6 APRIL 2020 | FINANCE
by Angela Kerek, Jörg Meissner, Christian Köhler, and Monika Obal – Published at Morrison & Foerster
The outbreak of COVID-19 has had a major impact on European economies. Many companies are facing unexpected shortages and unavailability of liquidity, revenues are stalling and some are struggling to preserve their commercial activities. In this summary, we have set out:
1. MANAGEMENT CONSIDERATIONS FOR LIQUIDITY MANAGEMENT
To manage available liquidity in the group and assess the risk of any default, borrowers should check through the following critical topics:
1.1 Considerations for Business Fundamentals
Assess Your Cash Flow
Understand Your Market
Know Your Duties
1.2 Review Terms of Commercial Agreements
Analyze Your Contractual Obligations
Avoid Potential Breaches and Handle Defaults
1.3 Financial Support Options
Assess availability Under Existing Facilities
Consider Accessing State Aid Measures for Governmental Relief
2. EMERGENCY GOVERNMENTAL MEASURES – LIQUIDITY MADE AVAILABLE THROUGH KFW
The following German governmental liquidity measures are already approved by the EU Commission.
The German Federal Government has expanded existing programs of KfW and has initiated new methods (KfW Special Programme 2020) for providing liquidity in the wake of the current COVID-19 outbreak. KfW’s role in the crisis is to facilitate the short-term supply of liquidity to companies.
2.1 KfW Backed Loan Programs
KfW backed loans are regular loans which will be disbursed and fronted by the commercial (relationship) banks of the relevant company. The uniqueness of KfW backed loans is that KfW will assume (depending on the relevant program) a certain portion of risk towards the fronting commercial bank. While the repayment obligations of the borrowing company remain, the default risk of the borrower will be partially borne by the fronting bank and partially by KfW.
The eligibility for accessing a KfW backed loan requires a registered seat of the company in Germany and further, general COVID-19 related criteria, which are:
For companies which seek funding for investments (including M&A) or working capital purposes or acquisitions, KfW offers participation in a KfW backed loan with a maximum principal amount on the group level of up to EUR 1 billion, but limited to 25 percent of the annual turnover for 2019, twice the labor costs for 2019 or current financing requirements for the next 12 months (large companies) or 18 months (small and medium-sized companies).
* Less than 250 employees and EUR 50 million annual turnover;
** More than 250 employees and EUR 50 million annual turnover or more than EUR 43 million total assets.
The specific applicable product lines of KfW depend on whether the company is on the market for more than five years or less than five years, but financing conditions do not diverge significantly.
2.2 KfW Special Programs – Direct KfW Participation in Syndicated Loans
a) KfW Participation Options
Within this programme, KfW offers
KfW’s participation aims at increasing the company’s chances of obtaining individually structured and tailor-made syndicated financing.
Companies with registered seats in Germany or foreign companies which seek financing for projects in Germany are eligible. Investments of German companies or their foreign subsidiaries outside Germany are not eligible. Further eligibility criteria are those set out above under the KfW Backed Loan Programs.
This program is available until December 21, 2020.
KfW’s commitment is for working capital or investments with a maturity of up to six years, with a minimum commitment of EUR 25 million, but limited to 25 percent of the annual turnover for 2019, twice the labor costs for 2019, or current financing requirements for the next 12 months.
2.3 Guarantees and Large Guarantee Programs
In addition to the KfW loan programs, the following guarantee programs are available in Germany:
a) General Guarantee Programs
Guarantees of up to EUR 2.5 million are made available in all states in Germany for SMEs and startups through guarantee banks (Bürgschaftsbanken) for working capital lines and investments on a federal and state level.
b) Large Guarantee Programs
In addition to programs for guarantees above EUR 20 million, large guarantee programs are available on a federal and state level. The programs are available until December 31, 2020. For working capital lines or investments above EUR 50 million, guarantees are available for a risk of up to 80 percent to the extent such risk is shared equally (50/50) between the federal and state levels.
3. APPLICATIONS AND INQUIRIES FOR ELIGIBILITY FOR KFW SUPPORT
Applications for KfW loans are made with relationship banks or other finance partners which may approach KfW with inquiries regarding eligibility first.
Documents required for application and/or inquiry are in particular the following: List of existing lenders as of December 31, 2019; Organizational chart of the group with all entities; Overview of shareholder structure; annual reports for 2018 and 2019, or preliminary versions if the 2019 final version is not available yet; performance (management accounts) from before COVID-19 outbreak; a brief company presentation; a summary of existing capital structure; a description of financing requests; the amount of current liquidity and breakdown/details; a liquidity plan (adjusted with impacts of COVID-19 on operations) showing the rationale for the financing request.
It seems that the priorities of KfW in the application process are ranked based on immediate liquidity needs, and to the extent indication is given that funding could be made available, approval processes seem to take not less than 2 to 3 weeks.
4. GERMAN ECONOMIC STABILITY FUND (WSF)
In addition and as a supplement to the measures made available through KfW, the German state-owned economic stability fund (Wirtschaftsstabilisierungsfonds, WSF) was approved with a total volume of EUR 500 billion, which will offer guarantees for the financial indebtedness of large, strategically important companies and will have the ability to purchase equity in distressed companies. EUR 400 billion is available for liquidity, EUR 100 million for recapitalization – see below, and there is an additional EUR 100 billion available for refinancing of KfW Special Programs.
Measures under the WSF are available until December 31, 2021.
Only companies that participate in the real economy (not financial institutions) are eligible to apply for support under the WSF. Whether measures will be applied will be determined by the Federal Ministry for Economic Affairs and Energy and the Federal Ministry of Finance.
Generally, large companies (as per the EU definition) are eligible and they must fulfill two of the following three criteria based on financial statements before January 1, 2020: They must have a balance sheet of more that EUR 43 million; more than EUR 50 million in total revenues per annum; and a yearly average of 249 employees.
In exceptional cases, SMEs can be eligible for measures under the WSF if they are critical to the German economy (within the meaning of the Foreign Trade Regulation). Eligible sectors would be: healthcare, energy, food, transportation, telecommunications, IT, media, finance, insurance, and cloud computing.
The companies must prove that no other financing resources are available to them (i.e., liquidity is only available through KfW). The company should not have experienced financial distress before December 31, 2019 and should have a clear going-concern prognosis.
The conditions for and terms of these measures will more strict than the ones under which KfW is providing liquidity and are subject to EU approval.
c) Available Instruments under the WSF
5. MEASURES OF THE EUROPEAN CENTRAL BANK
The European Central Bank (ECB) has taken the following relevant measures to directly or indirectly support companies in the EU with a view to the COVID-19 outbreak:
a) Pandemic Emergency Purchase Program and Additional Net Asset Purchase Program
ECB launched a EUR 750 billion asset purchase program of private and public sector securities. Purchases and an additional EUR 120 billion net asset purchase program, each of which will be conducted until the end of 2020, will include all of the asset categories eligible under the existing asset purchase program (including commercial paper, medium term notes, and Schuldschein loans, if applicable).
b) ECB Banking Supervision Provides Temporary Capital and Operational Relief for Banks to Facilitate Granting of Credit
ECB launched measures to ensure that its directly supervised banks can continue to fulfill their roles in funding the real economy. In particular, such banks are allowed to fully use capital and liquidity buffers, including Pillar 2 Guidance. Additionally, such banks will be allowed to partially use capital instruments that do not qualify as Common Equity Tier 1 (CET1) capital, for example Additional Tier 1 (AT1) or Tier 2 instruments, to meet Pillar 2 Requirements. The German Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht, BaFin) also applies these measures to less significant institutions in Germany.