Context of the measure
This second amendment complements the types of measures already covered by the Temporary Framework and the existing rules in relation to State aid which aim at supporting companies facing liquidity and solvency problems affecting their ability to borrow on the markets.
Considering that the emergency measures adopted by the Member States in order to manage the coronavirus outbreak have been resulting in losses that have decreased companies’ equity and reduced their ability to borrow on the markets, the Commission has decided to expand the Temporary Framework to enable well-targeted public interventions in the form of recapitalisation aid to those non-financial companies in need, to help reduce the risk to the EU economy as a whole.
Conditions under which aid in the form of recapitalization may be granted
With this new amendment, Member States will be allowed to support companies in need for equity by way of recapitalisation. Recapitalisation can be granted by the means of equity participation or by the way of hybrid capital instruments (e.g. profit participation rights, convertible bonds, etc.).
However, due to their high distortive potential, the Temporary Framework sets out a number of safeguards to avoid undue distortions of competition in the Single Market. In particular:
- Beneficiaries of such measure cannot be undertakings that were already in difficulty on 31 December 2019;
- Recapitalisation aid should only be granted if no other appropriate solution is available and if, without the State intervention, the beneficiary would go out of business or would face serious difficulties to maintain it;
- 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;
- The aid must be limited to enabling the viability of the company and should not go beyond restoring the beneficiary’s capital structure to before the COVID-19 outbreak;
- The State must receive appropriate remuneration for the risks it assumes through the recapitalisation aid (with conditions as close as possible as to market terms). The remuneration mechanism shall also incentivise beneficiaries and / or the owners to redeem the recapitalisation, in order to ensure the temporary nature of the intervention;
- Until the State has exited in full, beneficiaries are subject to bans on dividends and share buybacks, except for equity held by the Member State. In addition, until at least 75 % of the recapitalization is redeemed, a strict limitation of the remuneration of their management applies (including a ban on bonus payments), and beneficiaries (other than SMEs) are 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;
- Beneficiaries will not be able to use the aid to support economic activities of integrated companies that were already in difficulty prior to 31 December 2019;
- Beneficiaries (in particular large companies having received substantial State support for recapitalisation) and the State are required to submit an exit strategy within twelve months after the aid is granted. It should lay out (i) a plan of the beneficiary on the continuation of the activity and (ii) the measures that the beneficiary and the State will take to abide the repayment schedule. If six years after the recapitalization of publicly listed companies (or seven years after for the rest of them), the State’s intervention has not been reduced below 15 % of the beneficiary’s equity, a restructuring plan must be notified to the Commission;
- Beneficiaries other than SMEs will have to publish information on the use of the aid received, in particular how their use supports their activities in line with EU objectives linked to the green and digital transformation. The Commission encourages Member States to design national support measures in a way that meets green and digital transformation objectives.
Member States are therefore free to notify schemes or individual aids meeting those criteria, it being specified that where a scheme has been approved by the Commission, any individual aid exceeding EUR 250 million must be notified separately.
Conditions under which aid in the form of subordinated debt may be granted
The amendment also adds the possibility for Member States to grant aids in the form of subordinated debt which are subordinated to ordinary senior creditors in case of insolvency proceedings. Despite the fact that these measures carry less distortive consequences than intervention in the form of recapitalisation, subordinated debt increases the ability of companies to take on senior debt in a manner similar to capital support.
Accordingly, these specific aid instruments will have to comply with the conditions laid down at Section 3.3 of the Temporary Framework in relation to debt instruments. These instruments may be granted at reduced interest rates, which are at least equal to the base rate and the credit risk margins referred to in the table of point 27(a) plus 200 bps for large enterprises and 150 bps for SMEs.
However, if the amount of subordinated debt exceeds both of the below mentioned ceilings, the compatibility of the instrument with the Internal Market should be determined pursuant to Section 3.11 of the Temporary Framework relating to recapitalisations:
- Two thirds of the beneficiary’s annual wage bill for large firms (the annual wage bill for SMEs ); and
- 8.4 % of the beneficiary’s total turnover in 2019 for large firms (12.5 % for SMEs).
We are at your disposal to answer any questions you may have regarding the various measures adopted in France and at the EU level to mitigate the effects of the health crisis on your company.
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