#newliquidity – Additional Slovenian State Guarantee Scheme
#newliquidity – Additional Slovenian State Guarantee Scheme
Author: Mia Kalas, SELIH & PARTNERJI Law Firm
On 28 April 2020, the Slovenian Parliament adopted the Law on ensuring additional liquidity to the economy for mitigation of the consequences of the COVID-19 epidemic (Zakon o zagotovitvi dodatne likvidnosti gospodarstvu za omilitev posledic epidemije COVID-19, the “ZDLGPE”), which entered into force on 1 May 2020.
In addition to the financing products already offered by the Slovenian SID Bank and the Slovene Enterprise Fund, the aforementioned law introduces a scheme of state guarantees for bank loans aimed at ensuring the liquidity of Slovenian companies as well as the medium-term liquidity of the Slovenian banking system.
I. SUMMARY OF THE NEW GUARANTEE SCHEME
The following is a brief summary of the main features of the new state guarantee scheme:
The state guarantee will be available to the following lenders:
- banks and savings banks with seat in Slovenia;
- Slovenian branches of banks of EU member states, licensed to perform banking services in Slovenia
(hereinafter “banks”).
Conditions concerning the guaranteed loans:
- conclusion of the loan agreement after 12 March 2020 and latest by 31 December 2020;
- purpose is financing of the borrower’s core business: new investments or completion of already started investments, working capital, repayment of credit agreements concluded after 12 March 2020 until entering into force of the ZDLGPE which meet the conditions under the ZDLGPE), but not financing of affiliated companies or companies domiciled abroad;
- maturity does not exceed five years.
Conditions concerning the borrower:
- any legal entity or individual which performs business activity and which is an SME or a large enterprise (as defined in Commission Regulation (EU) No 651/2014) with its seat in Slovenia, except credit and other financial institutions under the laws regulating banking, insurance and pension / disabled persons’ insurance;
- after 31 December 2019 facing liquidity problems for business reasons in connection with the effects of COVID-19 epidemic in the area of Slovenia;
- as at 31 December 2019 was not an undertaking in difficulty as determined in point 18 of Article 2 of Commission Regulation (EU) No 651/2014;
- as at 12 March 2020 was not an obligor in default in accordance with the provisions of Regulation (EU) No 575/2013 of the European Parliament and of the Council whereby as at 12 March 2020 it does not have material delays in settling of obligations towards the bank as defined in the EBA’s guidelines;
- no business or registration in any country included in EU list of non-cooperative jurisdictions, and no owner from any such country
- on the day of submission of the loan application no outstanding tax/social contributions obligations (or benefiting from a moratorium thereon / having the right to pay them in instalments);
- inclusion in the Slovenian system of mandatory multilateral set-off (being an instrument of payment discipline).
Limitations applicable to the borrower:
- for the period between submission of loan application to the end of the bank’s right to call the guarantee: prohibition of payments of dividends, rewards for success to the management, purchases of treasury shares and payment of other financial liabilities to the (direct or indirect) parent companies, affiliated companies or owners;
- the bank shall include a warning concerning this prohibition in the loan agreement.
The aggregate of principal amounts which will be guaranteed is up to EUR 2 billion.
Amount of guarantee:
- 70 % of the principal of an individual loan provided to a large enterprise (as defined in Commission Regulation (EU) No 651/2014);
- 80 % of the principal of an individual provided to an SME (as defined in Commission Regulation (EU) No 651/2014);
- maximum aggregate per borrower: (i) up to 10 % of revenue from sale in 2019 and (ii) up to the amount of costs of labour for 2019;
- if the borrower benefits from an intervention moratorium (i.e. in respect of another loan agreement), then the amount of the deferred liabilities is counted into the maximum amount guaranteed;
- reduction of guarantee pro rata with any decrease of the borrower’s obligations.
Duration:
- may not exceed the term of the loan, including eventual prolongations.
As condition for fulfilment of the guarantee obligation, the bank and the state shall sustain losses proportionally and under same conditions.
The SID Bank (being the Slovenian export and development bank) will handle the operative tasks on behalf of the Republic of Slovenia.
Other features:
- the guarantee is granted ex lege (provided that the conditions are met);
- fulfilment of the guarantee either by payment from the State budget or by delivery of bonds issued by the SID Bank (in the case of loans to large enterprises) or by the State (in the case of SMEs);
- the bank shall be able to offer to SID Bank a sale of the receivable even before the event of non-payment. Should the SID Bank accept the offer, it shall pay by delivery of bond issued by SID Bank. By delivery of such bond all receivables of the bank (including collateral) shall pass onto SID Bank;
- the limitations set out in point 3.2 of the Communication from the Commission Temporary Framework for State aid measures to support the economy in the current COVID-19 outbreak will also be considered;
- the recourse receivables of the State towards the borrowers and the receivables of the lenders from the loan shall in the part which they are not secured have the status of priority claims in insolvency proceedings.
