State Aid Matters January 2009

More State aid changes to ease the downturn

New opportunities for subsidised loans, guarantees, extended de minimis grants and higher risk capital allowance

On 17 December 2008 the European Commission published new rules in the form of a Communication on a temporary framework for State aid measures to support access to finance in the current financial and economic crisis, hereafter “the Communication”. The Communication is intended to help Member States tackle the symptoms and effects of the credit crunch by temporarily relaxing the State aid discipline in certain areas.

At the time of writing Germany has already availed of the new opportunities afforded by the Communication, especially in terms of loans at subsidised interest rates and de minimis grants of up to €500,000 (up from the 200,000 otherwise permitted). Germany notified two schemes on 23 December 2008 and received a Commission
approval a week later, despite the holiday period. France and Portugal have since had up to €500,000 de minimis schemes approved as well.

As detailed in previous issues of State Aid Matters the Commission had previously adopted a temporary framework deviating from the usual State aid rules for the benefit of assisting stricken financial institutions. With its latest measure the Commission has extended this generosity to the wider economy, recognising that the  problems first felt most keenly in the financial sector have moved on the general economy at large. There remains a recognition that the root of the problem is the drying up of credit available from the financial sector. The Communication leans towards specifically addressing this issue, but also has wider effects with general application more or less across the board.

The Communication provides temporary derogations from the existing framework of State aid rules found in a mixture of “Block Exemption” Regulations, CommissionGuidelines and other Commission Communications. It is important to pay close attention to the letter of the Communication. It is not a block exemption nor an amendment of other block exemptions. The Communication speaks of what “the Commission will consider compatible”, which for clarity should perhaps have added “upon notification”.

What this means is that member States may avail of these new opportunities, but only after notification to the Commission and clearance. This is an important pre-condition.  However, with its exceptionally quick approval of the German measures notified in December, the Commission has signalled that it will move quickly to ensure the Communication is practically effective, and is not unnecessarily held up in the notification process. Gone, it seems, are the days of notifications languishing in Brussels for months – for “credit crunch” notifications at least perhaps.

For fundamentally sound businesses only
Other general points emerging from the Communication are that the changes effected are temporary – applying only until 31 December 2010 unless otherwise extended . They also only apply to firms not classified as “in difficulty” as at 1 July 2008. The latter fits with the general presumption that the emergency measures are there to help firms that are fundamentally sound but for the current economic crisis, and not to help those firms  that were failing anyway, for which the Commission’s Rescue and Restructuring Guidelines, if anything, are the only State aid tool available.

De Minimis up to €500,000
New de minimis schemes offering up to €500,000 per undertaking will be capable of being authorised following notification. The current de minimis limit is €200,000 per undertaking over three years as set out in the de minimis block exemption. This is not an extension to the block exemption, however, and as explained above any schemes intended to grant such aid at above €200,000 still need to be notified and approved by the Commission in advance. The presumption is that such notifications should be capable of proceeding smoothly and quickly provided the relevant details are observed and the schemes concerned contain all necessary safeguards to ensure proper implementation, record keeping and prevention of abuse. The new German scheme does this and while the UK Government does not currently appear to be establishing similar funds centrally it is possible that something similar may spring up in the UK by other means. The use of the opportunities afforded by the Communication is not limited to central government.

State guarantee schemes
Guaranteeing loans or equivalent instruments involves assuming a risk, which in turn must carry a premium, usually charged based on a percentage of the maximum risk, such as the total of the loan amount. The Commission has previously set out - in its 2008 Notice on State aid in the form of guarantees - a series of “safe harbour” premiums to be applied against individual borrower risk ratings, that will be presumed not to confer aid at all. The Commission now opens the door for subsidised guarantees and guarantee schemes to be authorised if amounting to no more than a discount of 25% for SMEs from the “safe harbour” levels set out in the aforementioned 2008 Commission notice. The permissible discount for large companies is 15%.

The Communication further notes that such newly permissible subsidised guarantees may extend to up to 90% of loans given, but the loan should not exceed the 2008 wage bill of the undertaking concerned, or the estimated two year wage bill for new companies. The UK Department for Business Enterprise and Regulatory Reform (BERR) has just announced, inter alia, a £10 billion Working Capital Scheme to secure up to £20 billion of short term business loans to companies with a turnover of up to £500million, noting in the small print that this is subject to State aid clearance.