Törngren Magnell on the Swedish Government Guarantee Programme
EMERGENCY AID FOR COMPANIES – THE SWEDISH GOVERNMENT GUARANTEE PROGRAMME FOR SMALL AND MEDIUM-SIZED COMPANIES
A large number of companies have been adversely affected by the coronavirus pandemic, which has resulted in the loss of income, poor liquidity and difficulties in obtaining financing. To mitigate the economic impact of the pandemic, the Swedish Government (the “Government“) has presented a range of new initiatives regarding economic relief and financial aid. One recent regulation adopted by the Government regards a SEK 100 billion government guarantee programme directed primarily at small and medium-sized companies, with the aim of facilitating their access to financing (the “Guarantee Programme“).
The Guarantee Programme in short
The Guarantee Programme is designed to provide support to companies through the demanding short-term effects of the coronavirus pandemic and to ensure that businesses are in a good position to emerge strong when the most difficult period is over and the economy recovers. The Government has given the Swedish National Debt Office (Sw. Riksgälden) (the “Debt Office“) a mandate to provide government guarantees, in a maximum amount of SEK 100 billion, to credit institutions as security for loans to companies that qualify for the Guarantee Programme. The Guarantee Programme is primarily directed at small and medium-sized companies established or conducting their main business in Sweden and which have been financially impacted by the pandemic, but are otherwise viable. Loans provided under the Guarantee Programme must be applied by the borrowing company towards covering costs and/or for making investments and may not exceed SEK 75 million per company unless the Debt Office in a specific case has decided otherwise (in such case the maximum amount is SEK 250 million). Guarantees provided under the Guarantee Programme will generally cover up to seventy (70) per cent of any credit loss arising from a loan covered by the guarantee, provided that certain conditions are met. In return, a guarantee fee as well as an administration fee is payable to the Debt Office. The interest rate on the loans covered by the guarantee needs to comply with certain requirements, e.g. the pricing of the loan shall reflect the diminished risk and lower capital adequacy requirement applicable to the credit institution as a result of the guarantee.
The guarantees provided under the Guarantee Programme will be issued to the credit institutions, which in their turn, will provide loans secured by the guarantees to companies in need. A company that would like to benefit of the Guarantee Programme has to apply for a loan by contacting a credit institution that is participating in the Guarantee Programme. According to information on the Debt Office’s website, so far 69 credit institutions have adhered to the Guarantee Programme.
Potential challenges for credit institutions participating in the Guarantee Programme
In order to participate in the Guarantee Programme a credit institution needs to apply for and enter into a guarantee agreement with the Debt Office. The guarantee agreement in template form is available on the Debt Office’s homepage and governs the relationship between the credit institution and the Debt Office setting out inter alia the requirements for demanding payment under the guarantee as well as other obligations of the credit institution. There are also provisions in the guarantee agreement that prescribe terms and conditions that need to be implemented into the loan agreement between the credit institution and the relevant borrower. From the perspective of the credit institution, most of the conditions in the guarantee agreement are clear and predictable. However, there are certain conditions that could be more difficult for the credit institutions to apply in practise.
In terms of the credit assessment, the credit institution will perform a credit assessment according to its normal routines without any involvement of the Debt Office. However, according to the guarantee agreement, the Debt Office can refuse to make a payment that a credit institution has requested under the guarantee if the loan granted to a company does not constitute a so called eligible credit (Sw. berättigad kredit), which is a loan that complies with certain conditions of the guarantee agreement.
In order to be qualified as an eligible credit, the lender (i.e. the credit institution) shall have carried out a proper credit assessment within the scope of the credit policy of the lender applicable to its customers in general and in accordance with applicable rules and regulations and deemed the borrower long term credit worthy. This must be explicitly evident in each credit decision. Such an assessment could be cumbersome to carry out without any further guidance, and with a risk that it could be questioned by the Debt Office in a potential subsequent review. A regular credit assessment must always be forward-looking but it is not clear what is intended with the long term creditworthiness, does this go beyond an ordinary credit assessment and could it mean that the credit institutions participating in the Guarantee Programme need to adjust their credit assessment routines? This is probably not the intention of the Debt Office, but the wording may cause uncertainty, especially since the Debt Office – in order to establish whether the conditions which trigger the payment obligation under the guarantee are met – is entitled to make a review of whether the relevant credit qualifies as an eligible credit or not. This could ultimately diminish the value of the guarantee and in certain cases have the effect that the credit institution carries the credit risk in its entirety, which is not in line with the purpose of the Guarantee Programme.
