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Funding options during COVID-19

Which considerations should be made when applying for government-supported funding?


Government support in the COVID-19 crisis – what are my options?

In response to the economic uncertainty caused by Covid-19, many national governments have developed proactive support packages for businesses, which are becoming increasingly relevant as it appears that the virus will have a long-term impact on the economy. An important part of these aid packages is the introduction (or extension) of government-backed guarantee schemes. The purpose of these guarantee schemes is to encourage financial institutions to provide additional liquidity to companies during the crisis. Carnegie Consult and Orchard Finance have mapped guarantee schemes, which larger companies are eligible for, in eight European countries[1]. Although the support offered is similar, across countries there are striking differences that we experience when supporting applications for our clients.

There are several trade-offs for companies with operations in one or more of the countries examined. Firstly, the question arises to which arrangements the company has access to and what the secured funding can be used for. After the choice has been made, a number of topics need to be taken into account when preparing an application. Below we list several key points of attention of the different arrangements.

  • Who is eligible for the scheme? The rule of thumb for all schemes is that only companies that were deemed financially healthy prior to the covid-19 outbreak are eligible for the schemes. Depending on the size of the company (SMEs or corporates), the arrangements may differ somewhat within a country.

  • How much funding can my company apply for? Under most schemes, the maximum amount of additional funding to be requested is limited to the maximum of either twice the annual labour costs for 2019 or 25% of the company's turnover in 2019. In addition, absolute ceilings or restrictions may apply in individual countries. Whether this ceiling is actually made available will also depend on the credit assessment and the extent to which the company can service its debt.

  • On whose door should my company knock? As a rule, funding applications are processed by the main relationship bank of the company. The aim of the schemes is to make additional funding (fresh money) available. A directly related requirement is that existing financing may not be withdrawn by the banks. After all, this would effectively transfer the credit risk of the banks to the governments, defeating the purpose of the scheme. What is also not in the formal arrangements, but which can be conditional in practice, is the contribution to the liquidity needs of the shareholders. Especially for significantly leveraged companies with private equity shareholders, this is scrutinised.

  • Are there any obligations for the use of additional funding? The guaranteed loans are primarily intended to support national businesses and local employment. Although international actors can apply for funding in different countries, the use of the financing will often only be permitted for activities within national borders. In our financing practice, we on multiple occasions have seen that the obligation to use the financing locally is strictly monitored by the banks.

  • How should an application be substantiated? In addition to the domestic use of the financing, in most cases a liquidity forecast will be requested that makes it plausible that the company really needs the additional financing. The requirements for the liquidity forecast may vary considerably from country to country.

  • What are the costs of the additional funding? The price tag of the additional funding varies. Where in a number of countries (including the Netherlands and Denmark) a market-based fee may be requested by the banks, in other countries (such as Germany, France and Belgium) interest rates are capped in absolute terms. In addition, a guarantee premium on the loan may charged to compensate for the government's support.

  • Can I repay the funding provided early? The terms of schemes offered range from one year in Belgium to a maximum of six in the Netherlands, France and Germany. The method of redemption is also diverse. None of the schemes examined explicitly detail consequences of early repayment. In practice, we see banks include their regular banking conditions and penalty clauses in the documentation. If the company seeks more flexibility in repayments, it is wise to raise this early in the financing process.

  • Are restrictions in place during the duration? Under virtually all schemes, distributions to shareholders are limited during the term of the loan. This applies not only to dividends or share buybacks, but in some cases also bonuses to top company executives. In practice, it also appears that banks (or the implementing organisations) may also expect contributions from the company's shareholders, especially if substantial dividends or shares have been repurchased in the years preceding the recourse to the scheme.

The schemes created can provide companies with additional liquidity for the foreseeable future. Like regular financing, the arrangements are accompanied by conditions that restrict companies. Because access, cost and restrictive conditions vary by country, it may be worthwhile for international companies to take a good look at these differences before making a choice where to apply. But also for companies that can only have a single option for application, it is good to know the conditions of the state aid before embarking on a loan process. It is always better to be well informed at the start of a process to proactively negotiate the terms than to learn the detail of the financing application at the end of the process in the draft credit agreement.

As independent advisors, we are happy to help you with questions about your financing options, including available government guarantee schemes, that apply to your business.

[1] The mapped guarantee schemes are in: The Netherlands (BMKB-C and GO-C), Germany (Sonderprogramm Corona-Hilfen), France (prêt garanti par l'Etat (PGE)), UK (Coronavirus Large Business Interruption Loan Scheme (CIBILS)), Belgium (Staatswaarborg voor bepaalde kredieten in de strijd tegen de gevolgen van het coronavirus), Denmark (Vækstfonden), Sweden (Företagsakuten – garantiprogram för företag) and Norway (Forskrift til lov om statlig garantiordning for lån til små og mellomstore bedrifter)

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