On 22 March, the National Bank of Belgium (NBB) announced a guarantee scheme that should help individuals and companies facing financial difficulties because of the impact of COVID-19. The scheme consists of two pillars.
First of all, the financial sector commits to providing viable non-financial companies with payment problems due to COVID-19 with a grace period until 30 October 2020, without additional costs or charges. This first pillar has been implemented by way of two charters that were published on 31 March 2020 on the website of Febelfin, the Belgian body representing the financial sector.
Secondly, the government has activated a EUR50 billion guarantee scheme for new loans and credit facilities. This pillar was partially implemented by a law of 27 March 2020. On 14 April 2020, the Belgian government has implemented a Royal Decree, providing highly anticipated and much needed further details in relation to this national guarantee scheme.
Guaranteed loans
The national guarantee scheme applies automatically to short-term loans of up to 12 months that are covered by the Royal Decree and granted by lenders to eligible borrowers from 1 April 2020 until 30 September 2020. The guarantee only applies to additional financing facilities. Factoring or leasing agreements, loans to consumers or mortgage-backed loans within the scope of Book VII of the Belgian Code of Economic Law, refinancing facilities, renewals and drawdowns of existing loans are excluded from the scope of application. However, credit facilities granted as a credit line, where the separate credit line constitutes a sufficiently distinct commitment on the part of the lender, do fall within the scope of the Royal Decree even if the credit line is granted under a syndicated loan agreement in which not all lenders qualify as guaranteed lenders. Loans are guaranteed up to a maximum amount of EUR50 million per company. Higher amounts require government approval.
Eligible borrowers
The guarantee scheme applies to new loans granted to non-financial companies, registered with the Belgian Crossroads Bank of Enterprises, that were not in payment default under any existing loan-, tax- or social security obligations on 1 February 2020 or had less than 30 days outstanding unpaid payment obligations on 29 February 2020. Other excluded borrowers are those undergoing active credit restructuring with one or more lenders on 31 January 2020 and those who, on the basis of the information available, are to be regarded as companies in difficulties. Especially this last exclusion will prevent certain borrowers who are in financial difficulties from obtaining financing which appears to contradict the overall purpose of the guarantee scheme.
A non-financial company is defined as a self-employed person or a company excluding:
- (i) any governmental entity;
(ii) any financial company within the meaning of the Regulation on transparency of securities financing transactions and of reuse and amending EMIR;
(iii) any entity which grants loans exclusively or mainly on their own account within the framework of their usual commercial or professional activities; and
(iv) any person whose subsidiaries are exclusively or mainly one or more of the entities listed under (ii) or (iii).
Furthermore, the Royal Decree contains provisions aimed at ensuring that the guaranteed loans are used for the benefit of the borrower’s Belgian activities and that the loans are not in large part used to finance the borrower’s foreign activities.
Guaranteed lenders
The governmental guarantee is granted to all lenders governed by Belgian law and branches in Belgium of lenders governed by foreign law with outstanding loans to one or more borrowers for a total outstanding principal of at least EUR 20,000. Guaranteed lenders will have to pay a fee to the Belgian State for the guarantee.
The Belgian State does not guarantee individual loans but guarantees loan portfolios per lender. The loss and loss contribution is calculated at portfolio level. Each lender may build up a portfolio of new loans within the limits of that lender's share of the maximum amount of loans guaranteed by the State (EUR 50 billion). This maximum amount is divided between the lenders concerned taking into account each lender's market share as at 31 December 2019.
Although this method of structuring the guarantee scheme is understandable, it can also be questioned. First of all, this structure makes it highly unlikely that the total maximum amount of loans guaranteed of EUR 50 billion will be attained. This can only happen if all lenders concerned build up a portfolio of loans that reaches the limit of their respective share in the maximum amount. In addition, a discrepancy will likely occur between lenders who receive loan applications for a total amount that exceeds their maximum share under the guarantee scheme and lenders who do not reach that limit at all which, in case of high demand, may constrain the guarantee scheme from realising its full potential.
Guaranteed losses
Each lender will bear the first loss of 3% on its portfolio itself. The State's intervention then amounts to 50% on losses between 3% and 5% and 80% on losses above 5%, always calculated at portfolio level. The loss is defined as the amount of the principal and interest due that is certain to be irrecoverable by the lender through recourse against the borrower, against a third party or by any other means. Final settlement can only take place after enforcement and foreclosure and when the loss is known for the entire portfolio. For lenders, this means that any payment by the State under the guarantee scheme will probably only take place after several years of legal procedures against defaulting borrowers.
Moreover, lenders are allowed to exclude a limited number of loans from the scope of the guarantee scheme on a monthly basis. This option can only be exercised at the moment the loan is granted and is permanent. The Royal Decree also states that the ratio between such ‘deselected’ loans and guaranteed loans may not exceed 0.175. The option to deselect certain loans is motivated by the observation that not all companies are affected by COVID-19. If Belgian lenders could only offer credit facilities to such companies under the more expensive terms of the guarantee scheme, their competitive position would be harmed.
However, lenders need to take into account that even though these deselected loans are not covered by the guarantee and no guarantee fee needs to be paid in relation to those loans, the loans remain part of the reference portfolio together with the guaranteed loans. This means that these deselected loans might still be taken into account to calculate to what extent the State will intervene, while a loss on a deselected loan will hence not be taken into account. In addition, if lenders exceed the 0.175 deselection factor, an additional fee has to be paid on the guaranteed loans while the deselected loans remain excluded from the scope of the guarantee scheme. Lenders would therefore do well to conduct a thorough cost-benefit analysis before deciding to deselect certain loans. Lenders can of course try to avoid the decision entirely by granting a loan that falls outside of the scope of the guarantee scheme but should take into account the anti-abuse provision of the Royal Decree which might lead to a requalification of certain loans as guaranteed loans.
Maximum interest rates
In order to ensure that the benefit of the guarantee scheme is passed on in full to the borrower, the Royal Decree stipulates that the maximum interest rate for the new loans is 1.25% plus a maximum fee amounting to 25 basis points for loans to SMEs and 50 basis points for loans to larger companies. That fee is an imputation of the fee payable by the lender to the State. Each borrower is entitled to repayment, by the lender, of interest paid in excess of the maximum guaranteed interest rate and of fees in excess of the maximum guaranteed fees, plus statutory interest from the moment interest payments are made.
Additional safeguards for the Belgian State
The Belgian Minister of Finance shall lay down the procedure for calling on the guarantee by a lender on the understanding that the lender may call on the State by 31 March 2023 at the latest. The State may suspend its obligations under the guarantee scheme in the event of non- or incomplete payment of the fee by a lender or in the event of failure by a lender to comply with the payment deferral scheme. Furthermore, the Royal Decree provides for a number of provisions which result in a reduction of the guaranteed losses such as the full or partial transfer of losses on guaranteed loans by the lender. Additional safeguards for the Belgian State include a benefit of execution provision, a pari passu-provision, a non-transferability provision and a right of set-off.
Conclusion
After a first analysis of the Royal Decree of 14 April 2020, the scope of the Belgian guarantee scheme has become clear. The Royal Decree follows the principle that State aid should be limited to the minimum and aims to keep the risk for the State and the taxpayer as manageable as possible. Losses incurred on loans granted under the guarantee scheme will largely be borne by the Belgian lenders. Only lenders that incur exceptional losses on their loan portfolio can expect partial governmental aid. Even in that case, it will likely take several years until final settlement under the guarantee scheme takes place. The question remains whether this mechanism will meet the expectations of softening the financial impact of COVID-19 and safeguarding future financing to borrowers.
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