New Danish state guarantee schemes may pave the way for "Corona-loans"
The outbreak of the new Corona virus (COVID-19) has sent shock waves through global financial markets and may cause significant liquidity problems for many Danish companies in the near term. The Danish Government has launched two new state guarantee schemes designated for "Corona-loans" to companies within those industries whose revenues and profits are among the worst affected by the outbreak of COVID-19. Plesner's Banking & Finance team reviews the new state guarantee schemes and the key issues that companies should consider before raising "Corona-loans".
The outbreak of COVID-19 has sent shock waves through global financial markets. While it seems too early to make predictions about the economic consequences in the long term, it is clear that the outbreak of COVID-19 may cause significant liquidity problems in the near term. Many Danish companies are already facing liquidity concerns and the maths are easy: When revenues deteriorate due to the production being reduced or wholly suspended, whilst costs such us salaries, rental expenses, etc. are not reduced correspondingly, a need for further liquidity may quickly arise.
To address an extraordinary need for liquidity caused by the outbreak of COVID-19, some companies may need to raise new debt financing, including an upsize of existing loan facilities and/or the establishment of new loan facilities, hereinafter referred to as "Corona-loans".
Two new state guarantee schemes
The Danish Government has launched two new state guarantee schemes designated for companies within those industries whose revenues and profits are among the worst affected by the outbreak of COVID-19. The guarantee schemes are announced at the website of the Danish Ministry of Industry, Business and Financial Affairs and further described in the Ministry's Fact Sheet (available in Danish only). The guarantee schemes comprise:
- Guarantee scheme for SMEs - This guarantee scheme is designated for small and medium-sized enterprises (SMEs) that have experienced an operating loss of more than 50% due to the outbreak of COVID-19. With this scheme, the Government introduces a state guarantee with respect to 70% of new bank loans to otherwise healthy SMEs within the relevant industries that can cover operating losses due to the outbreak of COVID-19. The scheme needs to be approved by the European Commission as the scheme implies state aid according to the Government.
- Guarantee scheme for larger companies - This guarantee scheme is designated for larger companies. With this scheme, the Government introduces a state guarantee with respect to 70% of bank loans to larger companies that can document a loss of revenues by more than 50% due to the outbreak of COVID-19. This scheme is proposed to be implemented on market terms.
The details of the two new guarantee schemes are not yet announced. Plesner's Banking & Finance team monitors the development closely and is available to answer questions and assist in evaluating how the new guarantee schemes may be utilised by banks and companies on a case-by-case basis, including as regards the interplay with existing debt financing (please see below).
Key considerations prior to raising Corona-loans
Danish companies that are considering raising Corona-loans and that already have debt financing in place (loan facilities, corporate bonds, etc.) should check their existing financing documents to ensure that they fully understand the potential implications of an additional debt incurrence. This applies whether or not the new Corona-loan is intended to be raised within the framework of the new state guarantee schemes. The considerations outlined below are largely also relevant to banks that are considering providing Corona-loans.
Some of the key questions are:
- Permission for additional debt incurrence: Will the company be permitted to take out a new Corona-loan under the terms of the existing debt financing? Or will the consent of (a qualified majority of) the existing creditors be required?
Companies with existing loan financing may, among others, consider whether the facilities agreement includes a regime for establishment of incremental/accordion facilities to be documented inside the existing facilities agreement. Further, it may be considered whether there are other relevant permissions (e.g., baskets) for additional debt incurrence to be documented outside of the existing facilities agreement.
- Legal documentation: How should the new Corona-loan be documented? Will an intercreditor agreement be required?
Companies with existing loan financing may, among others, consider if the new Corona-loan can be documented within the parameters of the existing facilities agreement, including by using a regime for establishment of incremental/accordion facilities. This may be particularly relevant to the extent the Corona-loan will be provided by one or more banks that are also incumbent lenders under the existing facilities agreement. Depending on the proposed financing structure, an intercreditor agreement between the existing creditors and the bank(s) providing the Corona-loan may also be required.
- Interplay between the terms of the existing debt financing and a new Corona-loan: How may a new Corona-loan impact on other terms of the existing debt financing? How can it be ensured that the terms of both the new Corona-loan and the existing debt financing work together?
Companies with existing loan financing may, among others, consider potential issues relating to financial covenants, amortisation, mandatory prepayments, etc. Each case will need to be examined based on the particular facts and the specific financing structure, including the specific terms of the existing loan financing and the new Corona-loan.
Plesner's Banking & Finance team is available to answer questions and assist in raising new Corona-loans and evaluating the potential implications under existing financing arrangements. Companies with existing loan financing may also refer to our Banking & Finance Q&A: Implications under loan documentation of the outbreak of COVID-19 (available in Danish only).