The Covid-19 crisis | Proposal for NOK 100 bn. loan and guarantee scheme to be adopted
Guarantee scheme for small and medium sized enterprises
The guarantee scheme will enable the Norwegian State to guarantee 90 per cent (on a pro-rata basis) of new loans from lenders licenced to provide financing services in Norway, to Norwegian small and medium sized enterprises, issued prior to 1st June 2020, up to an initial aggregate amount of NOK 50 bn.
The key criteria for granting guarantees include:
- The borrower must be (i) a small or medium sized enterprise, which will broadly follow EU’s definition, i.e. no more than 250 employees with an annual turnover of no more than EUR 50M and/or balance sheet of EUR 43M, and (ii) suffering from an acute liquidity shortfall due to the Covid-19 outbreak. Determining what constitutes an “acute liquidity shortfall” will largely be left to the lenders;
- The borrower must be deemed profitable under normal circumstances, excluding businesses in financial difficulties for other reasons and in any event businesses in financial difficulties as of 31st December 2019. Under EU regulation, the interpretation of “financial difficulties” includes that more than half the share capital has been lost or that accumulated losses exceed half the share capital;
- The guaranteed loans must be on market terms (disregarding Covid-19) and a guarantee premium must be paid for the guarantee on terms to be determined in later guidelines;
- The loan amount may not exceed 200 per cent of the borrower’s total cost of labour, including social and outsourcing expenses, or 25 per cent of the annual turnover in 2019 (subject to limited exceptions), and in any event not more than NOK 50M; and
- The term of the loan may not be longer than three years (including extensions).
To ensure quick and efficient deployment of capital, the lenders will manage the guarantee scheme and assert whether the conditions are met. These assessments will be controlled by the Government on an ad-hoc basis.
The proposal does not limit the borrower’s ability to pay dividends, but the Government “assumes” that guaranteed loans will not be used for dividend payments. Further, it is made clear that refinancing or replacement of existing credit/debt arrangements should fall outside the scope of the scheme.
The guarantee scheme requires ESA approval prior to becoming effective.
Re-introduction of the state bond fund
The bill for the new state bond fund introduces a framework by which Folketrygdfondet will be given a mandate similar to that following the 2008 financial crisis and is similarly intended to improve liquidity in the debt market. See our earlier newsletter.
The bond fund’s mandate will be determined at a later stage, but include the following elements:
- Investments are limited to debt instruments issued by entities headquartered in Norway;
- Opening for significant investments in debt instruments issued by non-financial entities, across all sectors;
- Investments allowed in the primary and second-hand market; and
- Opening for investments in investment grade and high-yield debt instruments, reflecting the falling credit ratings of many businesses as a result of the Covid-19 crisis.
Folketrygdfondet will manage the fund as a ‘market investor’ and only make investments alongside other investors on same terms, with an over-all goal of profitable investments. The mandate will further include restrictions on sector allocation, exposure and credit rating.
The proposal is an important step in the right direction. However, it is not clear whether it will be sufficient to meet the current challenges. Being hit simultaneously by an extraordinary fall in oil-prices and Covid-19, many businesses in Norway are especially vulnerable and the new proposal may not be flexible enough, or sufficient in amount to address the market turmoil.
Uncertainty also lingers around determination of what businesses would ‘otherwise be profitable’ (absent the Covid-19 crisis) in light of the fall in the oil-price and how to distinguish these effects. It also remains to be seen if (or in what shape) similar limitations will make its way into the bond fund mandate. Further, the requirement for third party co-investors/lenders may make it difficult for certain distressed businesses to qualify for the required funding as banks and investors simultaneously seek to bring down risk and preserve liquidity.
Finally, while addressing funding and market liquidity needs the new scheme does not address the underlying issues of incomes falling faster than costs, caused by Covid-19. To achieve the desired effect in a prolonged distress scenario, further initiatives may be required to address also these issues. The new scheme, although requiring loans to be on “market terms” should also provide sufficient flexibility to take into consideration the ‘one-time’ Covid-19 impact in the financial covenant structures of businesses that otherwise demonstrate their ability to endure the current crisis.