The bonds to be issued by SID Bank under the ZDLGPE:
- shall be irrevocably and unlimitedly guaranteed by the State;
- shall be issued in consideration of the conditions of the ECB for financing of financial institutions and EU rules concerning adequate credit risks coverage of banks;
- shall be subject to a decree to be issued by the Government in order that they can be used as a collateral instrument for security of the bank’s obligations towards the ECB.
Annual guarantee premiums shall burden the borrower as follows:
- SMEs (as defined in Commission Regulation (EU) No 651/2014):
- for the first year 25 BPs;
- for the second and third year 50 BPs;
- for the fourth and fifth year 100 BPs;
- large enterprises (as defined in Commission Regulation (EU) No 651/2014):
- for the first year 50 BPs;
- for the second and third year 100 BPs;
- for the fourth and fifth year 200 BPs.
BP = 1/100 of a percentage point of the unpaid principal amount at the relevant moment.
Enforcement towards the borrower may remain the competence of the bank under SID Bank’s supervision.
Cessation of guarantee:
- loan agreement concluded in breach of the conditions and the breaches occurred on the side of the bank;
- the bank establishes that the borrower provided false data in the application (in such case the bank is supposed to establish a “recourse” claim towards the borrower);
- the bank fails to inform the SID Bank on commencement of insolvency proceedings or liquidation proceedings at least 14 days before expiry of the deadline for reporting of claims;
- takes place also in the case of delivery of bonds, whereby the bank shall be obliged to repay the bonds issuer the entire amount, increased by default interest from the day of delivery of the bonds.
The Government will regulate further details with a decree, in particular with respect to:
- limitations of guarantee,
- calling of the guarantee and enforcement,
- deadlines, documentation, reporting, scope and manner of performance of authorisations granted to SID Bank.
II. CHALLENGES OF IMPLEMENTATION IN PRACTICE
The ZDLGPE entails several unclarities which will need to be resolved in practice. Some of the most notable questions arising in reading of the ZDLGPE include:
- Pursuant to the ZDLGPE, the SID Bank shall maintain a record of all loan agreements concluded in accordance with the ZDLGPE and monitor the use of the guarantee quota. However, it is not clear how the banks will be enabled to follow when the maximum of EUR 2 billion has been used, which is material for the loan approval decisions. Whilst the grounds of the draft contain an estimate that the amount of called guarantees in the next five years is not expected to exceed EUR 484.7 million, a reliable manner of checking this will be needed.
- Interpretation of the provision that the guarantee shall not exceed the loan term, which is in contradiction with the essential purpose of guarantee.
- Interpretation of the provision that as condition for fulfilment of the guarantee obligation the bank and the state shall sustain losses proportionally and under same conditions. This provision was very likely inspired by the Communication from the Commission Temporary Framework for State aid measures to support the economy in the current COVID-19 outbreak, but in the ZDLGPE it was turned into a “condition for fulfilment” on the side of the state. How will this be evidenced in practice, and forward looking?
- The choice of the method of fulfilment (cash or bonds) is on the side of the state, but the quality of these alternatives is not the same.
- The provision that by delivery of the SID Bank bonds all bank’s rights (including collateral) pass to the bank appears to be too broad. Normally, it should provide for passing of only the part of the rights (receivables) secured with the state guarantee.
- The excessively punitive nature of the following provisions:
- cessation of validity of the guarantee if the bank establishes that the borrower provided false data in the application. While in such case the bank is supposed to establish a “recourse” claim, it is in our view excessive that the bank is punished by loss of the guarantee for the borrower’s misrepresentation (which the bank cannot influence). The legal nature of the “recourse” claim is also questionable;
- the bank’s obligation to repay the bonds issuer the entire amount of the delivered bonds, increased by default interest from the day of delivery of the bonds. Again, the bank cannot influence certain reasons of cessation of the guarantee, so it should not be punished by default interest. This provision may additionally de-stimulate banks from lending, which is in contradiction with the basic aim of the guarantee scheme.
- Will in case of voidance of the guarantee the unsecured receivables of the bank also “lose” the status of priority claims in insolvency proceedings?
- Questions of valuation of the guarantees and / or the bonds delivered as a method of payment of the guarantees in the banks’ records, and meeting of the prudential requirements in respect of all of the above issues.
