COVID-19: Guarantee facilities for companies and self-employed workers

1. Introduction:

The Government of Spain approved last week the Royal Decree-law 8/2020, of 17 March, with urgent and extraordinary measures in order to mitigate the economic and social impact of the COVID-19 pandemic (RDL 8/2020).

Article 29 of the RDL 8/2020, establishes that the Ministry of Economic Affairs and Digital Transformation will grant guarantee facilities (avales) for a total maximum amount of €100bn in connection with the financing granted by credit institutions, financial credit establishments, electronic money entities and payment entities to companies and self-employed workers, in order for them to meet their needs arising from, amongst others, the management of invoices, working capital, maturity of financial or tax obligations or other liquidity needs.

The Council of Ministers has now adopted a Resolution dated 24 March 2020 approving the applicable conditions of the first tranche of the guarantee facilities, for a maximum amount of €20bn, to be granted by the Ministry of Economic Affairs and Digital Transformation and managed through the Official Credit Institute (Instituto de Crédito Oficial, ICO). The guarantees shall have a ranking “pari passu”, so that the Spanish State will share the risk with the financial entities.

2. Conditions and eligibility requirements

Definitions and purpose

SME

• Means, companies with less than 250 workers and with an annual business turnover of less than €50m or annual general balance sheet of less than €43m (in accordance with Regulation EU 651/2014).

Financial entity

• Means, credit institutions, financial credit establishments,electronic money entities and payment entities.

Purpose

• The purpose of the guarantee facilities is to cover new loans and other types of facilities, and renewals of loans granted by financial entities to companies and self-employed workers, in order for them to meet their needs arising from, amongst others, the management of invoices, working capital, maturity of financial or tax obligations or other liquidity needs.

Tranche and sub-tranches amount

First tranche

• Up to €20bn.

Sub-tranches

• Up to €10bn for renewals and new loans granted to SMEs and self- employed workers.

• Up to €10bn for renewals and new loans granted to those companies which do not comply with the definition of SME.

Eligible loans and risk analysis

Characteristics of the eligible loans

• Loans and other financing transactions granted to companies and self-employed workers with registry address in Spain, which have been affected by the economic effects of COVID-19, provided that: a) they are granted or renewed after 17 March 2020; b) the borrowers do not appear in the defaulting debtors list of the Bank of Spain at 31 December 2019; and c) the borrowers are not in an insolvency proceeding at 17 March 2020, either for (i) having applied for insolvency, or (ii) being in the cases which allow the application of the insolvency declaration by their creditors.

Maximum amount of loan per client

• For up to €1.5m in one or more loan transactions granted to self-employed workers and companies, the Commission Regulation (EU) No 1407/ 2013 of 18 December 2013 on the application of Articles 107 and 108 of the Treaty on the functioning of the European Union to the “de minimis” aids shall apply.

• For loans over €1.5m, up to the maximum established in the Temporary Framework of States Aid of the European Union for self-employed workers, SMEs and other companies.

Risk profile analysis and conditions for eligibility

• Guarantees will be granted to financings up to €50m approved by the financial entity in accordance with its risk policy, without prejudice of subsequent checks of eligible conditions.

• Financings over €50m will be guaranteed once ICO has analysed the fulfilment of the eligible conditions in addition to the analysis carried out by the financial entity.

Sources of financing of transactions

• This guarantees scheme will be granted to loans and other types of financing granted to companies and self-employed workers by financial entities regardless of its source of financing. Nevertheless, in case that the loan was funded by ICO, the guarantees scheme shall apply to the participation of ICO in the same conditions.

Maximum percentages, remuneration, application deadline and term of the Guarantees

Maximum percentages

• For SMEs and self-employed workers, the guarantees will cover up to 80% of the loan transaction.

• For non-SME companies, guarantees will cover up to 70% of new loan facilities and 60% of renewals.

Remuneration

• For guarantees to loans up to €1.5m, 20 bps over the total guaranteed amount.

• For guarantees granted to self-employed workers or SMEs for a nominal amount over €1.5m: a) 20 bps for guarantees up to 1 year; b) 30 bps for guarantees from 1 to 3 years; c) 80 bps for guarantees from 3 to 5 years.

