15 May 2020
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Second Amendment Adopted While Maintaining the Level Playing Field in the EU

Having recognized that the EU economy is, in its entirety, experiencing a serious downturn, the European Commission (“Commission”) saw it necessary to adopt a new State aid Temporary Framework to support the economy in the context of the coronavirus outbreak on March 19, 2020 (our article available here) (“TF”).  The TF helps target support for the economy while limiting negative consequences to the level playing field in the EU’s single market.  The first amendment to the TF was introduced on April 3, 2020 by which the Commission extended the TF to enable Member States to accelerate research, testing and production of coronavirus relevant products.


The Commission considered that otherwise viable non-financial undertakings subject to a temporary liquidity crisis due to the COVID-19 outbreak may face longer-term solvency issues as a consequence of decrease or a total suspension of their production of goods and provision of services.  This finally resulted in the adoption of the second amendment to the TF just a few days ago.  With this instrument in force, the risk of a rise in a significant number of insolvencies could be reduced leading to an economic upturn in the EU.


Therefore, under the second amendment, the Commission set the criteria under EU State aid rules, based on which Member States may provide public support to all undertakings facing financial difficulties due to the pandemic, in the form of:


  • Equity and/or hybrid capital instruments (recapitalisation aid to companies);


  • Aid to companies in the form of subordinated debt


Bearing in mind that: (i) recapitalisation is a process of restructuring a company’s debt and equity mixture, in order to steady a company’s capital structure, and (ii) subordinated debt is an unsecured loan that ranks below other, more senior loans or securities with respect to claims on assets or earnings, the main goal of introducing these measures is to ensure that the disruption to the economy does not result in the unnecessary exit from the market of undertakings which had viable operations before the outbreak.


Consequently, recapitalisations must therefore not exceed the minimum needed to ensure the viability of the beneficiary, and should not go beyond restoring the capital structure of the beneficiary to the one predating the COVID-19 outbreak.  Also, a number of Member States are considering taking an equity stake in strategic companies, to ensure that their contribution to the proper functioning of the EU economy is not jeopardised.  However, providing national public support in the form of equity and/or hybrid capital instruments should only be considered if no other appropriate arrangement can be found.


In order to further clarify what kind of measures will be available to beneficiaries, Member States can provide recapitalisations using two distinct sets of recapitalisation instruments – previously mentioned equity instruments and in particular the issuance of new common or preferred shares and/or other instruments with an equity component (referred to as “hybrid capital instruments”) and in particular profit participation rights, silent participations and convertible secured or unsecured bonds.


Recapitalisation measures must fulfill the following conditions:


  • without the State intervention, the beneficiary would cease its business operations or would face serious difficulties to maintain its operations. Such difficulties may be shown by the deterioration of, in particular, the beneficiary’s debt to equity ratio or similar indicators;


  • it is in the common interest to intervene. This may relate to avoiding social hardship and market failure due to significant loss of employment, the exit of an innovative company, the exit of a systemically important company, the risk of disruption to an important service, or similar situations duly substantiated by the Member State concerned;


  • the beneficiary is not able to find financing on the markets at affordable terms and the horizontal measures existing in the Member State concerned to cover liquidity needs are insufficient to ensure its viability; and


  • the beneficiary is not an undertaking that was already in difficulty on December 31, 2019.


Member States shall grant COVID-19 recapitalisation measures under an aid scheme approved by the Commission: (i) following a written request for such aid by the prospective beneficiary, (ii) while the beneficiaries receiving the recapitalisation measures are prohibited from advertising it for commercial purposes.


On the other hand, the Commission considers that subordinated debt can also be an appropriate means to support undertakings facing financial difficulties due to the COVID-19 outbreak.  In particular, it is a less distortive instrument than equity or hybrid capital, given that it cannot be converted into equity when the company is a going concern, therefore a State assumes less risk.  As previously stated, subordinated debt 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 TF including to grant debt with senior ranking to companies in need.


In case of Member States want to provide subordinated debt in amounts exceeding the prescribed thresholds, all conditions for recapitalisation measures set out above will apply.


Although the TF is in place until December 2020, it is inevitable that some of the insolvency issues will materialise as this crisis evolves.  With a view to ensuring legal certainty, the Commission has extended this period for recapitalisation measures which should be redeemed when the economy stabilises and shall not be granted later than June 30, 2021.