EU: COVID-19 Government support in the EU

Equity, hybrid capital instruments and subordinated loans now also benefit from the Temporary Framework facilitating Member States' support for businesses

In brief

As the economic and financial impact of COVID-19 on businesses across the EU deepens, businesses are increasingly looking to EU Member States to provide support to weather the crisis.


Key take-aways

  • The Temporary Framework for State aid that addresses the financial and economic impact of COVID-19 on businesses was amended for the second time on 8 May 2020. It now also covers recapitalisation (equity and hybrid capital instruments) and subordinated debt instruments but subject to stringent conditions and limitations.
  • The Framework makes it easier for Member States to make such support available quickly and in compliance with the EU State aid rules, which continue to apply. However, the Commission has merely accelerated the approval process. The underlying substantive rules of State aid control on the merits have not been relaxed.
  • The Commission will also deal swiftly with support that exceeds the monetary threshold of EUR 250 million for equity and hybrid capital instruments but otherwise complies with the Framework's conditions. Recapitalisation packages and subordinated debt instruments that do not meet the conditions of the Amended Framework can still be notified for approval.
  • Businesses should be careful when they accept COVID-19 support, because they always pay the price when Member States are found to have breached the State aid rules. Member States must recover the aid received. Recipient businesses are at risk of having to repay the aid (with compound interest) for 10 years after having benefitted from the support given the general State aid prohibition of the EU Treaties.
  • Potential beneficiaries of a COVID-19 support measure from an EU Member State or the UK (at least through the end of 2020) should verify at least material compliance with the Amended Temporary Framework or the remaining body of State aid law. 

In more detail

Amended Temporary Framework for COVID-19 government support: categories of measures covered

The Temporary Framework was initially adopted on 19 March 2020 (see here) to facilitate State aid compliant COVID-19 support by setting out conditions for accelerated Commission State aid approval of certain categories of Member State's COVID-19 support (for detail please refer to our client alert, available here).

The First Amendment to the Framework, adopted on 3 April (see here), expanded the scope of the Framework from five to ten categories of aid including. These include limited amounts of aid, aid in the form of loan guarantees and subsidised interest loans, aid for COVID-19 relevant R&D, testing and upscaling infrastructure and aid for investment in COVID-19 relevant products including vaccines, medical equipment and diagnostics, disinfectants and related raw materials. For details on the First Amendment, please refer to our related client alert, available here.

All Member States (except Cyprus) and the UK have taken advantage of the accelerated approval of COVID-19 State aid measures under the Framework (please see here for our regularly updated list of approvals).

The Second Amendment of 8 May 2020 adds recapitalisation measures as a further category and expands the pre-existing category of subsidised interest loans to include subordinated loans; all subject to strict conditions.

The Amended Framework recalls that not all support measures will qualify as State aid, including Member States' equity participations and hybrid capital instruments that are made on market terms and conditions, i.e., under conditions complying with the Market Economy Operator Principle ("MEOP"). Unfortunately, the Commission stops short of providing any guidance on how to confirm that a Member State's investment made while the effects of COVID-19 last comply with the MEOP and thus are State aid free. This might lead to confirmatory no-aid notifications where existing shareholders or creditors require certainty of the sustainability of a government's investment and thus of EU State aid compliance.

Finally, support measures above and beyond the strict conditions of the Amended Framework will be assessed by the Commission directly under the provisions of the TFEU. These approvals may take longer (potentially weeks or months) and the Commission may require Member States to adjust measures for proportionality and to limit distortions of competition. In these circumstances, businesses should insist that the Member State closely involves them throughout the notification and approval process (from preparation of pre-notification contacts) to ensure that approval is obtained as quickly as possible.

NEW: Recapitalisation measures and subordinated loans now also covered by the Framework

The Second Amendment applies to recapitalisation measures for undertakings facing financial difficulties due to the COVID-19 outbreak that are granted up to 30 June 2021 as measures of last resort, meaning where no other appropriate solution can be found. Recapitalisations are subject to stringent conditions because the Commission considers them to be highly distortive of competition.

Recapitalisations must be limited to the minimum needed to ensure the viability of the beneficiary and cannot go beyond restoring the capital structure of the beneficiary to the one predating the COVID-19 outbreak, i.e. the situation on 31 December 2019. In addition, large undertakings must report on how their use of the aid will support the green and digital transformation. But the Framework stops short of requiring Member States to impose related conditions for recapitalisations.

Recapitalisations exceeding EUR 250 million must be individually notified even if they otherwise meet all conditions of a scheme approved under the Framework. Approval will be subject to individual assessment including whether the recapitalisation is a measure of last resort; whether the selected recapitalisation instruments and its conditions are appropriate; whether the aid is proportionate; and whether all other conditions of the Framework are met.

Subordinated debt is considered less distortive. However, where a subordinated debt measure exceeds certain ceilings the Commission will assess it under the stricter conditions for COVID-19 recapitalisation measures.

1. Types of recapitalisation measures - The Framework now covers two distinct instruments:

  • Equity instruments, such as the issuance of new common or preferred shares; and/or
  • Hybrid capital instruments, meaning instruments with an equity component including profit participation rights, silent participations and convertible secured or unsecured bonds.

