State aid: expanded Ukraine Temporary Crisis Framework allows recapitalisation

On 28 October 2022, the European Commission (Commission) adopted a significant expansion of the Temporary Crisis Framework (TCF) it had adopted in March 2022 (see our blog post here) in response to the Russian invasion of Ukraine.

What has changed?

The TCF had already seen a first amendment in July 2022 which mainly targeted an accelerated rollout of renewable energy and clarified the conditions under which Member States may grant aid to cover companies’ increased gas and electricity costs.

With this second amendment, the Commission not only prolongs its application until 31 December 2023 (the initial expiration date was 31 December 2022), but also enables Member States to recapitalise companies facing severe solvency issues and provides for additional measures to support electricity demand reduction.

In addition, maximum aid ceilings applicable to limited amounts of aid have been increased significantly and access to liquidity support for energy companies that must provide financial collateral has been adjusted.

The main amendments to the TCF are set out below.

Member States may recapitalise companies under strict conditions

The TCF had so far enabled Member States to provide limited amounts of aid, guarantees and subsidised loans. The Commission has now opened the door for them to also recapitalise companies. However, the hurdles for recapitalisation are notably higher as compared to the Covid-19 Temporary Framework (Covid TF), which expired in June 2022.

Member States that wish to provide recapitalisation will need to demonstrate that the beneficiary would cease or downsize operations without such solvency support and that ceasing or downsizing operations would threaten energy markets or other markets which are of systemic importance for the economy.

In addition, the Commission considers the following general principles as particularly relevant in the required case-by-case assessment:

• the measure must not go beyond restoring the capital structure of the beneficiary to the one predating the crisis (i.e. the aid must be proportionate);
• companies belonging to a larger business group must demonstrate that their solvency issues are not the result of an arbitrary allocation of costs within the group and are too serious to be dealt with by the group itself. In such cases, a substantial contribution by the group to the costs of the solvency measure will typically be required;
• the Member State must receive reasonable remuneration in return such as an appropriate share of future gains in value of the beneficiary;
• where aid takes the form of subordinated debt or other hybrid capital instruments, the overall remuneration of such instruments must adequately factor in the characteristics of the instrument chosen, including its level of subordination and all modalities of payment;
• appropriate competition measures in line with the principles set out in the 2014 Rescue and Restructuring Guidelines will be necessary. Depending on the competitive landscape, divestments of assets may also be required as a compensatory measure. Behavioural measures, including commitments ensuring an effective ban on bonus payments or other variable payments, dividend payments, and acquisitions will be required; and
• for each beneficiary, Member States must undertake a long-term viability assessment and, where considered appropriate by the Commission, notify to the Commission for approval a restructuring plan in accordance with the Rescue and Restructuring Guidelines within a specified period of time.

Thus it appears that a compromise was reached between the Member States and the Commission: to include recapitalisation measures under the TCF but to also provide the Commission with the necessary tools to ensure that they would not distort the level playing field in the EU.

In particular, the Commission appears to focus on concepts such as burden sharing, potential divestments of a beneficiary’s business segments that are not directly affected by the crisis, and the potential need for concrete restructuring plans. These concepts were applied extensively during the financial crisis and feature prominently in the Commission’s 2014 Rescue and Restructuring Guidelines, but were not always the main focus during the Commission’s assessment of recapitalisation measures under the Covid TF.

Companies applying to their respective Member States for recapitalisation measures will therefore need to be aware that such aid may come at a higher price than it would have under the Covid TF.

Other main amendments

Guarantees: A new upper limit has been added in relation to the overall amount of loans per beneficiary for which guarantees may be granted. For large companies that need to provide financial collateral for trading activities on energy markets, the overall amount may now be increased to cover liquidity needs derived from these activities, from the moment of granting of the guarantees for the coming months. In addition, where the public guarantee is provided as financial collateral to central counterparties or clearing members to cover new liquidity needs derived from the need to provide financial collateral for cleared trading activities on energy markets for energy undertakings, that guarantee coverage may exceptionally exceed 90%.

Aid for the reduction of electricity consumption: To meet electricity consumption reduction targets, a new category of aid has been added to compensate companies for not consuming electricity compared to the expected consumption. Member States shall set up competitive bidding processes to award such aid, and must describe when the additional consumption reduction will be activated. The idea behind this aid category is to reduce consumption for more expensive electricity generation technologies (i.e. gas) at times of high demand.

If your business is affected by the current crisis and liquidity support is required, feel free to reach out to us to discuss which measures may be applicable and suitable to your situation.

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