Coronavirus crisis: European Commission extends its State aid Temporary Framework to recapitalisation measures

Europe

The European Commission adopted on 11 May 2020 a second amendment to extend the scope of the State aid Temporary Framework adopted on 19 March 2020. It aims at providing Member States with new instruments to support the economy. The framework sets out the conditions under which Member States may support companies with recapitalisation measures and subordinated debt.

The Temporary Framework is based on Article 107(3)(b) TFEU to remedy a serious disturbance across the EU economy. Only companies that encountered difficulties after 31 December 2019 are eligible for aid under the Temporary Framework to ensure that it is not used for public support unrelated to the COVID-19 outbreak.

Recapitalisation aid to companies

The Temporary Framework already provided for equity measures but limited to a maximum amount of 800.000 EUR. For large companies that are facing significant liquidity needs, it allows Member States to grant under certain conditions public guarantees and subsidized loans.

Nevertheless, public guarantees and subsidized loans were deemed not adequate for public support to large public companies or airlines.

Indeed, whereas the previous temporary framework focused mainly on the liquidity problem, the recapitalisation measures target the solvency problem of many companies, which becomes more serious the longer the crisis lasts.

As State holdings bear a high risk of distorting competition, the new rules include several protective mechanisms to keep the State involvement as low and its duration as short as possible.

Member States may carry out recapitalisation measures until 30 June 2021. The following key elements must be taken into account:

  1. Conditions on the necessity, appropriateness and size of intervention: Recapitalisation aid is possible in the form of equity and/or hybrid capital instruments such as profit participation rights or silent participations. The aid may be granted only if without the recapitalisation the company would go out of business or would face serious difficulties to maintain its operations. It must also be in the common interest to intervene, for example to avoid social hardship and market failure due to significant loss of employment, the exit of an innovative or a systemically important company, or the risk of disruption to an important service. Finally, the aid must be limited to the amount needed to ensure the viability of the company and should not go beyond the restoration of the company’s capital structure as it existed before the coronavirus outbreak, i.e. on 31 December 2019.

     

  2. Conditions on the State's entry in the capital of companies and remuneration: The State must be sufficiently remunerated for the risks it assumes through the recapitalisation aid. Moreover, the remuneration mechanism needs to incentivise beneficiaries and/or their owners to buy out the shares acquired by the State as soon as the economic situation allows. The incentive is created, for example, by a step-up mechanism that increases the remuneration of the State. This increase in remuneration can take the form of additional shares.

     

  3. Conditions regarding the exit of the State from the capital of the companies concerned: It is required to develop an exit strategy, in particular as regards large companies that have received significant recapitalisation aid from the State. If the State participation has not been reduced below 15% after 6 years for listed companies (7 years for SMEs and others), a restructuring plan must be proposed to the Commission.

     

  4. Conditions regarding governance: Until the State has exited in full, beneficiaries are subject to bans on dividends, non-mandatory coupon payments and share buybacks other than in relation to the State. Moreover, until at least 75% of the recapitalisation is redeemed a strict limitation of the remuneration of their management, including a ban on bonus payments, is applied.

     

  5. Protection of competition, prohibition of cross-subsidisation and acquisition ban: Companies cannot use the aid to support economic activities of integrated companies that were already in economic difficulties on 31 December 2019. Until at least 75% of the recapitalisation is redeemed, companies, other than SMEs, are in principle prevented from acquiring a stake of more than 10% in competitors or other operators in the same line of business, including upstream and downstream operations. If the beneficiary of a COVID-19 recapitalisation measure above EUR 250 million has significant market power on at least one of the relevant markets in which it operates, additional measures must be proposed to preserve effective competition in those markets.

Under this amendment, Member States must notify recapitalisation schemes or individual aid measures. When approving a scheme, the Commission will request the separate notification of aid to a company above the threshold of EUR 250 million for individual assessment.

Aid to companies in the form of subordinated debt

The amendment to the Temporary Framework also introduces the possibility for Member States to support companies facing financial difficulties due to the coronavirus outbreak by providing subordinated debt to companies at favourable terms. The interest rate must be at least equal to the rate for the subsidized loan as provided for in the Temporary Framework and a risk margin of 200 points for large enterprises and 150 points for SMEs. In the Commission practice, the risk margin for subordination under the private operator principle varies from 100 to 400 points above the interest rate for such a loan.

This concerns debt instruments that are subordinated to ordinary senior creditors in case of insolvency proceedings. Such subordination is mainly requested by banks.  Subordinated debt cannot be converted into equity whilst the company is a going concern and the State assumes less risk.

However, since such debt increases the ability of companies to take on senior debt in a manner similar to capital support, aid in the form of subordinated debt includes higher remuneration and a further limitation as to the amount compared to senior debt under the Temporary Framework. If Member States want to provide subordinated debt in amounts exceeding the thresholds, all conditions for recapitalisation measures set out above will apply.

Conclusion

The new instruments complement the State aid measures made possible so far by the Temporary Framework, such as low-interest loans, research and development aid and guarantees.

In addition, there remains the possibility for Member States to compensate companies for the damage caused by COVID-19 on the basis of Art. 107(2) b) TFEU. This is an instrument that is still relatively little used although it leaves more margin for public support by Member States as the Commission is compelled to authorize aid to compensate the damage caused by the pandemic.

Even existing possibilities for State aid, such as through the guidelines for rescue and restructuring aid, are still in existence.

It is now up to the Member States, within the extended limits of the Temporary Framework, to set up and notify new State aid schemes or to notify individual aid measures in order to support the real economy.

We from CMS keep you informed of the public measures adopted by Member States in order to support your business enterprises.

CMS has the widest coverage and the broadest team of state aid specialists in Europe. Furthermore, we have extensive experience in setting up aid schemes and in public interventions in favour of undertakings in difficulty.

Please refer to our brochure for the CMS contact in your jurisdiction.