Refinancing Companies in Distress: a Middle-Market Guide

Temporary liquidity strain or structural insolvency: the diagnosis that changes everything

The first decision, and the most expensive one to get wrong, is telling apart a passing cash problem from a deeper deterioration. They look alike from the outside — in both cases there is not enough money to pay — but they call for opposite treatments.

Temporary liquidity strains are timing mismatches between collections and payments that do not compromise the viability of the business: a major customer who pays late, a seasonal spike in inventory, or growth that consumes working capital faster than the company generates it. They are solved with the usual tools: credit lines, commercial discounting, factoring or a renegotiation of supplier terms.

Structural insolvency is another matter. Here the problem is that the business, as it stands, no longer generates enough cash: eroded margins, recurring operating losses, a cost of debt that exceeds the return on assets. In this scenario, deferring maturities without touching the underlying issue — what the Anglo-Saxon jargon calls *extend and pretend* — only destroys value. What is needed is a far-reaching financial restructuring and operational overhaul: haircuts, debt-to-equity conversion or asset sales, thoroughly rethinking the company’s financing options. It should be framed within the options available in a business crisis.

To avoid confusing the two, a static balance-sheet analysis is not enough. You have to look at the break-even point (if the company operates below it, it burns cash month after month), the trend in the EBITDA-to-cash conversion margin and the average maturation period (cash conversion cycle). And, above all, you have to model scenarios: what happens if sales fall 15% or if interest rates rise. A profitable company can die of a poorly diagnosed liquidity problem; and a company with cash may in fact be structurally broken.

The metric that truly matters: CFADS

EBITDA is useful, but it misleads in distress: it is an accounting result, not money in the bank. The benchmark metric for measuring real repayment capacity is Cash Flow Available for Debt Service (CFADS). Its calculation starts from EBITDA and adjusts it down to the cash that is genuinely free:

CFADS = EBITDA ± Δ NWC − maintenance CAPEX − cash taxes

The logic is straightforward: to EBITDA you add or subtract the change in operating working capital (if working capital grows, it absorbs cash and subtracts; if it is optimised, it releases cash and adds), you deduct only the CAPEX that is essential to maintain productive capacity — expansion CAPEX is discretionary in a crisis — and you subtract the taxes actually paid.

That CFADS is compared against debt service (interest plus principal amortisation) through the coverage ratio, the DSCR:

DSCR = CFADS ÷ (interest + principal amortisation)

If the projected DSCR falls below 1, the company cannot pay out of what it generates: it is consuming reserves or taking on new debt to pay the old. Most middle-market lenders require a minimum DSCR of around 1.25x to consider a structure sustainable. Where that threshold is not met, the CFADS model itself indicates how much debt is excess — how much must be converted into equity or written off — and it becomes the objective basis for the entire negotiation. It is the quantitative translation of managing with a focus on generating free cash flow.

The three tests under the TRLC: why acting in time is everything

Spain’s Consolidated Insolvency Act (TRLC), following the reform introduced by Law 16/2022 that transposed the EU Restructuring and Insolvency Directive, defines three stages of insolvency. Knowing which one you are in determines the roadmap and your room to manoeuvre:

• Likelihood of insolvency: it is objectively foreseeable that, without a plan, the company will not be able to meet obligations falling due over the next two years. This is the major innovation of 2022, and it offers the widest negotiating margin with the debtor fully in control.
• Imminent insolvency: it is foreseeable that the company will be unable to meet its due obligations on a regular basis within the next three months.
• Current insolvency: the debtor can no longer meet its due obligations on a regular basis, with a legal duty to file for insolvency within two months.

The difference between acting in the first stage or the last is enormous. Acting early makes it possible to retain control of management, to negotiate without the pressure of enforcement, and to request the temporary suspension of enforcement actions over assets needed for the activity. In addition, formally opening negotiations suspends the duty to file for insolvency and protects directors from claims for aggravating the insolvency. In practice, it is the best way to avoid insolvency proceedings and to limit directors’ liability.

One important technical point: for a plan to be credible before the court and the expert, the viability horizon cannot be short-termist. Spain’s General Accounting Plan sets the short term at twelve months, but doctrine requires a minimum of three years to demonstrate robustly that there is a reasonable prospect of avoiding insolvency.

How banks detect companies at risk

Banks are rarely caught off guard. They combine external sources — rating agencies, credit insurers (often the first to cut cover), payment-default registers such as RAI or ASNEF — with internal early-warning systems that monitor transactional behaviour in real time: falling average balances, revolving lines drawn to the limit, returned direct debits, repeated requests for extensions. Big data and advanced analytics make it possible to detect deterioration months in advance.

With those signals, the bank classifies the risk under IFRS 9 (set out in Annex IX of Bank of Spain Circular 4/2017), and that classification determines the provisions it must set aside. Therein lies the key to its negotiating stance: the worse the category, the more capital the exposure consumes and the greater the bank’s incentive to find an orderly way out.

