Covid-19 in Italy: Liquidity Decree as financial support for the companies

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published on 16 April 2020 | reading time approx. 6 minutes

  

Financial support for the companies: the provisions of the new “Liquidity Decree” 
(Decree Law no. 23 of 8 April 2020 published in the Official Gazette on 9 April 2020)

  

  


The Liquidity Decree introduced new important measures to support the liquidity of companies based in Italy damaged by the covid-19 emergency, that extend the measures previously provided for by the “Cura Italia” Decree, which we have already analysed in the articles “Coronavirus and measures to support liquidity through the banking system”, in particular those measures related  to the Guarantee Fund for SMEs. The support measures to be issued directly by banks for the liquidity of companies classified as SMEs provided for by the “Cura Italia” Decree remain unchanged (postponement of the repayment instalments of loans with due date on or before 30 September 2020; irrevocability - until the same term - of short-term credit lines and postponement of the repayment term of loans maturing before that date). 

The support provided for in the Liquidity Decree takes the form of the granting - until 31 December 2020 - of guarantees in favour of banks, national and international financial institutions and other entities authorised to extend credit in Italy, for loans in any form issued in favour of the aforementioned companies. These guarantees are granted to financial institutions by SACE and by the Guarantee Fund for Small and Medium Enterprises (“Guarantee Fund for SMEs”), whose scope of action is significantly extended, with the increase up to 90% - and in some cases up to 100% - of the percentage of guaranteed credit and with the extension of the operation of the guarantee to companies with up to 499 employees.

On 9 April 2020 ABI (the Italian Banking Association) issued a circular letter to the financial institutions associated with it, in which it draws their attention to the main provisions of the Liquidity Decree, in order to facilitate their immediate application.

The guarantee system provided for by the Liquidity Decree is differently regulated depending on the entity issuing the guarantee in favour of the financial institutions granting the loan to the company (SACE S.p.A. and the Guarantee Fund for SME).

The main idea is to cover the credit risk assumed by the banks through the granting of loans with funds made available by the State. The operation of the guarantors is in fact assisted by a State guarantee (at first request, explicit, unconditional and irrevocable) to cover both principal and interest repayments. In this way it is facilitated (or even made unnecessary, in the case of loans to SMEs - including self-employed workers and professionals - for a maximum amount of Euro 25,000) the examination of the creditworthiness of the company upon approval of the loan by the financial institution, whose risk is strongly mitigated.

Most of the measures (in particular, the increase in guarantee coverage percentages from 80% to 90%) are subject to the approval of the European Commission in accordance with the provisions of the Treaty on the Functioning of the European Union. 

This being said, with regard to the guarantees issued by SACE, there are a number of limits and conditions which reflect the provisions of European legislation introduced, on a temporary and urgent basis, by the European Commission by way of derogation from State aid provisions in order to deal with the covid-19 emergency. In addition, the maximum amount of guaranteed commitments may not exceed a total of EUR 200 billion, of which at least EUR 30 billion are intended for micro, small and medium-sized enterprises (SMEs), it being understood that SMEs will only be able to access to SACE coverage if they have reached the maximum threshold  for guarantees granted by the Guarantee Fund for SMEs.

In particular:
  1. SACE guarantee may not last longer than six years with the possibility for undertakings to take advantage of a pre-amortising period of up to 24 months;
  2. on 31 December 2019, the beneficiary undertaking did not qualify as an “undertaking in difficulty” within the meaning of EU legislation and on 29 February 2020 it did not hold exposures classified as “non-performing loans” by the banking system;
  3. the amount of the guaranteed loan shall not exceed the higher of (i) an amount equal to 25% of the 2019 turnover as resulting from the balance sheet and (ii) twice the personnel costs, again as resulting from the 2019 balance sheet;
  4. the guarantee may be issued for maximum coverage percentages which may be 90%, 80% or 70% of the granted financing, depending on the number of employees and the value of the turnover1;
  5. SACE guarantee may only be provided for new loans; to this end, the bank must demonstrate that, following the resolution of the loan for which the guarantee is requested, the total amount of the bank’s exposures to the beneficiary is higher than the amount of the outstanding exposure at the time of entry into force of the Liquidity Decree.
The loan covered by SACE guarantee must be intended to support personnel costs, investments or working capital employed in production plants and business activities located in Italy; this circumstance must be certified by the legal representative of the company. The bank, on its part, must certify by a declaration of its legal representative that the bank fees and interest applied to the financing guaranteed by SACE involve a financial cost for the company lower than the cost that would have been applied by the bank for transactions with the same characteristics but without guarantee.

The beneficiary company must also undertake (i) for itself and the companies in the group to which it belongs, not to distribute dividends in 2020 and (ii) to manage employees through trade union agreements.

The guarantee fees due to SACE are established by the Decree according to whether the beneficiary of the financing is a SME or an enterprise not falling into this category, and vary from 25 basis points to 50 basis points on the first year up to a maximum of 100 basis points and 200 basis points on the fourth, fifth and sixth year respectively, depending on whether or not they are SMEs.

