EC further extends Temporary Framework to support the economy in the current COVID-19 outbreak through recapitalisation and subordinated debt measures

On 8 May 2020, the European Commission adopted an additional amendment (the ‘Amendment’) to extend the scope of the State Aid Temporary Framework adopted on 19 March 2020 to enable Member States to support the economy in the context of the coronavirus outbreak. This follows the first amendment adopted on 3 April 2020.

The Amendment complements the State aid measures already authorised in terms of the Temporary Framework by establishing criteria through which Member States can provide recapitalisations and subordinated debt to companies in need, whilst ensuring fair competition within the internal market. Member States have been entrusted with the flexibility to draw out national measures in conformity with additional policy objectives, such as the green and digital transformation of their economy and combatting fraud, tax evasion or aggressive tax avoidance.

Recapitalisation aid to companies

The COVID-19 crisis has resulted in a number of non-financial companies being adversely affected due to various obstructions in supply chains, which have in turn resulted in losses which decreased such businesses’ equity and their overall ability to borrow on the markets. The Amendment seeks to expand the Temporary Framework to enable well-targeted public interventions to reduce the risks to the EU as a whole, subject to a number of conditions.

Primarily, recapitalisation aid should be necessary, appropriate, in the common interest and limited to enable the viability of the company. In return, the Member State should be sufficiently remunerated for the risks assumed through the recapitalisation aid. The Member State’s involvement also signals an effective ban on dividends and share buybacks until the exit of the Member State and limitations on the remuneration of management until 75% of the recapitalisation is redeemed.

The scope of recapitalisation aid is of a temporary nature and beneficiaries and Member States should work on developing an exit strategy. Where the exit of the Member State is in doubt following 6 years (or 7 years for non-publicly listed companies) after recapitalisation aid, the Commission should be notified with a restructuring plan for the beneficiary.

In an effort to make sure that beneficiaries do not unduly benefit from recapitalisation aid, beneficiaries are not allowed to use the aid to support economic activities of integrated companies that were in economic difficulties prior to 31 December 2019. Companies that were already in difficulty on 31 December 2019 are ineligible for aid under the Temporary Framework.

Aid to companies in the form of subordinated debt

The Amendment also introduces the possibility for Member States to support undertakings facing financial difficulties due to the COVID-19 outbreak by providing subordinated debt to companies at favourable terms. This relates to debt instruments that are subordinated to ordinary senior creditors in the case of insolvency proceedings. Subordinated debt cannot be converted into equity whilst the company is a going concern. Since such debt increases the ability of companies to take on senior debt in a manner similar to capital support, aid in the form of subordinated debt includes higher remuneration and a further limitation as to the amount compared to senior debt under the Temporary Framework.

The full text of the Amendment can be found here.