuring has financial, legal, and operational components. Attempting to manage it without specialist advisors is like performing surgery on yourself: possible in theory, disastrous in practice.
Proactive communication. Do not wait for the bank to call. Take the initiative, explain the situation, present the plan, and demonstrate that action is being taken. Banks infinitely prefer a business owner who recognises the problem and acts to one who buries their head in the sand.
In many middle-market restructurings, there comes a point where the current business owner does not have the resources — financial or managerial — to implement the viability plan. That is where the entry of a special situations investor can be transformative.
The investor provides fresh capital to stabilise the treasury and finance the operational plan. They bring credibility with creditors, who see a partner committed to recovery. They bring professional management capability, restructuring experience, and a contact network that can unblock stalled situations.
For the business owner, the entry of an investor means sharing ownership — something that is never easy — but also sharing the burden. And in a distressed situation, sharing the burden can be the difference between saving the company and losing it.
Acting too late. The most common and most costly mistake. Every month that passes without action, cash deteriorates, creditors grow impatient, and options shrink.
Confusing liquidity with viability. A liquidity injection solves the immediate problem but not the cause. If the company does not modify its operating model, it will be back in the same situation in 18 months.
Negotiating without a plan. Approaching creditors asking for help but without a structured plan of what is needed and how it will be repaid. Creditors help those who help themselves.
Ignoring commercial debt. Focusing exclusively on bank debt and forgetting that suppliers, the tax authority, and Social Security are also creditors. A restructuring that only addresses financial debt can be undone if suppliers enforce their claims.
Not adapting the organisational structure. Restructuring the debt but maintaining the same cost structure, the same management team, and the same processes that led to the crisis. The debt adapts to the new scenario, but the company does not.
Paradoxically, a well-executed restructuring can turn a distressed company into one that is stronger than before the crisis. The crisis forces decisions that in good times are postponed: closing unprofitable lines, adjusting the structure, professionalising management, focusing the strategy.
Companies that emerge from a restructuring tend to have a healthier financial structure, leaner costs, a more committed team, and a clearer business model. It is no coincidence that many of the most solid companies in the Spanish business landscape have, at some point in their history, gone through a restructuring process.
At Blue Mountain, our experience in restructurings has taught us that the determining factor is not the severity of the crisis, but the quality of the response. Companies with severely deteriorated situations have recovered with the right plan and the right team. And companies with apparently minor problems have ended up in liquidation through inaction.
If your company faces an unsustainable debt situation, the time to act is now. Not tomorrow, not next month: now.
By Blue Mountain Capital
By Blue Mountain Capital
By Blue Mountain Capital
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