As regards already existing security that the credit institution has been granted from a borrower and which secures the borrower’s obligations in general, the proceeds of the enforcement of such security shall be shared between the credit institution and the Debt Office according to a certain order of priority set out in the guarantee agreement. This may cause difficulties for the credit institutions in terms of assessing the value of the security for a specific engagement and also cause issues in practice when applying such an order of priority.
According to another clause in the guarantee agreement, the Debt Office appoints the credit institution to handle the collection of debt in respect of the Debt Office’s subrogation right against the company due to the Debt Office’s payment under the guarantee. Since the credit institution will need to collect their part of the debt, it may be a practical approach of handling the process. However, the credit institutions may deem this as an additional administrative burden which may be difficult to be reimbursed for. It is stated that the debt collection may be done according to the normal debt collection routines of the credit institution and without the involvement of the Debt Office. Nevertheless, it may appear uncertain to a credit institution whether the Debt Office actually could have remarks on the handling and the effects thereof.
Further, credit institutions must conclude that a borrower under a loan within the Guarantee Programme does not, as per 31 December 2019, qualify as an undertaking in difficulties. Although this is clearly defined, it is an additional assessment outside the scope of the customary credit assessment that the credit institution must carry out.
The need for emergency economic relief and financial aid to mitigate the economic impact of the coronavirus pandemic is clear and the pressure on the Government to provide such support has been high. Although the Guarantee Programme was meant to result in a risk reduction for credit institutions when providing loans to small and medium-sized companies, there is a risk that the Guarantee Programme may not have the full intended impact due certain specific provisions of the guarantee agreement and the uncertainty of applicable requirements.
Main terms and conditions of the Guarantee Programme
Availability Period: Loans must be granted from 1 April 2020 until and including 30 June 2020. The Debt Office may extend the period with up to three (3) months.
Maturity: A maximum of three (3) years.
Beneficiaries: Small and medium-sized companies in Sweden which have been financially affected by the coronavirus pandemic but are otherwise viable. All industries except for financial companies may benefit from the Guarantee Programme. The company may not qualify as an “undertaking in difficulty” (Sw. “företag i svårigheter”) as defined in the Commission Regulation (EU) No 651/2014 of 17 June 2014.
Loan Amount: The maximum loan amount is SEK 75 million per company, unless a larger loan amount has been approved by the Debt Office. However, the loan amount per company shall in no event exceed SEK 250 million. The aggregate amount of all loans granted to the same company (covered by the guarantee) may not exceed:
- the higher of twenty-five (25) per cent of the beneficiary’s 2019 annual revenue; or twice its employment costs during 2019;
- for companies founded after 1 January 2019, the estimated annual salary costs for the first two (2) financial years; or
- under special circumstances and if the company can show liquidity needs, the guarantee may be extended to cover loans over eighteen (18) months for small and medium-sized companies and twelve (12) months for larger companies.
Interest: The risk reduction and lower capital adequacy requirement as a result of the guarantee shall be reflected in the interest rate offered by the credit institutions. The company may defer paying interest on the loan during the first twelve (12) months.
Amortisation: The company will not be obliged to repay the loan during the first twelve (12) months (or a longer period if agreed between the credit institution and the company). The company may refrain from amortising other existing loans with the same credit institution during the term of the loan.
No dividends: The company may not, throughout the term of a guaranteed loan, pay bonuses or variable remuneration to management, or pay dividends other than what is comparable with regular salary payments.
Guarantee fee: The guarantee fee payable to the Debt Office is risk-based and will be determined based on the company’s risk class, which is set by the credit institution and will generally be calculated as a percentage per annum of the credit amount secured by the guarantee. The guarantee fee is payable by the credit institution yearly in advance.
Payment under the guarantee: Within three (3) months from final maturity or upon the occurrence of an event of default, the credit institution may demand payment under the guarantee from the Debt Office. The Debt Office may refuse payment under the guarantee if, in the opinion of the Debt Office, the loan does not comply with the conditions set out the guarantee agreement to qualify as an eligible credit.
Recourse of guarantee amount: If any amount is paid to the credit institution under the guarantee, the credit institution shall administrate the Debt Offices’ right of recourse against the Company.