Intervention: viability plan, IBR and the restructuring expert

Banks almost never pull support all at once: a disorderly liquidation sharply reduces their recovery. Instead, they move the file to their restructuring teams and demand a detailed business plan, validated by an Independent Business Review (IBR) prepared by a reputable external advisor. A good IBR does not stop at historical EBITDA: it analyses the business model, tests the projections and models CFADS under different stress scenarios to determine which debt is genuinely sustainable.

Alongside the IBR comes the figure of the restructuring expert, introduced by the 2022 reform. This is an independent professional, with legal and financial expertise, who assists the debtor and creditors, mediates and drafts the reports required for court sanction (homologation). The essential difference from the insolvency administrator is that the expert does not take over management: directors keep operational control.

The expert is appointed by the court and, as a general rule, this is optional — although it becomes mandatory in specific cases: when requested by the debtor or by creditors representing more than 50% of the affected liabilities, when the suspension of enforcement is sought or — most relevantly — when the aim is to sanction a plan whose effects extend to classes or shareholders that have not voted in favour.

The law also provides a special regime for micro-enterprises (fewer than 10 employees and annual turnover below €700,000 or liabilities below €350,000), with a simplified procedure run through an electronic platform. Within it, public debt owed to the Tax Authority and Social Security receives reinforced treatment, and the debtor must be current on its ongoing obligations to those administrations.

Sustainable versus unsustainable debt: the strategies

Once repayment capacity has been measured with CFADS, financial debt is split into two tranches with different treatments.

Sustainable debt: amend and extend

This is the portion the company can repay out of its recurring cash flows. It is handled with amend-and-extend techniques: extending maturities to fit cash generation, granting principal grace periods, cutting margins and loosening covenants to avoid acceleration over temporary blips. It is usually documented in syndicated agreements. This is the territory of classic debt refinancing, close to managing badly structured debt.

Unsustainable debt: structural measures

• Haircuts: partial forgiveness of claims to restore balance-sheet equilibrium.
• Debt-to-equity swap: creditors convert debt into shares, which usually dilutes or removes the historical shareholders.
• Ring-fencing (asset segregation): isolating the profitable business units in newly incorporated companies (Newcos), transferring to them only the sustainable debt and leaving the toxic liabilities in the original company.
• Sale of business units: divesting entire lines to raise liquidity and cancel debt, often within a distressed M&A

New money: interim and new financing

To sustain the business during the negotiation and to execute the plan, the TRLC specially protects two figures: interim financing (provided during the negotiation, up to court sanction) and new financing (committed in the plan). Both fall within the company financing options available even in situations of stress, and enjoy a double shield: protection against clawback (rescission) actions and a first-ranking payment priority in any subsequent insolvency (50% as a general privilege and 50% as a claim against the estate). This is the incentive the law designs so that fresh money flows in where, otherwise, it would not.

A front that gets overlooked: contracts

Restructuring is not only about financial debt. The plan can act on contracts with reciprocal obligations pending performance (Art. 618 TRLC): onerous leases, supply or distribution contracts that no longer fit the new model. Court sanction alone does not touch them, but the plan may provide for their modification or, failing agreement, their termination in the interest of the restructuring. And here is the financial crux: the indemnity claim arising from that termination may also be affected by the plan, subject to the same haircuts and extensions as the rest. This prevents an indemnity from turning into a preferential liability that chokes cash precisely when the company is trying to recover.

The pre-insolvency legal framework: classes, cramdown and absolute priority

Affected creditors are grouped into classes reflecting a homogeneous legal and economic position, mandatorily separating claims of different ranking (secured, ordinary, subordinated). Correct class formation is a validity requirement: defective class formation can bring down the court sanction. To approve the plan within each class, qualified majorities are required: two-thirds of the class’s liabilities as a general rule and three-quarters for a class of secured claims (Art. 629 TRLC).

The major innovation is the cross-class cramdown: a non-consensual plan can be sanctioned and imposed on dissenting classes if it is approved by a majority of classes — with at least one holding a special privilege or being “in the money”. Over it operates the absolute priority rule (Art. 655.2.4º TRLC): a dissenting class cannot receive less than the full amount of its claim if a junior class or the shareholders keep any value. The *gifting* doctrine softens this rigidity, allowing senior creditors to voluntarily cede part of their own value to junior classes or shareholders in order to ease the transition and avoid litigation.

The whole system therefore hinges on the valuation of the company as a going concern: it is what determines which classes are “in the money” and which are “out of the money”, and therefore who has standing to object and who does not. That is why a rigorous valuation is the real battleground of any restructuring.