2. Recapitalisation conditions - COVID-19 recapitalisation measures must fulfil the following four cumulative conditions:

  • Absent the recapitalisation, the company will exit the market or will face serious difficulties to maintain its operations by reference to the deterioration of, in particular, its debt to equity ratio or similar indicators.
  • The recapitalisation is in the common interest. This would be the case, e.g., to avoid social hardship and significant loss of employment, the exit of an innovative or of a systemically important company.
  • The company does not have access to affordable market financing and the measures existing in the Member State to cover liquidity needs are insufficient to ensure its viability.
  • The company was not in financial difficulty on 31 December 2019.

3. Recapitalisation remuneration - COVID-19 recapitalisation measures must contain appropriate incentives for undertakings to redeem the recapitalisation when market conditions permit. Member States may adapt the remuneration methodology set out in the Framework to the features and seniority of the capital instrument provided a similar result in terms of exit incentives and remuneration.

Remuneration of equity - The Framework includes thresholds for capital injections and equivalent interventions linked to (i) share price and (ii)  to valuations of independent experts or by other proportionate means for companies that are not publicly traded. Recapitalisation measures must include a so-called step-up mechanism, which increases the Member State's remuneration as an incentive for the company to buy back the capital injection as soon as possible. The remuneration should increase by at least 10% (in the form of additional shares or other mechanisms) at two instances:

  1. Four years after the equity injection where Member State has not sold at least 40% of it; and
  2. Six years after the equity injection where the Member State has not sold 100% of it.

If the beneficiary is not publicly listed, the step-up may take place in years five and seven, respectively.

The buy-back price should be the higher of (i) the nominal investment by the Member State increased by an annual interest remuneration 200 basis points higher than applicable to hybrid capital instruments under the Framework, or (ii) the market price at the time of the buy-back. The Member State may always sell its equity stake at market prices to purchasers other than the company.

Remuneration of hybrid capital instruments must factor in, the characteristics of the instrument (including level of subordination), risk and modalities of payment, exit incentives (such as step-up and redemption clauses), and an appropriate benchmark interest rate. Given the widely varying nature of hybrid instruments, the Framework does not provide guidance for all types of instruments but instead requires that all hybrid instruments are designed based on the principles that it establishes, reflecting the risk of the respective instrument.

The Framework sets out the required minimum remuneration of hybrid capital instruments until they are converted into equity-like instruments. The remuneration should be at least at the base rate (1 year IBOR or equivalent as published by the Commission) plus a pre-determined minimum premium (increasing each year from 225 bps to 800 bps for SMEs and from 250 bps to 950 bps for large enterprises from the 1st year to the 8th year and additional years). The conversion into equity will be made at 5 percent or more below TERP (Theoretical Ex-Rights Price) at the time of the conversion.

A step-up mechanism must be included to increase the remuneration of the State for converted hybrid instruments of at least 10% of the remaining participations two years after the conversion into equity or, alternatively, an equally effective mechanism.

4. Governance - The most important restrictions on governance attached to recapitalisations are:

  • As long as at least 75% of the COVID-19 recapitalisation measures have not been redeemed:
    • Prohibition (except for SMEs) to acquire a more than 10% stake in competitors or other companies in the same line of business, including upstream and downstream operations,. Exceptions may be authorised by the Commission where acquisitions are strictly necessary to ensure the viability of the beneficiary.
    • The remuneration of the beneficiaries’ management must not go beyond its fixed part of on 31 December 2019 (no bonuses, other variable or comparable remuneration elements shall be paid).
  • Until the COVID-19 recapitalisation measures have been redeemed in full:
    Prohibition to make dividend payments, non-mandatory coupon payments, or buy back shares (except from the State).

5. Exit -  Companies (other than SMEs) that received a recapitalisation of more than 25% of their equity must submit a credible exit plan for the participation of the Member State, unless the State’s intervention is reduced below the level of 25% of equity within 12 months from the date of the granting of the aid.

The exit plan must include the beneficiary's plan on the continuation of its activity and the use of the funds invested by the State, and a repayment schedule covering remuneration and redemption and the measures that the beneficiary and the State will take to implement the repayment schedule.

If six years (seven years for SMEs or non-listed companies) after the COVID-19 recapitalisation the State’s intervention has not been reduced below 15% of the beneficiary’s equity, a restructuring plan in accordance with the Commission's Rescue and Restructuring Guidelines must be notified to the Commission for approval.

6. Subordinated debt conditions
The Commission acknowledges that subordinated debt, meaning debt subordinated to ordinary senior creditors in the case of insolvency proceedings, is a less distortive instrument than equity or hybrid capital, because it cannot be converted automatically when the company is a going concern.

Consequently, the Framework provides that subordinated debt is subject to the conditions of section 3.3 of the Framework that apply to subsidised interest loans. However, an additional credit-risk mark-up must be added to the interest rate (200 bps for large enterprises and 150 bps for SMEs on top of the margins applicable to non-subordinated subsidised loans) and certain maximum ceilings apply to the amount of subordinated debt. These ceilings are:

  • Two thirds of the company's annual wage bill for large enterprises and the annual wage bill for SMEs; and
  • 8.4% of the company's total turnover in 2019 for large enterprise and 12.5% of the company's total turnover in 2019 for SMEs.

If both of these ceilings are exceeded, subordinated debt is subject to the stringent conditions for COVID-19 recapitalisation measures of section 3.11 of the Framework, summarized above.​

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