On May 24, Spain's new law (Law) on public works concession contracts was published in the Spanish Official Gazette. The Law will enter into force next 24 August, and will be applicable to public works concession contracts advertised in the Official Gazette after that date.

The importance of the Law on Private Finance Initiative (PFI) projects in Spain is twofold ? clarification of existing legal grey areas on concessions, and stronger guarantees and rights for project lenders.

In terms of concessions, the new Law clarifies a number of key points critically shaping the evaluation of a project's risks. For example, under the legal rules still in force it is not always clear whether the transfer of the work to the contracting authority takes place at the end of the construction stage or at the completion of the entire concession project; i.e. whether public works concession contracts are based on a build-operate-transfer (BOT) or a build-transfer-operate (BTO) scheme. In this regard, the new Law favours the BOT scheme.

Another grey area newly clarified is in cases in which the concessionaire is entitled to ask for measures intended to re-establish a financially balanced budget for the concession (e.g. by requesting an extension of the concession period, an increase in the tolls and fees received by the concession holder, etc.). The new Law sets forth a limited number of cases in which the contracting authority must take measures to re-establish such a balance, in favour of either the concessionaire or of the contracting authority itself.

On the lending side the new Law provides bankers with a number of rights and guarantees to make the private financing of the construction and management of public works more attractive. One of the four principles on which the new Law is based is that of ?diversification of financing sources?. This is crucial to the development of public-private partnership. The Spanish legislator thereby recognises that the vast majority of public works to be undertaken require bank financing, be it through lending facilities or, more significantly, through securitization techniques to tap the capital markets.

Significantly, this new Law is only a piece, although perhaps the most important one, of a wave of legislative reforms now in motion, which should encourage public-private partnerships across a range of sectors. In the last few months, the Council of Ministers has sent to Parliament a draft of a new Railway Act, a draft of a new Law regulating goods pertaining to the public authorities (which should have an important influence on real-estate projects), and a draft of a new Ports Act.

The role of bank financing for new public works

Whilst the availability of concessions as security for lenders is not something revolutionary (it is commonly used for certain other types of concessions), the role and extent of the rights of banks in financing the construction and operation of public works is perhaps substantially more significant as provided in the new Law. These rights arguably approach as closely as possible the rights typically conferred to lenders under direct agreements in the context of non-recourse financing.

In recognising the significance of the lenders of a concession-holder, the Law contemplates as a general principle that if the concession is terminated and the concession-holder is due any termination payment by the Administration (for instance, because of nationalisation), the banks shall be paid first, and then, only if resources remain, will the concession-holder and other creditors be paid. Note that no security right is needed to ensure the bank's priority.

The new Law offers detailed regulation on the issuance of bonds by concession-holders, arguably with a view to extend the use of this financing instrument to new projects. Two features are worth noting:

? Bond issues may be used provided that their tenure does not extend beyond the duration of the concession. The authority that issued the concession must be notified of each bond issue within a month from the issue date.

? The size of the bond issue will not be constrained by the general limits applicable to ordinary corporations (generally, in the case of unsecured bonds, these are limited to the equivalent of capital plus reserves). This may prove to be a very useful tool for structuring non-recourse financing for newly set-up Special Purpose Vehicles (SPVs)

Otherwise, the Law seeks to protect the banks' position in the event of termination or cancellation of the concession, particularly on the assumption that the banks will have mortgaged the public works concession exclusively for the purpose of financing such works. Mortgages of public works concessions to secure third parties' obligations will not be permitted. On that basis, the Law gives the mortgagee banks the following rights:

? A right to protect their security interest: The banks may petition the Administration to impose restrictions on the concession-holder if the banks believe that the value of the concession has ?seriously deteriorated? due to the concession-holder's actions. Note that it is not necessary for the banks to have announced a default. A similar provision, although far more restrictive, applies to mortgages generally.

? Step-in rights: If the mortgaged concession were to be terminated due to the concession-holder's breach, the Administration must listen to the banks' views before terminating the concession and, if the Administration believes it to be compatible with the purpose of the concession, let the banks step into the concession-holders' position. No indication is given as to whether the banks themselves will have to step in or if they could nominate an SPV to step in.

