Refinance or go into insolvency? It is the most critical decision a distressed company faces. We analyse the objective criteria for choosing the right path and the consequences of getting it wrong.
At the most difficult moment in a company’s life — when debt has become unsustainable and the status quo is no longer viable — there is a fork in the road. To the left, refinancing: negotiate with creditors, restructure debt, retain control. To the right, insolvency proceedings: the court procedure for managing insolvency.
Choosing poorly at this fork has severe consequences. Refinancing when insolvency was inevitable only delays the inevitable and consumes valuable resources. Filing for insolvency when refinancing was possible destroys value unnecessarily and generates a stigma that could have been avoided.
The choice between refinancing and insolvency is not a matter of personal preference. It is a technical decision that must be based on the objective analysis of four variables.
The fundamental question: is there a viable business beneath the financial crisis? If the company generates — or can generate with reasonable adjustments — sufficient EBITDA to service restructured debt, refinancing makes sense. If the business is structurally deteriorated and cannot generate enough cash under any realistic scenario, insolvency is more likely to be the appropriate path.
The distinction is crucial. Many middle-market companies in Spain have financial problems but viable businesses. Debt accumulated from a failed investment, the loss of a key client, or an external event. The underlying business — its clients, its know-how, its competitive position — remains valuable. In these cases, refinancing allows that value to be preserved.
Refinancing requires creditor agreement. If creditors are few, professional, and willing to negotiate, refinancing is viable. If they are numerous, heterogeneous, or antagonistic, the process becomes complicated.
Court-approved refinancing agreements can overcome minority creditor blockages (with 60% or 75% support, dissenting creditors can be crammed down), but they require a critical mass of supportive creditors. If more than 40% of creditors are actively opposed, the insolvency route may be more efficient.
Refinancing takes time — typically between 3 and 9 months — and during that time the company needs to keep operating. If the company does not have sufficient liquidity to sustain operations during negotiation, insolvency may be unavoidable simply because there is not enough time to negotiate.
Pre-insolvency (the Article 583 TRLC notification) can provide temporary oxygen by blocking enforcement, but it does not generate new liquidity. If the company needs urgent fresh capital, the entry of a special situations investor may be the missing piece to make refinancing viable.
Refinancing works better with financial debt (banks, debt funds) than with commercial debt (suppliers) or public debt (tax authority, Social Security). Financial creditors are accustomed to negotiating restructurings; suppliers, less so. And the public administration has more limited negotiating margins.
If the problem is predominantly financial debt, bilateral refinancing or court approval usually works. If commercial and public debt are significant, a restructuring plan (which can include all classes of creditors) or insolvency may be more appropriate.
Confidentiality. Refinancing is a private process. It is not published in any register, does not generate news, does not alert clients or suppliers. In sectors where reputation is a critical asset, this is decisive.
Control. The business owner retains management control. There is no insolvency administrator, no court intervention in operational decisions. The owner negotiates as a party, not as the subject of a procedure.
Speed. A well-planned refinancing can be completed in 3-6 months. Insolvency proceedings last years.
Cost. No significant court costs, no insolvency administrator (whose fees can be substantial), no indirect costs that insolvency generates (loss of suppliers, commercial image deterioration).
Value preservation. The company continues operating normally during negotiations. It does not lose suppliers who stop delivering for fear of non-payment, nor clients who seek alternatives for fear the company will disappear.
Requires agreement. Refinancing needs the consent — voluntary or forced via court approval — of creditors. If creditors are unwilling to negotiate, refinancing is not possible.
Limited scope. Traditional refinancing primarily affects financial debt. If the problem includes significant commercial or public debt, it may not be sufficient.
Risk of failure. A failed refinancing leaves the company in a worse position than before: it has consumed time, money, and credibility. And it often ends in insolvency anyway.
Universality. Insolvency affects all creditors, of all classes. There is no need to negotiate individually with each one.
Court protection. The stay on enforcement is automatic and absolute. No creditor can enforce their guarantees during proceedings (with some exceptions for secured creditors).
Powerful tools. The insolvency judge can authorise collective redundancies, terminate onerous contracts, void transactions detrimental to the estate, and approve productive unit sales with limited employment succession.
Clean slate. If the company exits insolvency via a creditors’ agreement, it does so with a restructured financial position. Debt has been judicially restructured and dissenting creditors are bound.
Stigma. In Spain, insolvency remains synonymous with failure. Suppliers who stop delivering, clients who seek alternatives, employees who look for other jobs. The stigma destroys business value.
Duration. Years. Fast insolvency proceedings are the exception, not the norm.
Cost. Insolvency administrator, lawyers, court agents, experts. The costs of insolvency are paid from the company’s resources, reducing what is available for creditors.
Loss of control. In the best case (voluntary insolvency), the business owner retains management under supervision. In the worst case (involuntary insolvency or suspension of powers), control is lost entirely.
The transposition of the European Restructuring Directive has significantly changed the landscape. The main changes:
Restructuring plans. A new, flexible, and powerful mechanism that allows all types of debt — financial, commercial, public — to be restructured with approval by classes of creditors and court confirmation. It is a middle ground between refinancing and insolvency.
Strengthened protection during negotiations. The debtor can request the suspension of individual enforcement actions and of the obligation to file for insolvency while negotiating a restructuring plan.
Cross-class cram-down. The court can confirm a restructuring plan even if a class of creditors votes against it, provided certain fairness requirements are met.
These changes significantly expand the space between pure refinancing and insolvency. Many situations that previously could only be resolved through insolvency can now be addressed through a pre-insolvency restructuring plan.
In our experience managing restructurings in the Spanish middle market, the decision is usually made in a tense meeting between the business owner, their legal advisors, their financial advisors, and, frequently, a potential investor. Each brings a different perspective.
The business owner wants to avoid insolvency at all costs — because of the stigma, the loss of control, the fear. The legal advisors evaluate personal liability risks. The financial advisors analyse the numbers. And the investor assesses whether there is a viable business that deserves their capital.
The right answer is not always the one the business owner wants to hear. Sometimes, refinancing is possible and desirable. Other times, insolvency is unavoidable and delaying it only worsens the damage. And on occasion, the entry of an investor is what tips the balance towards refinancing.
What never works is inaction. Waiting for the situation to resolve itself, postponing the decision, seeking a cosmetic refinancing that does not address the underlying problem. Every week of inaction reduces options and worsens the final outcome.
If your company faces this fork in the road, seek specialist advice. And seek it early — not when cash has run out and options have narrowed to one. Contact our team.
By Blue Mountain Capital
By Dirk Manuel Martens Jiménez
By Dirk Manuel Martens Jiménez
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