• For guarantees granted to non-SME companies for new facilities with a nominal amount over €1.5m: a) 30bps for guarantees up to 1 year; b) 60 bps for guarantees from 1 to 3 years; c) 120 bps for guarantees from 3 to 5 years.

• For guarantees granted to non-SME companies for renewal of facilities with a nominal amount over €1.5m: a) 25 bps for guarantees up to 1 year; b) 50 bps for guarantees from 1 to 3 years guarantees; c) 100 bps for guarantees from 3 to 5 years.

Application deadline

• 30 September 2020, which could be extended by a Resolution of the Council of Ministers.

Term

• The term of the guarantee will be the same as the term of the facility, up to a maximum of 5 years.

Rights and obligations of financial entities

Rights and obligations of financial entities

• The financial entity will decide on the granting of the relevant financing to the client in accordance with its internal procedures and lending and risk policies.

• The costs of new loans and renewals that benefit from these guarantees shall be kept in accordance with the costs charged prior to the start of the COVID-19 crisis, considering the public nature of the guarantee and its cost of coverage.

• Financial entities undertake to maintain, at least until 30 September 2020, the limits of working capital facilities granted to all clients and, in particular, to those clients whose loans are guaranteed by this scheme.

• Financial entities will identify these transactions in their accounting and risk management systems, in order to enable their tracking. Subsequently, they will incorporate this identification in their statement submitted to the Risk Information Centre, following the instructions of the Bank of Spain for this purpose.

Financial relations between ICO, financial entities and the Ministry of Economic Affairs and Digital Transformation

ICO's relationships with financial entities

• ICO will pay to the financial entities the amounts corresponding to the guarantees enforced.

• The administrative management of the guarantee between ICO and the financial entity, and the recoveries in the event of its enforcement, will be carried out in accordance with the procedure that will be established by ICO in the master guarantee agreement with the entities.

ICO management and administration fees

• Management and administration fee: 0.05% flat, calculated on the volume of the guaranteed portfolio.

Payment of guarantee remuneration and management and administration fee and recoveries

• Financial entities will pay to ICO the amounts derived from the remuneration of the guarantee and the percentage, on a pari passu basis, of the recoveries equivalent to the guaranteed risk that, where appropriate, they obtain from the unpaid amounts. The ICO will transfer these amounts to the Provision Fund approved by Royal Decree Law 12/1995.

• The ICO will charge to the Provision Fund the amounts corresponding to the management and administration fee in the year in which they are accrued.

• If after 2028, and after the payment by the Ministry of the last certification sent by ICO, recoveries take place, the ICO will pay to the Treasury, in January of the following year, the amounts it has received from financial entities in the immediately preceding year corresponding to unpaid transactions for which the Ministry has previously paid the guarantee.

Replacement of the Royal Decree-Law 12/1995 Provision Fund

• The Ministry of Economic Affairs and Digital Transformation will replace annually, or whenever necessary to maintain the positive balance, the amounts that have been charged to the Provision Fund 12/1995 due to the enforcement of the guarantees and the expenses and costs of management and administration of the guarantee. The replacement procedure will be similar to that provided in other recent Agreements with the adaptations to the provisions of this Chapter of this Royal Decree-Law and the references will be understood as made to the Ministry of reference of the guarantee.

• In the first quarter of each of year from 2021 to 2027, the amounts committed for "replacement ICO guarantee" and "administration cost" may be reviewed, after certification by the ICO of the outstanding balance of the guaranteed transactions as of 1 January of each year.

Guarantee facility monitoring and authorisation

Guarantee facility monitoring

• The ICO will inform the Ministry of Economic Affairs and Digital Transformation every two weeks regarding the utilisation of the guarantee scheme.

Other formalities

• No additional formalities are required to this Resolution of the Council of Ministers.

Authorisation to the Minister of Economic Affairs and Digital Transformation

• The Minister of Economic Affairs and Digital Transformation is authorised to put in place the necessary measures that secure the adequate distribution of the guarantee facilities among the operators.

State aid

State aid

• The guarantee facilities are subject to the regulations on State aid of the European Union.

See our Coronavirus (COVID-19) feature for more information generally on the possible legal implications of COVID-19.