? To take control of cash-flows: Provided it is so agreed in the mortgage deed, if the secured obligations have not been totally or partially discharged, the banks may ask the Administration to force the concession-holder to set aside certain cash-flows to attend the servicing of the debt or even to have payments due by the Administration to the concession-holder made directly to the banks. Furthermore, the banks may even ask for the control of revenue-generating commercial assets that are part of the concession (e.g. shops in motorway areas).

Special provisions are further introduced in connection with foreclosure proceedings of mortgages of public works concessions. Again, the banks have an important role to play if no bidder is awarded the concession after a public tender. They may apply for the concession to be awarded to them or even suggest a new concession-holder (thus reinforcing their step-in rights) or finally agree to the termination of the concession upon the payment to the banks of any amounts that would then be owed to the concession-holder.

Finally, new provisions are introduced that may result in ?participative loans? becoming even more popular in the non-recourse financing of public works. Participative loans are a type of hybrid financial instrument, which is deemed equity for borrowers for certain purposes and pure debt for lenders. Although deeply subordinated and with restrictions applicable on voluntary prepayments, participative loans are a recurrent feature in practically all project finance deals in Spain.

The Law provides that participative loans are permitted and that such loans shall provide for the lender's participation in the concession-holder's income. Contrary to the general rule, voluntary prepayments will be permitted, thus relaxing one of the existing restrictions. Even the public Administrations are allowed to make this type of loan to concession-holders, but in such cases voluntary prepayments by borrowers must be made on a Net Present Value (NPV) basis, taking into account future profits expected pursuant to the financial model reviewed and approved by the relevant Administration.

The use of securitization techniques

The new Law presumes that concession-holders are likely to use securitization techniques and sets out specific provisions to facilitate that process, albeit keeping it under a degree of control.

Concession-holders' future tariff income, commercial rents (e.g. paid by shops in motorway areas) and even a public administration's commitments to make capital contributions to a concession-holder, may be securitized. An authorisation is required from the Administration that awarded the concession, although the Law allows the Administration to refuse this authorisation if it is not in the public interest. If the authorisation is not issued within a month of the petition it can be deemed to have been refused.

Other formalities are essentially limited to documenting the assignment of future credits in a notarized deed (?escritura pública?) and notifying the relevant public Administration that undertook to make capital contributions. Only if the securities are to be ultimately placed among non-institutional or non-professional investors must the issuance of securities be stated in the concession's recording at the Land Registry. Finally, concession-holders that have securitized their credits must include the features of the relevant securities issues in their annual report.

Securities or participations backed by such credit rights may be placed in special securitization funds (?fondos de titulización hipotecaria?), thus following the regulated securitization structures, but may also be the subject of tailor-made securitizations through the use of other vehicles.

Holders of securitized issues are afforded protection against the issuer's bankruptcy and treated like mortgage creditors. The similarity with mortgage creditors is expressly reinforced in that, provided that the holders of securitized issues have appointed a sole representative (who may be an institution), such holders are given the same rights as mortgage creditors under this Law.

To the extent that the holders of securitized issues have not been paid in full, if the relevant concession is terminated, the Law aims to protect them.

First, in the event the concession were to be cancelled (other than due to the concession-holder's definitive insolvency, but still applicable upon receivership or ?suspensión de pagos?), the Law allows the public Administration to take over (?secuestrar?) the concession for the purpose of repaying the amounts owed to these holders.

Second, if the relevant concession is indeed to be terminated, the public Administration must negotiate with the holders of securitized issues' representative the amount of outstanding debt and the terms for the repayment of this debt. If the concession-holder is responsible for the termination of the concession, the public Administration may discharge such indebtedness by making available to the holders of securitized issues the lower of the following amounts: the compensation payable by law to the concession-holder, or the difference between the face value of the securities and the amounts received by the holders as principal and interest. If the concession is terminated without the concession-holder's fault and no agreement is reached, the public Administration may discharge its obligations by paying the difference between the face value and the amounts already collected by the holders of the securities.

Third, recognising that securitization structures usually have longer tenures, the Law expressly permits the term of a concession to be extended by 20 years (10 years for concessions to operate) if necessary in order to repay the holder of securitized issues that remain outstanding.

The new Law goes a long way to increasing legal certainty and providing important rights and guarantees for the lenders in public works concession projects, opening attractive PFI opportunities in Spain. However, the practical impact of the new Act will still significantly depend on the attitude of the contracting public authorities towards its application.