OREANDA-NEWS. Legal changes that facilitate debt restructuring agreements for personal borrowers in Spain formalise practices that are already common, Fitch Ratings says. The legal changes also introduce debt forgiveness into the Spanish personal insolvency regime. However, we do not think the attitude of mortgage borrowers who are able to pay will materially change, as debt cancellation would only happen after liquidation of assets when the borrower is unable to follow a repayment plan.

We view the changes as neutral for Fitch's Spanish RMBS and covered bond ratings, although we will monitor implementation and borrower behaviour to fully assess their impact. Willingness to pay is a key credit concern for mortgage debt, and we do not think borrowers' behaviour will materially change. The new procedure is explicitly designed for borrowers who don't have the ability to pay. Nor do we think it materially undermines the full recourse recovery framework for Spain's mortgage market. It restricts recourse to the future assets of the borrower but not their present assets.

Royal Decree 1/2015 (RD1/15), enacted on 27 February, will allow individuals with liabilities of up to EUR5m to approach a local notary and initiate restructuring of their financial and commercial debts. The notary will act as a mediator and assess the consolidated inventory of assets and liabilities and the cash flow generation ability of the borrower, and formulate a restructuring agreement for the analysis of creditors.

Restructuring options include: maturity extensions; payment in kind; principal write downs; or debt-to-equity conversions if the debtor owns their own business. These are already used by mortgage lenders in Spain following the housing crash, in preference to lengthy and costly repossessions. In 2013, we estimated that 9% of the Spanish securitised residential loan balance had been modified. Bank of Spain data suggest that the market-wide proportion of refinanced mortgage loans as of June 2014 was 10%. Once restructuring is initiated, most procedures such as litigation and foreclosure are suspended for three months.

Some borrowers, such as those who have already restructured their debt in the past five years or those who have been convicted for crimes against property, order or forgery over the past 10 years, cannot use the new procedure. As debt restructuring plans need the approval of 65%-80% of secured creditors, depending on the measures proposed, it means that in many cases the mortgage lender can approve - or veto - the plan.

We do not think opportunistic applications, where borrowers test how the new procedure is implemented and whether the mediator can accurately assess their ability to pay, will be widespread. Not only do both the notary and creditors have to approve a restructuring plan, but if borrowers are found to have acted in bad faith (for example in cases of documentation fraud, or if previously undisclosed assets are found), debt re-profiling and debt cancellation could be reversed. This can also happen if the economic situation of the borrower improves materially.

If the mediator cannot produce a viable restructuring plan, the case will be transferred to court to start an insolvency proceeding, which means liquidation of assets and potential debt forgiveness. Debt forgiveness is conditional on the repayment of secured loans up to the value of the security, which means secured creditors continue to have a privileged status and their repayment ranks senior and is sourced from the ring-fenced liquidation proceeds of the property. Amounts of the mortgage loan left unpaid after the liquidation of the property are recognised as obligations to ordinary creditors, which Fitch has always ignored for additional recovery expectations.

Fitch will monitor the restructurings implemented under the new scheme and the payment behaviour of mortgage borrowers.