Corporate Debt Refinancing as a strategic decision, not just a financial one

Refinancing a company is no longer a simple matter of extending maturities and renegotiating interest rates with the banking pool. In today's environment —with more sophisticated debt instruments, more demanding lenders and a pre-insolvency framework deeply reformed by Spain's Law 16/2022— refinancing is a strategic transaction that shapes the continuity of the business, the relationship with creditors and the very position of the shareholders.

A well-executed refinancing buys time, reorganises liabilities and restores viability to a sound project going through a difficult period. A poorly designed one merely postpones the problem, makes the debt more expensive and erodes lenders' confidence at the very moment it is most needed. The decisive factor is almost always timing: companies that act early —while they still generate cash and retain negotiating room— secure materially better terms than those that arrive at the table with their backs against the wall.

When should a company refinance?

Refinancing makes sense when the current debt structure is no longer aligned with the business's real cash-generating capacity. It is worth distinguishing the scenarios, because the right answer differs in each case.

The first, and most common, is liquidity tension caused by a maturity mismatch: a profitable business that has financed long-term investments with short-term debt, or whose working capital has surged due to rapid growth. Converting short-term obligations into long-term debt restores breathing room in the treasury without affecting the viability of the business.

The second is the opportunity to improve terms: when market rates ease or the company has improved its risk profile, refinancing makes it possible to reduce financial costs, release collateral or remove overly restrictive inherited covenants.

The third, more delicate one, is insolvency prevention. Here refinancing stops being routine management and becomes a rescue tool, usually through the pre-insolvency mechanisms the law provides. The practical rule is clear: the earlier the mismatch is detected, the wider the range of solutions and the lower the cost of each one.

The new pre-insolvency framework: restructuring plans (Law 16/2022)

No refinancing today is designed in isolation from the prevailing insolvency framework. Law 16/2022, which transposed EU Directive 2019/1023, replaced the former court-sanctioned refinancing agreements and out-of-court payment arrangements with a single, more flexible figure with far greater cram-down power: the restructuring plan.

Its key innovation is that it can be triggered early, in the face of probable insolvency —when the debtor foresees being unable to meet obligations falling due within the next two years— which rewards proactivity. It is worth being clear about the three situations the law defines:

The three states of insolvency

  • Probable insolvency (2-year horizon): the debtor is entitled to enter the pre-insolvency stage and propose a plan. There is no obligation to file for insolvency, and creditors cannot petition for involuntary insolvency.
  • Imminent insolvency (3 months): the debtor may file for voluntary insolvency or enter the pre-insolvency stage; creditors are still not entitled to petition for involuntary insolvency.
  • Actual insolvency (current default): the debtor is obliged to file for insolvency within the following two months, and creditors are fully entitled to petition for involuntary insolvency.

Classes of creditors and cross-class cram-down

One of the most innovative aspects is the classification of the body of creditors into classes, grouped according to the common interest derived from their ranking in a hypothetical insolvency. Within the same rank, the law allows separate classes where there are economic reasons to justify it (for example, distinguishing financial creditors, strategic suppliers and trade creditors).

If the plan obtains the required majorities, its effects can be extended to dissenting classes through court confirmation, triggering the cross-class cram-down. For the first time in Spanish commercial law, creditors can impose a restructuring on shareholders, which may involve converting debt into equity (debt-to-equity swap), diluting existing stakes or even selling the productive unit.

Safeguards and public-law claims

This power comes with significant safeguards. Crammed-down creditors and shareholders retain the right to challenge the court confirmation, arguing that the valuation of the company is not realistic or that the plan fails the “best-interest-of-creditors test”, which guarantees that no affected party receives worse treatment than in an ordinary liquidation. Secured claims form a separate class with the right to enforce the charged asset in certain cases.

Public-law claims (the tax authority and Social Security) deserve special mention: they cannot be subject to write-downs or forgiveness, deferrals are capped at 18 months, and to affect them the company must prove it is current on its tax and Social Security obligations through the relevant certificates from the AEAT and the TGSS.

Key elements of a refinancing process

Before negotiating, an honest diagnosis of three dimensions is essential —they determine what can be asked for and what can be offered.

The first is cash-generating capacity: the company must realistically assess whether it can service the debt under the structure it intends to negotiate. Refinancing rests on cash, not on accounting profits.

The second is the level and structure of debt: how debt is split between short and long term, what portion is secured, what interest burden it carries and which maturities are concentrated in the coming quarters.

