The Participating Loan.
An interesting solution for restoring the equity of a subsidiary company is found in the so-called “préstamos participativos,” which can be translated as “participating loans” or “participative loans.” These loans are treated as equity to determine if a company is in a dissolution situation due to its net equity being less than half of its share capital due to losses on the balance sheet.
The main characteristics of “participating loans” are as follows:
-
There is a variable interest rate linked to an indicator of the company’s economic situation, whether it is net profit, operating margin, or any other criterion freely agreed upon between the contracting parties. It is also possible to agree on a fixed interest rate, independent of the company’s performance.
-
There is no freedom for early repayment. In fact, the borrower may only repay the loan early to the lender if such repayment is offset by an increase in the equity (through a capital increase or a contribution to equity) of an amount equal to or equivalent to the early repayment.
-
Repayment is subordinated to the satisfaction of other creditors. Thus, in the event of liquidation, it will only be repaid after the full satisfaction of all other creditors, both unsecured and privileged.
If these conditions are met, this special financing will be integrated into the equity to determine whether the company is in a dissolution situation.
