How will Covid-19 public financing be renegotiated with the banks?

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Last May 2021, the Secretary of State for the Economy and Business Support approved the Code of Good Practice for the renegotiation of financing guaranteed by public entities (ICO, CESCE or CERSA) on the occasion of the Covid-19 crisis.

Thus, companies that received aid in the form of bank financing guaranteed by these public entities will have the possibility to apply for one of the 3 measures made available to them:

  1. Extension of ICO loans: for two more years, so that the maximum term for loans of less than €1.8 million will be 10 years, and for loans of more than €1.8 million it will be 8 years. This extension will be mandatory for banks in cases of a decrease in sales of more than 30% in the period 2020 compared to 2019, and only optional if the decrease in turnover is less.
  2. Conversion of the financing into a shareholder loan, with maintenance of the public guarantee: in this case, a decrease in turnover of more than 30% is mandatory and the company must also have recorded losses in 2020. The refinancing of the guaranteed debt will be binding for all banks, when more than 50% of the guaranteed nominal amount supports it.
  3. As a measure of last resort, the reduction (write-down) of the principal of the financing by means of transfers by the State.

All these modalities will be implemented in the framework of an agreement to renegotiate the debt of all banks, making their best effort to include both the secured and unsecured part, generated between 3/17/20 and 3/12/21.

One or more measures may be implemented at the same time or successively. In order to coordinate the whole process between the various financial institutions, it has been stipulated that the bank with the highest risk ICO will be the coordinator of all the banks, and the company must contact it. Tranches 1 and 2 must be communicated to ICO before 12/1/21, and tranche 3 before 12/1/22. Debt secured by collateral or guarantors is excluded from these coordination rules.

Another very important point to bear in mind is that, if any of these three modalities are used, the banks undertake to maintain the working capital lines until 12/31/22. And as far as the refinancing of the non-guaranteed debt is concerned, the unanimity of all the financial institutions will be necessary.

For more details on the eligibility criteria and how the whole process works, please contact us. At Altria Corpo we can handle all these procedures and negotiations with financial institutions, as well as look for all kinds of additional financing solutions from among the more than 100 alternative financing providers to which we can provide access.

Anticipating financial decisions, key facing 2021

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The extension of the grace period in ICO credits that the government is preparing will not be enough. Companies must plan and make decisions now to overcome the difficult 2021.

As of March 2021, the financing lines guaranteed by the ICO should begin to be paid back by the companies. However, for many of them, the one year grace period that these credits have seems too short in view of the evolution of the pandemic and its undoubted impact on the economy. Even with an eventual improvement in the health situation and the economy in the next half year, the reality is that the volume of debt that companies have generally incurred is too high to be able to repay these loans without liquidity tensions.

Faced with this outlook, and pressure from companies and financial institutions, the Spanish Government is taking measures and in all likelihood is going to extend the grace period, to one more year until 2022, and extend the term of the loans from five to eight years. Banks and businesses will welcome these new conditions. On the part of the financial institutions, they have assumed a risk of 25,000 million Euros which, if the number of defaults increases, could lead to significant provisions and even cause some banks to fall into losses. On the part of the companies, the situation is serious in many of them, and even a recent report by Alvarez & Marsal indicates that 14% of the companies will probably disappear due to the effects of the economic crisis and the inability to repay the debt incurred.

In spite of this relief in the repayment terms of the ICO credits, it seems clear that the companies cannot rely only on this measure, which also still needs the approval of Brussels, so it may suffer changes in the negotiation with the European authorities, among them the European Central Bank, which must approve this measure, and in such approval could set the mandatory provisions in case of increased grace periods and repayment terms, which in practice would mean that it could not be applied by the banks due to the increased cost it would entail.

European Central Bank headquarters in Frankfurt

In short, there is an urgent need to anticipate an economically very complicated and financially very tense scenario. It is crucial at this time to protect the cash flow and look for new financial instruments that can either cancel the existing debt that generates a higher monthly service for another much longer term that substantially reduces this service, or capitalize the companies to strengthen their solvency, resist the decrease in income and profits and bet on the digitalization and the implementation of new business lines.

At Altria Corpo we are actively managing our clients to find the best solution to overcome this coming year. Despite the difficulties of the credit market and especially the caution of many financial institutions, there is still a variety of possibilities, both in the area of restructuring bank debt, with the help of debt funds and other similar alternative financing instruments, and in that of other financial solutions that operate with the guarantee of the company’s assets, both real estate and productive equipment, or even the stock itself. Without forgetting the possibilities that the entry of equity offers, be it venture capital funds, or industrial partners or those with a more permanent vocation.

These are moments where, in order to achieve a solution that gives economic and financial viability to the company, a high knowledge of all the possibilities that exist in the financing market is required, as well as the capacity to prepare a complete dossier where the current financial statements are clearly explained and above all, an economic and treasury projection of the company for the next months and years can be made. The help of an expert advisor is, without a doubt, more necessary than ever at this time.

Altria Corpo is a financial consultancy founded in 2014 by Albert Gumà and based in Barcelona. Its clients are medium and large companies, to whom it offers its experience in all types of debt and equity financing, and access to more than 150 financial providers including banks, alternative financing, debt funds, public funds and other instruments. In its 7 years of existence, Altria Corpo has positioned itself as a reference in the search for financing for medium and large companies, with an accumulated advised transactions worth of more than 250 million and more than 600 operations. The scope of the companies advised covers the entire Spanish territory, with a concentration in Catalonia, which represents 80% of the total amount advised.