The European Commission has revised its Temporary Framework for State Aid to support the economy during the coronavirus (COVID-19) pandemic to allow capital injections by EU member states into nonfinancial firms affected by the pandemic.
To support the economy in the current COVID-19 pandemic, the European Commission on March 19 adopted a Temporary Framework for State Aid (Temporary Framework), which specifies the measures of financial support EU member states can provide to companies in line with EU state aid rules, in order to ensure their liquidity and access to finance. The Commission amended the Temporary Framework on April 3, enabling EU member states to grant investment aid in order to accelerate research, testing, and production of COVID-19 relevant products, and operating aid in order to ease the liquidity constraints facing firms in regions particularly affected by the pandemic.
On May 8 the Commission adopted a further amendment identifying two additional temporary state aid measures, including public support in the forms of recapitalization and subordinated loans, that the Commission considers compatible under Article 107(3)(b) of the Treaty on the Functioning of the European Union (TFEU) in the light of the COVID-19 pandemic. These new measures aim at ensuring that the disruption of the economy does not result in the unnecessary exit from the market of undertakings that were viable before the pandemic.
State recapitalization measures are associated with a higher risk of distorting competition; they are therefore likely to be subjected to more intense scrutiny by the Commission compared to other aid measures under the Temporary Framework. Firms interested in aid of this form should verify independently that they are eligible for it. A robust eligibility analysis can help firms map and mitigate any potential state aid risks, engage more effectively with the relevant member state, and expedite the state aid review by the Commission (where required).
Under the May 8 amendment, recapitalization aid can be provided only to nonfinancial firms where all of the following conditions are satisfied:
Recapitalization under the Temporary Framework can be provided through the issuance of fresh equity (e.g., new common shares) and/or debt financing instruments with a potential equity component (hybrid capital), such as profit participation rights, silent participations, and convertible secured or unsecured bonds. Recapitalization aid comes with stringent conditions and ongoing restrictions to ensure the member state’s “appropriate” remuneration, its swift exit from the firm in question, and the avoidance of potential distortions of competition:
Member states can put in place a recapitalization scheme or individual aid measures subject to prior notification and clearance by the Commission. When approving a scheme, the Commission will request the separate notification of aid to a company above the threshold of €250 million (approx. $270 million) for individual assessment.
The May 8 amendment also introduces the possibility for member states to provide subordinated loans to firms at favourable terms. This concerns debt instruments that are subordinated to ordinary senior creditors in case of insolvency proceedings, and complements the toolbox available to member states under the existing Temporary Framework, including to grant debt with senior ranking to firms in need.
Subordinated debt cannot be converted into equity while the company is a going concern and the member 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 wish to provide subordinated debt in amounts exceeding the thresholds specified in the Temporary Framework, as amended, all conditions for recapitalization measures set out above will apply.
Proposed recapitalization measures are expected to be subjected to more intense scrutiny by the Commission relative to other measures under the Temporary Framework. This is because recapitalizations, unlike temporary liquidity measures, tend to have a lasting impact on the financial position of the relevant firm and can therefore give rise to significant distortions of competition.
Accordingly, where the proposed recapitalization requires an individual notification to and authorization by the Commission, the applicant firm should expect a vigorous and potentially longer prenotification and state aid review process. Member states and firms in need of fresh capital will be expected to prepare a robust notification explaining why they consider that the proposed recapitalization is necessary and appropriate in the circumstances, and showing that the capital sought is limited to the minimum necessary for preserving the firm’s viability. Critically, the applicant firm should be in a position to demonstrate that it has explored—and exhausted—all other financing options, including other, less distortive, state aid measures, such as subordinated loans.
Firms should remain vigilant as to state aid risk even where their proposed recapitalization does not require a prior notification to and clearance by the Commission (e.g., where a member state injects less than €250 million (approx. $270 million) into a firm pursuant to a scheme that has been preapproved by the Commission). In such circumstances, firms should verify independently that the recapitalization is in line with EU state aid rules including the Temporary Framework, as amended.
Under EU state aid rules, a potential confirmation by an EU member state that a given financial support measure is free of state aid, or that it constitutes permissible state aid (e.g., on the basis that it complies with the conditions of a national recapitalization scheme), does not absolve the recipient company of any potential liability under EU state aid rules.
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