- Unclarity of the duration of limitations on payments of dividends etc. applicable to the borrower.
Author: Mia Kalas, SELIH & PARTNERJI Law Firm
On 28 April 2020, the Slovenian Parliament adopted the Law on ensuring additional liquidity to the economy for mitigation of the consequences of the COVID-19 epidemic (Zakon o zagotovitvi dodatne likvidnosti gospodarstvu za omilitev posledic epidemije COVID-19, the “ZDLGPE”), which entered into force on 1 May 2020.
In addition to the financing products already offered by the Slovenian SID Bank and the Slovene Enterprise Fund, the aforementioned law introduces a scheme of state guarantees for bank loans aimed at ensuring the liquidity of Slovenian companies as well as the medium-term liquidity of the Slovenian banking system.
I. SUMMARY OF THE NEW GUARANTEE SCHEME
The following is a brief summary of the main features of the new state guarantee scheme:
The state guarantee will be available to the following lenders:
- banks and savings banks with seat in Slovenia;
- Slovenian branches of banks of EU member states, licensed to perform banking services in Slovenia
(hereinafter “banks”).
Conditions concerning the guaranteed loans:
- conclusion of the loan agreement after 12 March 2020 and latest by 31 December 2020;
- purpose is financing of the borrower’s core business: new investments or completion of already started investments, working capital, repayment of credit agreements concluded after 12 March 2020 until entering into force of the ZDLGPE which meet the conditions under the ZDLGPE), but not financing of affiliated companies or companies domiciled abroad;
- maturity does not exceed five years.
Conditions concerning the borrower:
- any legal entity or individual which performs business activity and which is an SME or a large enterprise (as defined in Commission Regulation (EU) No 651/2014) with its seat in Slovenia, except credit and other financial institutions under the laws regulating banking, insurance and pension / disabled persons’ insurance;
- after 31 December 2019 facing liquidity problems for business reasons in connection with the effects of COVID-19 epidemic in the area of Slovenia;
- as at 31 December 2019 was not an undertaking in difficulty as determined in point 18 of Article 2 of Commission Regulation (EU) No 651/2014;
- as at 12 March 2020 was not an obligor in default in accordance with the provisions of Regulation (EU) No 575/2013 of the European Parliament and of the Council whereby as at 12 March 2020 it does not have material delays in settling of obligations towards the bank as defined in the EBA’s guidelines;
- no business or registration in any country included in EU list of non-cooperative jurisdictions, and no owner from any such country
- on the day of submission of the loan application no outstanding tax/social contributions obligations (or benefiting from a moratorium thereon / having the right to pay them in instalments);
- inclusion in the Slovenian system of mandatory multilateral set-off (being an instrument of payment discipline).
Limitations applicable to the borrower:
- for the period between submission of loan application to the end of the bank’s right to call the guarantee: prohibition of payments of dividends, rewards for success to the management, purchases of treasury shares and payment of other financial liabilities to the (direct or indirect) parent companies, affiliated companies or owners;
- the bank shall include a warning concerning this prohibition in the loan agreement.
The aggregate of principal amounts which will be guaranteed is up to EUR 2 billion.
Amount of guarantee:
- 70 % of the principal of an individual loan provided to a large enterprise (as defined in Commission Regulation (EU) No 651/2014);
- 80 % of the principal of an individual provided to an SME (as defined in Commission Regulation (EU) No 651/2014);
- maximum aggregate per borrower: (i) up to 10 % of revenue from sale in 2019 and (ii) up to the amount of costs of labour for 2019;
- if the borrower benefits from an intervention moratorium (i.e. in respect of another loan agreement), then the amount of the deferred liabilities is counted into the maximum amount guaranteed;
- reduction of guarantee pro rata with any decrease of the borrower’s obligations.
Duration:
- may not exceed the term of the loan, including eventual prolongations.
As condition for fulfilment of the guarantee obligation, the bank and the state shall sustain losses proportionally and under same conditions.
The SID Bank (being the Slovenian export and development bank) will handle the operative tasks on behalf of the Republic of Slovenia.
Other features:
- the guarantee is granted ex lege (provided that the conditions are met);
- fulfilment of the guarantee either by payment from the State budget or by delivery of bonds issued by the SID Bank (in the case of loans to large enterprises) or by the State (in the case of SMEs);
- the bank shall be able to offer to SID Bank a sale of the receivable even before the event of non-payment. Should the SID Bank accept the offer, it shall pay by delivery of bond issued by SID Bank. By delivery of such bond all receivables of the bank (including collateral) shall pass onto SID Bank;
- the limitations set out in point 3.2 of the Communication from the Commission Temporary Framework for State aid measures to support the economy in the current COVID-19 outbreak will also be considered;
- the recourse receivables of the State towards the borrowers and the receivables of the lenders from the loan shall in the part which they are not secured have the status of priority claims in insolvency proceedings.
