The EU Commission has published a further amendment to its 19 March guidance document on state aid in reaction to the COVID-19 outbreak.
The amendment, announced on 8 May 2020, comes in addition to the first amendment of 3 April to the Temporary Framework (see our blog post). The latest amendment takes a step further than shorter-term liquidity support: it sets out the permissible circumstances and conditions under which member states can offer time-limited equity or equivalent recapitalisation support to ‘real economy’ companies (as opposed to financial institutions).
This is a potentially highly relevant instrument for larger companies in cases where short-term liquidity measures are proving insufficient, and where the company is also finding itself unable to tap markets for the equity capital necessary to ensure longer term viability. But the EU’s latest amendment makes it clear that recapitalisation aid will come with strings attached, including restrictions on the company’s commercial behaviour and the remuneration of its own management.
The question for companies will be whether the financial and commercial costs of this recapitalisation aid, and its time-limited nature, will limit its attractiveness and cause them to redouble their efforts to find market-based solutions.
What new measures are provided for under the amendment?
Member states can put in place recapitalisation schemes and individual recapitalisation measures for non-financial undertakings (collectively referred to as 'COVID-19 recapitalisation measures'). COVID-19 recapitalisation measures shall not be granted later than 30 June 2021. The beneficiary of a COVID-19 recapitalisation measure must fulfil the following conditions:
- Without the state intervention, it would go out of business or would face serious difficulties to maintain its operations. Such difficulties can 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;
- It has exhausted the possibilities to find financing on the markets and the horizontal measures existing in the member state concerned to cover liquidity needs are insufficient to ensure its viability; and
- It is not an undertaking that was already in difficulty on 31 December 2019 (within the meaning of the General Block Exemption Regulation).
What form can the recapitalisation schemes take?
Member states can provide COVID-19 recapitalisation measures using two distinct sets of recapitalisation instruments:
- equity instruments, in particular, the issuance of new common or preferred shares; and/or
- debt financing instruments with a potential equity component (referred to as 'hybrid capital instruments'), in particular profit participation rights, silent participations and convertible secured or unsecured bonds.
The amount of the COVID-19 recapitalisation must not exceed the minimum needed to ensure the viability of the beneficiary, and in any event must not go beyond restoring the capital structure of the beneficiary to the one predating the COVID-19 outbreak, ie the situation on 31 December 2019. Within these parameters, member states have the discretion to choose the amount provided for in the recapitalisation.
If the aid provided for amounts to more than EUR 250 million, a separate, individual notification will be required.
How will the member states be remunerated?
Pricing for equity instruments should not exceed the average share price of the beneficiary over the 15 days preceding the request for the capital injection. For non-listed companies, the Commission recommends an independent valuation.
1. Equity capital instruments
Any recapitalisation measure shall include a step-up mechanism increasing the remuneration of the state, to incentivise the beneficiary to buy back the state capital injections.
This increase in remuneration can take the form of additional shares granted to the state or other mechanisms, and should correspond to a minimum of 10 per cent increase in the remuneration of the state (for the participation resulting from the state’s COVID-19 equity injection that has not been repaid), for each of the step-up steps:
- Four years after the COVID-19 equity injection, if the state has not sold at least 40 percent of its equity participation resulting from the COVID-19 equity injection, the step-up mechanism will be activated.
- Six years after the COVID-19 equity injection, if the state has not sold in full its equity participation resulting from the state’s COVID-19 equity injection, the step-up mechanism will again be activated.
If the beneficiary is not a publicly listed company, member states may decide to implement each of the two steps one year later, ie five years and seven years after granting of the COVID-19 equity injection, respectively.
2. Hybrid capital instruments
The minimum remuneration of hybrid capital instruments until they are converted into equity-like instruments shall be at least equal to the base rate, plus the premium as set out in the table below:
Remuneration of hybrid capital instruments: 1-year IBOR +
Type of recipient
2nd and 3rd year
4th and 5th year
6th and 7th year
8th year and after
The conversion of hybrid capital instruments into equity shall be conducted at 5 per cent or more below the theoretical ex-rights price (TERP) at the time of the conversion.
Member states may choose the form of any variation of the above instruments and may choose a pricing formula that includes additional step-up or payback clauses. The Commission may also accept alternative instruments and structures, as long as they follow the principles set out above.
What constraints are imposed upon potential COVID-19 recapitalisation measures?
Where the beneficiary of a COVID-19 recapitalisation measure above €250m is an undertaking with significant market power on at least one of the relevant markets in which it operates, member states must propose additional measures to preserve effective competition in the relevant markets. In proposing such measures, member states may in particular offer structural or behavioural commitments under the EUMR.
Beneficiaries receiving a COVID-19 recapitalisation are prohibited from advertising the recapitalisation for commercial purposes.
As long as at least 75 per cent of the COVID-19 recapitalisation measure has not been redeemed, a beneficiary other than a SME shall be prevented from acquiring a more than 10 per cent stake in competitors or other operators in the same line of business, including upstream and downstream operations.
In exceptional circumstances, and without prejudice to merger control, such beneficiaries may acquire a more than 10 per cent stake in operators upstream or downstream in their area of operation, only if the acquisition is necessary to maintain the beneficiary’s viability. The Commission may authorise the acquisition if it is necessary to maintain the beneficiary’s viability. The acquisition may not be implemented before the Commission has taken a decision on this issue.
Beneficiaries must put in place accounting separation from activities of undertakings that were 'in difficulty' on 31 December 2019. Beneficiaries cannot make dividend payments, nor non-mandatory coupon payments, nor buy back shares, other than in relation to the state.
As long as at least 75 per cent of the COVID-19 recapitalisation measures has not been redeemed, the remuneration of each member of the beneficiaries’ management must not go beyond the fixed part of his/her remuneration on 31 December 2019.
For persons becoming members of the management on or after the recapitalisation, the applicable limit is the lowest fixed remuneration of any of the members of the management on 31 December 2019. Under no circumstances, bonuses, other variable or comparable remuneration elements shall be paid
How should member states exit from a COVID-19 recapitalisation scheme?
The beneficiary shall have at any time the possibility to buy back the equity stake that the state has acquired, as long as buy-back price is the higher amount of:
- the nominal investment by the state increased by an annual interest remuneration 200 basis points higher than presented in the table above; or
- the market price at the moment of the buy-back.
The state may sell its equity participation at market prices to purchasers other than the beneficiary.
Beneficiaries other than SMEs that have received a COVID-19 recapitalisation of more than 25 per cent of equity at the moment of intervention must demonstrate a credible exit strategy for the participation of the member state, unless the state’s intervention is reduced below the level of 25 per cent of equity within 12 months from the date of the granting of the aid.
The exit strategy shall lay out:
- the plan of the beneficiary on the continuation of its activity and the use of the funds invested by the state, including a payment schedule of the remuneration and of the redemption of the state investment (together 'the repayment schedule’); and
- the measures that the beneficiary and the state will take to abide by the repayment schedule.
The exit strategy should be prepared and submitted to the member state within 12 months after aid is granted and must to be endorsed by the member state. If, six years after the COVID-19 recapitalisation, the state’s intervention under the Temporary Framework has not been reduced below 15 per cent of equity, the member state must submit a restructuring plan in accordance with the rescue and restructuring guidelines to the Commission for approval. If the beneficiary is not a publicly listed company, member states may decide to notify a restructuring plan one year later.
For further insights on navigating the impact of COVID-19, visit our coronavirus alert hub.