The third is the relationship between debt and cash, measured with ratios such as Net Financial Debt to EBITDA and Free Cash Flow for Debt Service (FCSD), which are also the language creditors will think in.

It is worth internalising a principle that underpins the whole process: in refinancings, “Cash is King”. Cash-generating capacity is the governing variable and is a direct consequence of the evolution of the income statement and the balance sheet.

The stages of a well-structured refinancing

1. Viability diagnosis and financial modelling

The first step is to analyse the results, balance sheets and cash flows of the last three or four years to answer specific questions: what happened? is it a results or a balance-sheet problem? short term, long term or both? is there a solution? You need to understand the business drivers, identify the origin of the problem (falling revenue, margin erosion, financial costs or a debt imbalance) and its impact on cash.

On that diagnosis a 12-36 month financial model is built, projecting the income statement, balance sheet and treasury under realistic and stressed scenarios, identifying the levers that can be pulled and estimating the ranges of sustainable and unsustainable debt and the working-capital and new-money needs. This stage links to company valuation and the business plan, which provide the quantitative basis for the whole operation.

2. Presentation to the banking pool and signing of the standstill

Once the information is consolidated, the creditor pool is convened to present the situation transparently and request a standstill agreement: lenders temporarily freeze principal repayments, certain interest and the exercise of enforcement actions for a defined period. At this stage it is often advisable to notify the commercial court of the start of pre-insolvency negotiations in order to halt enforcement over assets needed for the continuity of the business.

3. The debt map and the structure proposal (term sheet)

It is essential to request the complete debt map, because knowing each creditor's position makes it possible to assess their motivations. This map must distinguish short- and long-term debt, on- and off-balance-sheet risk (guarantees, reverse factoring), overall exposure per institution, privileged versus ordinary debt, the quality of collateral and the maturity calendar.

With the breathing room provided by the standstill, the debtor and its advisors design the proposal and summarise it in a term sheet: a preliminary, non-binding document setting out the key terms (maturity extensions, grace periods, rate reductions, write-downs, dations in payment, working-capital consolidation or new-money injection).

4. The Independent Business Review (IBR)

In syndicated transactions or those with significant debt, lenders often condition their approval on an independent review IBR of the business plan. The IBR is not a standard audit but a forward-looking viability analysis that acts as a bridge of trust between management and risk committees. A rigorous IBR addresses the validation of cash drivers, quality of earnings, working-capital and cash-conversion-cycle analysis, and scenario sensitivity to define covenants and liquidity buffers. This is precisely the kind of work delivered by Maraz's due diligence and financial reports and forensic services.

5. Drafting the contracts and closing

Once the term sheet is agreed and viability validated, the refinancing contracts, framework agreements and new collateral are drafted and signed. It is worth recalling that many of these transactions enjoy exemption from Transfer Tax and Stamp Duty (ITP and AJD).

The cash flow plan: the tool that underpins the negotiation

The cash flow plan is probably the most important and the most underrated tool. It makes it possible to anticipate cash flows and, above all, to estimate whether the company has enough time to operate as a going concern during the period —often several months— that the negotiation takes.

Two complementary methods coexist. The direct method projects expected receipts and payments over a 13-to-17-week horizon and is updated weekly, allowing granular short-term control and the careful pacing of payments during the negotiation. The indirect method starts from the accounting result, adjusts non-monetary items and projects cash flow over twelve months and two further years, demonstrating long-term repayment capacity. Combining the two is what allows deficits to be detected in advance and credible strategies to be designed.

Financial covenants: the rules of the game after signing

The financial covenants are the conditions creditors impose to ensure financial discipline throughout the life of the debt. Negotiating them well is as important as negotiating the rate or the maturity: an overly demanding covenant can trigger a technical default even when the business is performing reasonably well.

The most common are the Net Financial Debt / EBITDA ratio, which sets a leverage ceiling; interest coverage, which checks that EBITDA covers financial costs; capex limits, which prevent cash being drained into fixed assets before creditors are served; and dividend restrictions. Careful management —and the negotiation of realistic headroom and cure rights, or equity cure— strengthens creditors' confidence.

Strategies and sources of financing: from the bank to direct lending

There is no single solution. Debt re-profiling (renegotiating maturities, rates and grace periods) is usually the core of the agreement. Access to new credit lines provides working capital, ideally with the appeal of new money, which in pre-insolvency frameworks can enjoy privileged protection. A capital injection —from shareholders or strategic investors— strengthens solvency and sends creditors a powerful signal of shareholder commitment.