The bonds to be issued by SID Bank under the ZDLGPE:
- shall be irrevocably and unlimitedly guaranteed by the State;
- shall be issued in consideration of the conditions of the ECB for financing of financial institutions and EU rules concerning adequate credit risks coverage of banks;
- shall be subject to a decree to be issued by the Government in order that they can be used as a collateral instrument for security of the bank’s obligations towards the ECB.
Annual guarantee premiums shall burden the borrower as follows:
- SMEs (as defined in Commission Regulation (EU) No 651/2014):
- for the first year 25 BPs;
- for the second and third year 50 BPs;
- for the fourth and fifth year 100 BPs;
- large enterprises (as defined in Commission Regulation (EU) No 651/2014):
- for the first year 50 BPs;
- for the second and third year 100 BPs;
- for the fourth and fifth year 200 BPs.
BP = 1/100 of a percentage point of the unpaid principal amount at the relevant moment.
Enforcement towards the borrower may remain the competence of the bank under SID Bank’s supervision.
Cessation of guarantee:
- loan agreement concluded in breach of the conditions and the breaches occurred on the side of the bank;
- the bank establishes that the borrower provided false data in the application (in such case the bank is supposed to establish a “recourse” claim towards the borrower);
- the bank fails to inform the SID Bank on commencement of insolvency proceedings or liquidation proceedings at least 14 days before expiry of the deadline for reporting of claims;
- takes place also in the case of delivery of bonds, whereby the bank shall be obliged to repay the bonds issuer the entire amount, increased by default interest from the day of delivery of the bonds.
The Government will regulate further details with a decree, in particular with respect to:
- limitations of guarantee,
- calling of the guarantee and enforcement,
- deadlines, documentation, reporting, scope and manner of performance of authorisations granted to SID Bank.
II. CHALLENGES OF IMPLEMENTATION IN PRACTICE
The ZDLGPE entails several unclarities which will need to be resolved in practice. Some of the most notable questions arising in reading of the ZDLGPE include:
- Pursuant to the ZDLGPE, the SID Bank shall maintain a record of all loan agreements concluded in accordance with the ZDLGPE and monitor the use of the guarantee quota. However, it is not clear how the banks will be enabled to follow when the maximum of EUR 2 billion has been used, which is material for the loan approval decisions. Whilst the grounds of the draft contain an estimate that the amount of called guarantees in the next five years is not expected to exceed EUR 484.7 million, a reliable manner of checking this will be needed.
- Interpretation of the provision that the guarantee shall not exceed the loan term, which is in contradiction with the essential purpose of guarantee.
- Interpretation of the provision that as condition for fulfilment of the guarantee obligation the bank and the state shall sustain losses proportionally and under same conditions. This provision was very likely inspired by the Communication from the Commission Temporary Framework for State aid measures to support the economy in the current COVID-19 outbreak, but in the ZDLGPE it was turned into a “condition for fulfilment” on the side of the state. How will this be evidenced in practice, and forward looking?
- The choice of the method of fulfilment (cash or bonds) is on the side of the state, but the quality of these alternatives is not the same.
- The provision that by delivery of the SID Bank bonds all bank’s rights (including collateral) pass to the bank appears to be too broad. Normally, it should provide for passing of only the part of the rights (receivables) secured with the state guarantee.
- The excessively punitive nature of the following provisions:
- cessation of validity of the guarantee if the bank establishes that the borrower provided false data in the application. While in such case the bank is supposed to establish a “recourse” claim, it is in our view excessive that the bank is punished by loss of the guarantee for the borrower’s misrepresentation (which the bank cannot influence). The legal nature of the “recourse” claim is also questionable;
- the bank’s obligation to repay the bonds issuer the entire amount of the delivered bonds, increased by default interest from the day of delivery of the bonds. Again, the bank cannot influence certain reasons of cessation of the guarantee, so it should not be punished by default interest. This provision may additionally de-stimulate banks from lending, which is in contradiction with the basic aim of the guarantee scheme.
- Will in case of voidance of the guarantee the unsecured receivables of the bank also “lose” the status of priority claims in insolvency proceedings?
- Questions of valuation of the guarantees and / or the bonds delivered as a method of payment of the guarantees in the banks’ records, and meeting of the prudential requirements in respect of all of the above issues.
- Unclarity of the duration of limitations on payments of dividends etc. applicable to the borrower.