The case law that has changed the board (2023-2026)

In barely three years, the courts have turned the restructuring plan into a real tool and, above all, have shown that creditors can take control of a viable company without its shareholders’ consent. Three cases mark the trajectory:

• Celsa (2023). Commercial Court No. 2 of Barcelona sanctioned the first large-scale hostile plan: the creditor funds capitalised their debt, took the equity, and the founding family was displaced. The court established the doctrine that, in insolvency, economic risk has shifted from shareholders to creditors, and shareholders lose their veto right to block a viable plan. The Barcelona Court of Appeal confirmed this criterion shortly afterwards in the J. Vilaseca case (2024).
• Naviera Armas (2025). The Las Palmas Court of Appeal validated the first *gifting* transaction in Spain: the bondholders ceded 6% of the equity to the founding family. The court accepted that it did not breach absolute priority because it was a voluntary transfer of value belonging to a class that was “in the money”, after establishing that the objecting creditors were “out of the money”.
• Rator (2025). Commercial Court No. 2 of Murcia sanctioned the first hostile plan backed by the banks together with an industrial investor, who took control without the shareholders’ consent. Banks no longer merely endure restructurings: they promote them.

But cramdown is not unlimited. In Das Photonics (2024), the Valencia Court of Appeal upheld for the first time a challenge to a non-consensual plan and declared it ineffective for defective class formation. The message for the middle market is twofold: the tool is powerful, but a poorly built class architecture makes it collapse.

The participating-loans issue: mind the forum

A live point with very practical consequences is the ranking of participating loans (préstamos participativos) — common in intra-group and shareholder financing. The Madrid Court of Appeal (Judgment 265/2025, of 9 September, Asistencias Carter case) holds that they are ordinary claims unless there is an express subordination agreement.

The Barcelona Court of Appeal and Commercial Court No. 1 of A Coruña (Order 474/2025, Serviocio case) hold the opposite: that subordination is inherent to their nature. The divergence awaits unification by the Supreme Court and, in the meantime, it makes it essential to analyse the competent forum carefully and to draft contracts with explicit ranking clauses. For a family business with shareholder loans on its balance sheet, this detail can decide who calls the shots in the restructuring.

What the Spanish market numbers say

The 2025 snapshot confirms two things. First: corporate insolvency proceedings reached their highest figure of the last decade, with 6,637 cases, 6% more than the previous year. Second, and less intuitive: the restructuring plan, the flagship tool of the reform, still has not taken off in volume — 276 plans in 2025, 16% fewer than in 2024, just a fraction of total proceedings. The takeaway for the middle-market owner is clear: the restructuring plan concentrates the largest, most complex cases and has reshaped bargaining power, but it remains a specialists’ tool that requires top-tier advice to be used well.

How Maraz Corporate Finance helps in a refinancing process

The new legal framework penalises inaction and rewards anticipation. For a middle-market company, delaying the response can cost control of ownership or lead to liquidation. At Maraz Corporate Finance we provide early financial diagnosis (modelling of CFADS and of the sustainable/unsustainable tranche), robust viability plans that withstand the scrutiny of independent experts and the courts, class-structure design, and negotiation with banking pools and investors.

When the company needs to strengthen its finance function during the process, we cover it with a fractional CFO. If your company is going through a complex situation and needs to refinance or restructure its debt, assess financing alternatives or explore the full financing service, get in touch with our team.

Javier de Rojas Roca de Togores

Partner – Maraz Corporate Finance

FAQs on refinancing companies in distress

What is the difference between a liquidity strain and structural insolvency?

A liquidity strain is a temporary mismatch between collections and payments that does not compromise the viability of the business and is solved with short-term financing. Structural insolvency is a deep deterioration in the ability to generate cash: recurring losses, eroded margins, a cost of debt higher than the return on assets. The first is fixed by deferring; the second requires fundamental measures such as haircuts or capitalisation. Confusing them is the most expensive diagnostic error.

What is CFADS and why is it the key metric?

CFADS (Cash Flow Available for Debt Service) measures the cash genuinely available to service debt: EBITDA ± change in working capital − maintenance CAPEX − cash taxes. If projected CFADS is lower than debt service (interest plus principal amortisation), the financial structure is unsustainable and requires immediate intervention. It reflects real cash, not accounting profit.

What is cramdown, or cross-class cramdown?

It is the mechanism that allows a restructuring plan to be sanctioned by the court and imposed on classes of creditors that vote against it, provided it is approved by a majority of classes (with at least one holding a special privilege or being “in the money”) and the absolute priority rule is respected. It prevents a minority from blocking the rescue of a viable company, as the Celsa and Rator cases showed.

Can a company lose control of ownership in a restructuring?

Yes. If the going-concern valuation of the company is lower than its debt, shareholders are “out of the money” and can be displaced through debt capitalisation, even against their will, via cramdown. That is what happened in Celsa, where creditors took the equity and the founding family was removed. This is why acting early — while you still have bargaining power — is decisive in protecting ownership.

What protection does a provider of new money to a company in crisis have?

The TRLC specially protects interim financing (provided during the negotiation) and new financing (committed in the plan). Both are shielded against rescission actions if liquidation follows, and enjoy a first-ranking payment priority: 50% as a claim with general privilege and 50% as a claim against the estate. The aim is to incentivise the entry of fresh money that would otherwise not arrive.