Increasingly, the answer lies in diversifying the financial pool beyond traditional banking. Direct lending funds (private debt) have gained ground in the Spanish middle market: they are not a cheap option —they carry a premium for risk and illiquidity— but they offer structural flexibility and speed of execution. They allow longer maturities (5-7 years), bullet structures (principal repaid at maturity), lower demands for real collateral and greater capacity to negotiate covenant waivers, all without diluting shareholders. Combining structured bank debt with private-debt tranches eases amortisation pressure and facilitates complex restructuring plans. You can explore these alternatives on our financing and debt restructuring and refinancing pages.

Critical mistakes that doom a refinancing to failure

Experience in special situations shows that many failures are not due to a lack of financing, but to methodological mistakes in the preliminary stages.

The first is refinancing the balance sheet without restructuring the operation. Debt is usually not the problem but the symptom. Postponing maturities without tackling eroded margins, bloated structural costs or obsolete product lines leads to a second default. Any sustainable refinancing requires an operational turnaround plan.

The second is underestimating Working Capital Requirements. Projecting sales growth without accounting for the additional cash needed to finance inventories and receivables leaves the company short of operating liquidity prematurely, breaching the new repayment plan.

The third is technical errors in valuation and the cost of capital (WACC): using book values instead of market values, ignoring the beta of debt when levering the equity beta, or using the nominal tax rate instead of the effective one. These inconsistencies undermine the credibility —and the legal defence— of the plan, especially when the aim is to cram down dissenting creditors through court confirmation.

Conclusion

Refinancing is a key tool for restoring a company's financial stability, but only when approached with method and anticipation. A well-structured process starts from an honest diagnosis, relies on a solid cash flow plan that provides time and credibility, rigorously analyses the FCSD and debt sustainability, negotiates from a detailed knowledge of each creditor's position and makes intelligent use of the Law 16/2022 framework and private-debt alternatives. Careful covenant management and technical transparency —a robust business plan backed by a professional IBR— are the pillars that make a truly sustainable debt structure possible.

Debt restructuring is not synonymous with failure: it is a responsible strategic management tool to clean up the balance sheet, optimise the cost of capital and return the company to the path of profitability.

If you need to refinance your company's debt, at Maraz Corporate Finance you will find the ideal partner to achieve your objectives. Discover also our financial advisory and fractional CFO services to support you before, during and after the process.

FAQs about corporate debt refinancing

What is corporate debt refinancing?

Corporate debt refinancing is the process of modifying the terms of a company's existing debt —maturities, interest rates, collateral or repayment schedule— or replacing it with new financing, in order to align debt service with the business's real cash-generating capacity. Its goal is to restore financial stability, improve liquidity and avoid insolvency situations.

When is the best time to refinance debt?

The best time to refinance is early, before missing any payment, while the company still generates cash and retains negotiating room. As a practical benchmark, refinancing should be considered when the Net Financial Debt to EBITDA ratio exceeds three times and projections point to medium-term liquidity tensions. Acting early widens the range of solutions and reduces the cost of each one.

What is the difference between refinancing and debt restructuring?

Refinancing focuses on renegotiating the financial terms of the debt (maturities, rates, grace periods) to ease the burden, whereas restructuring is a broader concept that may include write-downs, debt-to-equity conversion, asset sales or a court-confirmed restructuring plan under Law 16/2022. In practice, a comprehensive restructuring usually combines financial refinancing with changes to the operation of the business.

What is a restructuring plan under Spain's Law 16/2022?

A restructuring plan is the pre-insolvency instrument introduced by Law 16/2022 that allows a company to modify its assets, liabilities or equity in order to avoid or overcome insolvency. It can be triggered even in the face of probable insolvency (a two-year horizon), groups creditors into classes and, if it obtains the required majorities, allows dissenting creditors —and even shareholders— to be crammed down through court confirmation.

What documentation does a company need to refinance its debt?

The basic file includes the annual accounts and corporate income tax returns for recent years, the current-year financial statements, a detailed and up-to-date banking pool, certificates of being current with the tax authority and Social Security, financial projections and the business plan, and corporate documentation (incorporation deeds, powers of attorney, beneficial ownership). A complete and consistent file is decisive for credibility with creditors.

 

Javier de Rojas Roca de Togores

Partner - Maraz Corporate Finance