COVID-19 Solidarity Guarantee Regulation: First comment and assessment
The Federal Council's new emergency ordinance on the collateralisation of SME emergency loans(RO 2020 1077; officially somewhat awkwardly called "COVID-19-Solidarbürgschaftsverordnung", abbreviated here as "COVID-19-SolBüVO") was drafted in record time. Applications for this guarantee programme (which is not unproblematic in its structure from an economic point of view) can be submitted by SMEs as early as today, 26.03.2020, 08:00h, via an application form available online . The Federal Council has also published explanations and an FAQ. FINMA and SwissBanking also issued media releases.
The CHF 20 billion guarantee programme is available to individual companies, partnerships and legal entities and builds on the existing structures of the legally regulated guarantee cooperatives.
The programme includes two credit facilities:
Loan origination process for Covid 19 loans
Credit facility 1 (so-called "Covid-19 credit"): Amounts of up to CHF 0.5 million are disbursed by the banks in a straightforward manner on the basis of a simple application and are 100% guaranteed by the Confederation via the guarantee cooperatives.
Credit Facility 2 (so-called "Covid-19 Credit Plus"): Amounts exceeding this are guaranteed by the Confederation at 85 percent, the rest must be guaranteed with curant collateral or the guarantee cooperatives cover the remaining amount themselves. A prerequisite is a prior review of the application by the bank. The maximum amount of the credit facility is CHF 20 million per applicant.
According to the Federal Council, the loan amounts of up to CHF 0.5 million should cover over 90% of the affected companies. The Federal Council assumes that bridging loans of up to CHF 20 million will be guaranteed by the Confederation through this mechanism. However, the total amount must be approved by the Federal Assembly (Art. 2 COVID-19-SolBüVO), which creates uncertainties.
First comments and remarks
The following stands out when reviewing the COVID-19 SolBüVO:
A Covid 19 credit is available to businesses established before 01.03.2020, businesses established later are not eligible.
According to Art. 3 Para. 1 lit. c COVID-19-SolBüVO, the prerequisite is that the applicants are "economically significantly impaired due to the COVID-19 pandemic, in particular with regard to their turnover". This essential discretionary criterion, that an "substantial This essential discretionary criterion, that there must be an "impairment, particularly with regard to turnover", contradicts the promise of the Federal Council that loans will be available "quickly and unbureaucratically". The explanatory notes to the aforementioned provision then also state that turnover losses due to problems in the supply chain, i.e. turnover losses that do not arise directly-causally due to the behaviour of the buyers, do not entitle to a Covid 19 credit. SO, the explanations explicitly mention the case that there is no reason for a credit if, for example, businesses have to be closed due to hygiene reasons. This distinction seems to be very problematic and misses the point of helping the entire "real economy" (as FINMA apparently expresses it in contrast to the surreal economy) through the crisis.
NOTA: This distinction seems unworldly to us: for an SME, the Corona crisis is a crisis regardless of whether customers stop placing orders or whether they have to close the business for hygiene reasons. With this restriction, all SMEs could be excluded from Covid-19 credits that had to close their business due to Art. 6 COVID-19-VO-2. There is no clear link here between this regulation and the operational measures imposed under COVID-19-VO-2.Sports and cultural enterprises can choose whether to apply for a COVID 19 credit or (alternatively) claim the sectoral support packages, e.g.; applying for both together is excluded (Art. 3 para. 1 lit. d COVID 19 SolBüVO).
NOTA: It is completely unclear what the situation is with non-profit companies (donation-financed companies), which are currently losing donation income due to the economic fears caused by the Corona crisis. Profond's umbrella organisation for non-profit foundations has already written a letter to the Federal Council in this regard. The COVID-19-SolBüVO does not contain an explicit exclusion for these companies: so our advice is to try it immediately!Covid 19 credits (both facilities together) are limited to 10% of the "turnover [...] in 2019". In the case of over-long financial years or younger companies, the turnover is considered to be three times the annual net payroll, with a minimum of CHF 100,000 and a maximum of CHF 500,000.
NOTA 1: With this restriction, all companies with less than CHF 5.0 million in turnover are excluded from Facility 2 (Covid-19 Credit Plus).
NOTA 2: Start Ups without turnover can only rely on the turnover assessment based on the net payroll if they were founded after 01.01.2020 or have adopted an overlong financial year when founded in 2019. Start-ups without turnover cannot therefore apply if (i) they were founded before 01.01.2019 and/or (ii) if they did not adopt an extra-long financial year in 2019.No Covid 19 loans are granted to companies (i) that are, among other things, in debt-restructuring proceedings (Art. 3 para. 1 lit. b COVID 19-SolBüVO) or (ii) with a turnover of more than CHF 500 million (Art. 6 para. 2 lit. a COVID 19-SolBüVO).
NOTA: The size restriction is understandable, but not the restriction regarding companies in debt-restructuring moratorium. These companies must present a positive restructuring prognosis and are under the supervision of the court-appointed administrator. A Covid 19 loan would tend to be even better secured as a mass loan than it is for 'normal' companies.Covid 19 loans may not be used for expansion investments, but expressly also for "replacement investments" (Art. 6 Ab.s 2 lit. b COVID 19 SolBüVO). It is also excluded to on-lend these loans within the group.
NOTA: This probably excludes the use of such funds for intra-group cash pooling.Also, no shareholder loans may be repaid or dividends etc. distributed until Covid 19 facilities have been amortised. Whether the exclusion of a "repayment of capital contributions" also includes a capital reduction is left open in the explanatory notes. The principle is that no "misappropriation" of funds should be permitted.
The Covid-19 loans (Facility 1 and 2) must be amortised within 60 months (Art. 5 COVID-19-SolBüVO)COVID-19-SolBüVO).
Facilities 1 are to be issued at an interest rate of "0.0 percent" (Art. 13 para. 3 lit. a COVID-19-SolBüVO), Facilities 2 at an interest rate of 0.5% pa.
NOTA: The explanatory notes are also silent on the issue of passing on negative interest. But this is a topic that could come to an end anyway in the wake of the Corona pandemic.Art. 24 COVID-19-SolBüVO seems to us to be very important: In another emergency amendment to the Code of Obligations, it was determined that the Covid-19 loans (and only Facility 1) willnot be taken into account as debt capitalfor "the calculation of over-indebtedness pursuant to Article 725 paragraph 2 CO [...] until 31 March 2022".
NOTA: Facilities 1 are therefore to be treated in the same way as subordinated loans in balance sheet terms under the light of Art. 725 para. 2 CO, but only "until 31 March 2022". In other words: if it is already foreseeable in the annual financial statements as at 31 December 2012 that a Covid 19 loan (Facility 1) cannot be repaid, then the steps provided for by the legislator must presumably already then be initiated by the supreme body (balance sheet deposition or [if there is a prospect of restructuring] application for debt-restructuring moratorium).
"The process has now been largely clarified. Many questions remain unanswered and many companies (including start-ups) will receive no or only limited support. A level playing field must be created through the banks' practices."
The question of whether refinancing of existing loans is possible remains completely open: companies that have existing loans and are suffering from the Corona pandemic are now being competed against by competitors who can finance their current assets at much more favourable conditions. This unequal treatment has yet to be eliminated. In addition, the banks are also likely to be interested in refinancing some of the loans in order to achieve a better collateral situation.
We will provide additional information and report on experiences shortly.
Balthasar Wicki and Hans Kuhn are available to answer any questions.