Financing of recent big corporate transactions in Spain

By Higini Marsal, Grup Vilar Riba

Transactions such as CVC and Deoleo and the merger of the IDC Salud (Capio) and Quirón hospital groups have been possible thanks to the application of the covenant lite or covlite formula, a structure which, for its nature and characteristics, tends to be associated with situations in which excess cash flow and a lack of opportunities has forced lenders to relax guarantees in order to ensure profitability and the survival of their business.

The most relevant aspect of this formula is that the creditor’s contractual protection is minimalised in the case of deterioration of either ratios or the debtor’s payment capacity. Guarantees are virtually non-existent. A financial model is built on the acquired business generating sufficient future revenue to meet the ongoing interest payments and the return of the principal loan amount. Additionally, there are two specific design characteristics that make them even more interesting.

First, funds are supplied directly by the end investors while the structuring agent merely performs the initial analysis and acts as mediator. The risk therefore does not appear on their balance sheet. The debt is carved up and divided in accordance with market interests. Second, repayment of the funding before the final due date, normally being between seven and ten years, is never a consideration. The later the deadline, the greater volatility these fixed-rate securities introduce into the portfolios of those subject to periodical mark-to-market valuation of their positions. Greater risk should be translated into a demand for increased profit.

Higini Marsal
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Higini Marsal is Vilar Riba’s Corporate Finance Director. Higini is a graduate in Business Administration from the International University of Catalonia, and he holds an MBA from ESADE and completed the corporate finance post-graduate programme at ESADE School of Law, Spain. He has seven years of previous experience in audit at PricewaterhouseCoopers and five years in transaction services at Deloitte. Before his incorporation to the Vilar Riba Group, he spent five years working for an M&A boutique based in Barcelona, where he led the Food & Beverage sector together with some industrial experts.

pulished: October 2014

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