A simplified procedure is provided for the issuance of SACE guarantee in favour of companies with less than 5,000 employees in Italy and a turnover of less than 1.5 billion Euros. For companies exceeding these thresholds, the guarantee is subject to approval by decree of the Ministry of Economy and Finance, after consultation with the Ministry of Economic Development.

The guarantees issued by the Guarantee Fund for SMEs are intended for enterprises with no more than 499 employees. The European Commission shall authorize: (i) the increase from 80% to 90% of the coverage percentage of the direct guarantee issued by the Fund in favour of the financing institutions for each financial transaction and (ii) the increase from 90% to 100% of the coverage percentage of the reinsurance or counter-guarantee issued by the Fund in favour of Confidi or other guarantee funds (provided that the guarantees issued by the latter in favour of banks do not exceed the maximum percentage of 90% of the financed amount and that they do not provide for the payment of premiums for the credit risk assumed).

The amount of the guarantee that can be issued by the Fund on favourable terms in favour of each company is increased from EUR 1.5 to 5 million, it being understood that the (total) loans guaranteed for each company may not exceed the higher of the following amounts:
  1. double the beneficiary undertaking’s wage bill of 2019 (including social security contributions and the cost of personnel working on the undertaking’s site but formally on the payroll of subcontractors);
  2. 25% of the total turnover of 2019;
  3. the requirement for working capital and investment costs foreseen by the enterprise in the following 18 months (in case the enterprise is an SME) and in the following 12 months (in case of other enterprises with no more than 499 employees); the requirement is subject to self-certification by the owner/legal representative of the enterprise.
As already provided for in the “Cura Italia” Decree, loans relating to transactions of debt restructuring may also be guaranteed by the Fund, upon condition that the new loan provides for a 10% increase in the loan subject to restructuring.

The guarantee is also granted in favour of beneficiaries who have, on the date of application to the Fund’s guarantee, exposures with the bank classified as “unlikely-to-pay exposures” or “overdrawn or past due exposures”, provided this classification does not precede 31 January 2020; companies may also benefit from the guarantee if they have been admitted, after 31 December 2019, to composition procedure in continuity pursuant to art. 186-bis of the Italian Bankruptcy Law or that have entered into restructuring agreements pursuant to art. 182-bis or that have submitted certified plans pursuant to art. 67 of the Italian Bankruptcy Law, provided that they no longer have exposures classifiable as “non performing” and that the bank can reasonably assume that the exposure will be fully repaid upon its maturity date.

Companies with turnover not exceeding Euro 3,200,000 may benefit from a guarantee of the Fund for 90% of the financed amount, to which a further 10% cover granted by Confidi or other entities authorized to issue guarantees may be added; in this case, however, the guarantee issued by the Fund may not exceed 25% of the beneficiary’s turnover.

The new loans in favour of SMEs and natural persons engaged in business, arts or professions, damaged by the covid-2019 emergency, provided for by the “Cura Italia” Decree in the maximum amount of Euro 3,000 with 100% direct guarantee from the Fund, have been raised to the maximum amount of Euro 25,000, or the lower amount represented by 25% of the beneficiary’s turnover (as resulting from the latest financial statements or tax declaration or other appropriate documentation or even self-certification). The guarantee of the Fund is granted to the financing institution provided that such financing has a maximum duration of 6 years and a pre-amortisation of 2 years. For these loans, the Liquidity Decree provides for a subsidised interest rate (based on variable indexes and currently estimated at around 1.5% - 2% per year). The guarantee in this case is automatic and does not require any analysis or evaluation by the Fund. Therefore, the bank will only be required to provide the loan based on the verification of compliance with the formal requirements of the Decree. However, this form of “automatic” guarantee is also subject to the approval of the European Commission.

The Decree provides for a simplified procedure for access to the Fund, since only the data necessary to fill in the economic-financial form of the evaluation model provided for by the Fund’s operating regulations, aimed at verifying the beneficiary company’s credit risk, will have to be submitted by the banks.

In conclusion, it is certain that the measures established by the Government to support the liquidity of companies through a significantly facilitated access to credit are substantial, probably even more than could have been expected. The big question will be the operation and effectiveness of the system, which will have to be supplemented by internal regulations and procedures, both by banks and by guarantee institutions, and therefore the promptness with which it will be possible to respond to the needs of companies to avoid a domino effect of amplification of the crisis before, in fact, the measures put in place by the Government manage to contain it.


1) The maximum SACE guarantee percentage is equal to (i) 90% of the amount of the loan for companies with less than 5,000 employees in Italy and turnover up to 1.5 billion Euro; (ii) 80% of the amount of the loan for companies with more than 5,000 employees in Italy and turnover between 1.5 and 5 billion Euro; and (iii) 70% for companies with turnover exceeding 5 billion Euro. For the purposes of the calculation, loans already guaranteed by SACE in favour of the company or supported by another public guarantee must be cumulated.
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