State aid in financial turmoil

Author: | Published: 1 Nov 2009
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Wolf Theiss (Romania)

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In an attempt to boost the Romanian economy and to ensure that small and medium-sized enterprises (SMEs) as well as large companies experiencing financial difficulties may have access to finance for investment and working capital, the Romanian Government acting through the Inter-ministerial Committee of Financing, Guarantees and Insurance (ICFGI) has passed a set of norms regulating the terms and conditions establishing a state aid scheme.

The norms facilitate access to finance during this economic and financial crisis via guarantees granted to SMEs and large enterprises, as approved by Decision 104 of June 18 2009. They set forth the main regulatory framework for the granting of loan guarantees, observing the framework and recommendations issued by the European Commission in this field.

The eligible beneficiaries under the state aid scheme are either SMEs or large firms which: (i) carry out their business activities within the Romanian territory; (ii) were not in financial difficulties as of July 1 2008; and (iii) are, as a result of the global economic and financial crisis, experiencing financial difficulties. Certain undertakings are however excluded, irrespective of whether the aforementioned conditions are met. The Romanian state will not offer guarantees for loans granted to companies engaged in the production of (i) weapons, alcohol and tobacco; (ii) gambling; or (iii) real estate transactions (i.e. the construction or the acquisition of immovable assets for the purposes of selling or renting them).

Under the norms, SMEs are defined as undertakings with less than 250 employees and with an annual net turnover not exceeding the equivalent in Romanian leu (domestic currency) of €50 million or with an annual accounting turnover not exceeding the equivalent in leu of €43 million. All other undertakings that do not fulfil these criteria are considered to be large firms.

The definition of "firm in difficulty" is in line with the one used in European Commission Regulation 800/2008 declaring certain categories of aid compatible with the common market in application of Articles 87 and 88 of the Treaty (General Block Exemption Regulation) – when speaking of SMEs – and in accordance with point 2.1 of the Community guidelines on state aid for rescuing and restructuring firms in difficulty (2004/C 244/02) – when speaking of large undertakings.

The guarantee fund under the state aid scheme amounts to L250 million (approximately €58.5 million) for 2009 and L200 million (approximately €46,8 million) for 2010. The scheme is in place until December 31 2010 and the eligible beneficiaries may lodge a request before October 30 2010. The requests shall be filed with the Export-Import Bank of Romania – Eximbank SA together with the legal, financial and commercial documentation concerning the company and the financed project.

Eximbank is the body empowered to analyse the related documentation and to propose to ICFGI, for its approval, the granting of a loan guarantee based on the principle "first-come, first-served". The state guarantee shall: (i) not cover more than 90% of the value of the investment or working capital loan; (ii) be granted only in addition to other real or personal guarantees granted by the beneficiary in favour of the lender; and (iii) be granted only for investment loans with a maturity not exceeding six years and for working capital loans with a maturity not exceeding four years. Furthermore, the maximum amount of the loan must not exceed the total annual wage bill of the beneficiary for 2008. The guarantee may be granted in the currency of the loan and may not be cumulated with de minimis state aid granted for the same purposes. Nonetheless, the state aid granted under the norms may be cumulated with other state aid measures up to the maximum level of funding allowed under the applicable regulations.

Practically speaking, should an eligible beneficiary fulfil these requirements and the ICFGI approve the granting of the loan guarantee, the beneficiary, the lender and Eximbank, on behalf of the Romanian state, will enter into a guarantee convention providing for the rights and obligations of the parties and, inter alia, the payment of a guarantee premium.

The guarantee premium is based on the characteristics of the guarantee and those of the loan that is guaranteed – the amount and the duration of the transaction, the security package offered by the beneficiary and other experience affecting the recovery rate evaluation, the probability of default by the beneficiary due to its financial position, the sector of activity and the prospects of the beneficiary.

To mitigate the risk taken on by the state and to cover the costs incurred when granting a loan guarantee based on the rating of the beneficiary, the norms provide for a minimum guarantee premium, also called a safe harbour premium. In accordance with the European Commission regulations, under the norms the beneficiaries of the loan guarantee may benefit within the first two years from a reduction of up to 25% (for SMEs) and 15% (for large companies) of the annual premium calculated on the basis of the safe-harbour premium.

By adopting the norms, the Romanian State (much as many other European countries), strives to address the current resistance by private banks to grant loans to SMEs and to large companies that arey experiencing financial difficulties, while at the same time avoiding further loss of confidence in the financial system. While this should be welcomed by both banks and entrepreneurs, one must not ignore the possible negative effects of such state aid scheme on competition and the creation of large contingent fiscal liabilities.

Andreea Poenaru and Claudia Arnautu