European Government Support Schemes: Current State of Play
The Situation: The economic crisis caused by COVID-19 has triggered an unprecedented response from European governments to support their economies with government-backed financial support.
The Development: As companies affected by COVID-19 in Europe's most important jurisdictions continue to seek out and obtain support to assist with ongoing liquidity needs, European governments have made some key changes to existing schemes and their related guidance.
Looking Ahead: Corporates across Europe should continue to assess whether the European schemes can help them with their ongoing liquidity needs.
Companies across Europe continue to seek out and obtain government-backed financial support to assist with ongoing liquidity needs in the wake of the COVID-19 pandemic. This Commentary observes the relative impact of these schemes introduced across Belgium, France, Germany, Italy, the Netherlands, Spain and the United Kingdom and highlights key developments since our original White Paper, "Financial Government Support Measures Related to COVID-19 for European Corporates," was published.
Given the prolongation and severity of the COVID-19 crisis, European governments have moved quickly to extend the availability of schemes beyond the originally contemplated closing dates.
In the United Kingdom, the COVID-19 Corporate Financing Facility ("CCFF"), a commercial paper purchase program available to rated entities, has been extended for new applications until 31 December 2020 and will close for new purchases of commercial paper on 23 March 2021. Similarly, the deadline for new loan applications under the United Kingdom's Coronavirus Large Business Interruption Loan Scheme ("CLBILS") has also been extended until 31 January 2021.
Elsewhere in Europe, some governments have taken steps to push out application deadlines even further to 30 June 2021. The French and Dutch governments have recently announced their intention to extend their loan guarantee schemes (the PGE Scheme and the GO Scheme, respectively) to the half-year end while it is understood that the German government is in the process of requesting approval from the EU Commission for a similar extension. The German recapitalization program, which was due to close in June 2021, is currently subject to a proposed extension through the end of Q3 2021.
The deadlines for the Belgian, Italian and Spanish guarantee schemes remain at 31 December 2020, but as we emerge from the second wave of COVID-19 in Europe, many expect that some or all of these will ultimately be extended.
Deployment to Date
The story with regards to actual deployment of funds is a mixed one. A great deal of liquidity has been made available to European businesses, but in some jurisdictions, significant sums remain unaccessed.
For example, the Italian Liquidity Taskforce confirmed on 11 November 2020 that a huge EUR 153.4 billion of the original EUR 170 billion allocation still remains available to corporate borrowers affected by COVID-19. Moreover, as of 19 November 2020, only 658 applications have been approved for facilities totaling £4.84 billion under the UK CLBILS scheme, and similarly as of early October 2020, only £15.8 billion is outstanding under the CCFF program.
A different picture emerges in France, where EUR 125 billion has been deployed to date and another EUR 175 billion of the original allocation remains available. In Spain, the relative take-up has been even stronger, with EUR 80.68 billion of government-guaranteed debt deployed to more than 558,000 companies as of the end of October 2020. Demand has been such that the Spanish government introduced in July a second EUR 40 billion government-guarantee scheme, which is rapidly being used up.
As of 4 November 2020, the number of applications in Germany for KfW corona aid loans was 95,0000 (approximately 75% of which are for loans in excess of EUR 800,000). According to KfW, 99% of applications made have been successful, and commitments under that scheme have now reached in excess of EUR 45 billion.
Other new programs have been introduced over the summer months. In July, Belgium introduced a second government-guarantee scheme for loans to small and medium-sized enterprises ("SMEs") for a term of 12 to 36 months (unlike the original scheme which was limited to 12 months). The French government has also announced its intention to provide a limited pool of direct loan capital to certain SMEs that were originally denied access to the PGE Scheme.
The recurring message from governments in Europe is that the funds are there if businesses can meet the relevant eligibility criteria, the various components of which remain largely unchanged from our White Paper review.
The data available on borrower take-up for government financial support by sector across the relevant jurisdictions shows some unsurprising themes. For example, French government data shows the following breakdown:
In Spain, the four sectors which have been most actively financed under the government support programs have beentourism (18%), construction (13%), industrial (10%) and food distribution companies (10%). In Germany, aviation, tourism, retail and automotive have been the largest beneficiaries of government support, the EUR 6 billion recapitalization of Lufthansa and the EUR 150 million government-backed convertible bond to the TUI travel group being two such examples.
Key Changes to Schemes
Since our original note, European governments have also made some key changes to existing schemes and their related guidance.
In the United Kingdom and elsewhere, private equity-backed businesses have in a large part struggled to meet the criteria of not being an 'undertaking in difficulty' as of 31 December 2019 under European Union state aid law. The definition of 'undertaking in difficulty' includes businesses that had accumulated losses greater than half of their subscribed share capital, which a lot of private equity-backed businesses funded through loan note issuances do. New guidance in the United Kingdom issued by the British Business Bank in September 2020 suggests that the assessment as to whether an entity is an 'undertaking in difficulty' can be determined at the date of application for government funding rather than 31 December 2019. This flexibility means businesses and their private equity fund owners can take steps to convert loan notes or other debt-like instruments into equity or write them off altogether in order to qualify for the scheme, giving them the option to restructure their finances before their loan application is made.
In France, the repayment rules with regards to the PGE Scheme have been relaxed, such that borrowers may now apply for an additional year's principal repayment holiday in addition to the one-year automatic deferral available as a matter of law. The eligibility criteria for seasonal businesses has also been modified, and the French government can now grant 'seasonal guarantees' with a higher ceiling than the standard government guarantee. While the standard guarantee limit is currently capped at 25% of 2019 revenues, the seasonal guarantee will be based on the highest revenue generating three months of 2019, which is clearly more advantageous for companies in seasonal industries such as tourism.
In Spain, the key scheme changes have been twofold. Firstly, subject to the satisfaction of certain solvency-related requirements, the maximum term of guaranteed debt under the original program is now limited to eight years rather than five years. Secondly, similar to changes in France, the period before which any amortization begins has been increased from 12 to 24 months.
Finally, since 21 October 2021, the German government has extended the scope of the government guarantee to bonds as well as loans. This allows German companies for the first time to access capital markets directly for new government-supported funding without having to go through an intermediary, such as a financing bank.
Two Key Takeaways
- European governments have made some key changes to existing schemes and their related guidance as companies affected by COVID-19 seek out and obtain support to assist with ongoing liquidity needs.
- Given the level of government-backed funding still available in Europe and the likelihood of further extensions of availability deeper into 2021, corporates across Europe should continue to assess whether the European schemes can help them with their ongoing liquidity needs.
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