Article

Economic Stabilization Fund

Guarantees and silent partnerships as stabilisation instruments

It's here at last... The EU Commission approves the Economic Stabilisation Fund to support the German economy affected by the COVID-19 Pandemic. Prohibitions on distributions and dividends, waiver of bonuses, shareholder contributions and obligations of the parent company are the price to pay...

EU Commission approves the WSF as a further component of the German rescue package for companies - Germany may support the economy damaged by the COVID 19 pandemic with a further 600 billion euros. The EU Commission sees no distortion of competition.

Even if implementing ordinances are pending, the WSF now has the green light from Brussels.

The WSF provides for two stabilisation instruments (whereby a combined application is possible):

  • Federal Government guarantees to secure loans including credit lines and capital market products in the debt capital area
  • Recapitalisations for direct strengthening of equity capital

Guarantees and other warranties for bank loans and recapitalizations up to a volume of EUR 100 million granted under the WSF are subject to standardized conditions. Beyond these thresholds, individual structuring is carried out within the framework of the law and the regulations implementing the WSF Act.

Standard product "Silent partnership up to EUR 100 million"

  • The maximum amount of the silent participation is the amount required to compensate for a loss of equity caused by corona crisis-related losses in order to restore equity to the level existing on 31 December 2019 in absolute terms or in relation to the balance sheet total (the lower amount is decisive).
  • Loss sharing is possible.
  • Term until 30.06.2021 at the latest.
  • Plausibility check of the planning feasibility of regaining independent financing capability required.
  • In the event of insolvency or liquidation, subordination to all creditors, but with priority over other equity components.
  • Repayment with final maturity after 7 years at the latest (6 years for listed companies), but after 10 years at the latest.
  • Repayment in instalments possible on the basis of a repayment plan to be submitted.
  •  Termination/termination only after full restoration and repayment of the nominal amount of the silent participation plus the WSF's remuneration claims.
  • Profit participation increasing from 4.0% in year 1, 4.5% in years 2 and 3, 5.0% in years 4 and 5.7.0% in years 6 and 7, and 9.5% in the following years; in case of non-performance, possibly compound interest.
  • Possibly special compensation of 20% of the nominal amount not yet repaid, payable in 2 annual instalments, for the first time at the time of full repayment of the silent partnership, if and to the extent that the silent partnership remains in the company for more than 7 years
     

Standard product "Guarantee for bank loans"

  • Collateral by means of the Guarantee is only provided for loans that can be expected to be repaid within the loan term under normal economic development or where there is sufficient probability of successful follow-up financing.
  • Collateral for loans and working capital lines.
  • A maximum of twice the wage and salary payments including social security contributions or 25% of the borrower's sales revenues in 2019, or alternatively the comprehensibly planned financing requirements for the next 12 months.
  • Maximum term is 6 years.
  • Modified proportionate default guarantees with a maximum of 90% coverage of the default on the principal claim plus interest.
  • Borrower must provide reasonable and economically reasonable collateral.
  • Collateral to be provided serves to secure the entire loan; the provision of special collateral for the lender's share of the risk is not permitted.
  • Default is deemed to have occurred if and to the extent that illiquidity has been proven and no significant proceeds from the realisation of the borrower's assets and any collateral provided are to be expected in the foreseeable future, even after enforcement measures have been taken, no later than 12 months after the due date of unpaid interest and/or principal. The lender must submit a statement of account of the default. 
  • As a matter of principle, WSF will make advance payments on the guarantee debt subject to reservation.
  • Guarantee commission in the first year at least 0.5%, in the following two years 1.0% and thereafter 2.0% of the (remaining) guarantee amount. These minimum rates are subject to individual risk-based surcharges.
     

General standard terms and conditions

For the term of guarantees from EUR 100 million and for silent partnerships up to EUR 100 million, there is a prohibition of distributions or dividends and a prohibition of repurchase of own shares/shares. During the term of the guarantee, no bonuses or other variable or comparable remuneration components may be granted to members of executive bodies and managers, including any Group remuneration. Likewise, no special payments in the form of share packages, gratuities or other separate compensation in addition to the fixed salary, other compensation components placed at the free discretion of the company and legally not required severance payments may be granted.

Until at least 75 percent of the measure has been definitively repaid, no total compensation for members of the Executive Committee above that member's base compensation as of December 31, 2019. For persons who become members of the Executive Committee at the time of the measure or thereafter, the upper limit is the base compensation of members of the Executive Committee at the same level of responsibility as of December 31, 2019.

Information rights shall be provided for in favour of the WSF. A shareholder contribution commensurate with the structures and financial circumstances is generally required. In the case of group companies, a guarantee or other joint obligation on the part of the parent company is generally required. Debt rescheduling is excluded. Regular repayments on bank loans are to be suspended until the end of 2021. Existing credit lines in the company must be fixed until at least the end of 2022.
 

Additional conditions for silent partnerships

The investor must undertake not to pursue an aggressive expansion strategy for the duration of the silent partnership. Participations of more than 10 % in companies in upstream and downstream business activities are only possible to a limited extent, if and where this is necessary to maintain the profitability of the company or the target company, other buyers are not available and the EU Commission has approved the acquisition of the participation before it is implemented. The company is required to submit a restructuring plan in accordance with the rescue and restructuring guidelines of the European Commission for approval by the latter in the event that, seven years (six years in the case of listed companies) after the stabilization measure, the sum of silent participations paid out and not yet repaid and any other state equity instruments still existing at that time for stabilization purposes is not less than 15% of the equity of the company.

There is no legal entitlement in each case. The decision is subject to due discretion within the scope of the available funds.

The Federal Ministry of Economics and Energy is the contact for the companies and is responsible for examining applications. The decision will be made depending on the volume of support applied for:

KfW decides on guarantees up to a volume of 100 million euros.
BMWi and BMF decide on guarantees of 100 to 500 million euros and recapitalisations of up to 200 million euros by mutual agreement. Guarantees of 500 million euros and recapitalisations of 200 million euros and more are submitted to the interministerial WSF committee.

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