Covid-19: Spanish Public Fund to Support the Solvency of Strategic Companies

On 24 July 2020 the conditions of the Spanish Fund to Support the Solvency of Strategic Companies (the "Fund") have finally been published. We highlight below the most relevant features.

1. WHAT IS THE MAIN PURPOSE OF THIS NEW FUND?

1.1 The Fund aims to mitigate the impact of the Covid-19 Crisis in the balance sheet of solvent companies considered strategic for the national or regional productive and economic tissue when credit or liquidity support measures have not proven sufficient to ensure that their business can continue. It is conceived as a last resort when the beneficiary cannot maintain its activity despite efforts to operate equity replacements and/or financial restructurings.

1.2 A company may be considered strategic, among other reasons, because of its noticeable social and economic impact, its relevance to safety, public health, infrastructure or communications or their contribution to the proper functioning of the markets. In particular, the Administration will take into account the systemic or strategic importance of the sector of activity or the company, its innovative nature, the essential nature of services provided and the role in achieving the medium-term objectives in the field of the ecological transition, digitalisation, productivity growth and human capital.

1.3 The Fund has no legal personality and depends on the Central Administration through the Treasury Department. It was created pursuant to Royal Decree-law 25/2020, of 3 July and the Council of Ministries approved the development of its conditions on 21 July 2020. These conditions were published on 24 July 2020 (Order PCM/679/2020).

1.4 Eur 10,000 million have been initially allocated to the Fund.

2. WHEN WILL THE FUND START OPERATING?

2.1 The Treasury Department has been entrusted to effectively launch the Fund within 30 days and it will provide support until 30 June 2021 (or later if so provided under the State aid Temporary Framework adopted by the European Commission on 19 March 2020, the "EC Temporary Framework").

2.2 In any case, the granting of support from the Fund is subject to prior declaration of te European Commission that this scheme is compatible with internal market rules. Interventions in excess of Eur 250 million per beneficiary will be notified individually in accordance with the provisions of the EC Temporary Framework.

3. HOW CAN COMPANIES ASK FOR THIS SUPPORT?

3.1 Any interested company can apply for support to the Fund. These applications will be dealt with by the management board of the Fund but the grating of the aid will ultimately be submitted to approval by the Council of Ministers.

3.2 The Fund must reply to any request within six months. Once this period has elapsed without an express decision having been issued and notified to the applicant, the application shall be deemed rejected.

4. WHICH COMPANIES CAN APPLY FOR SUPPORT?

In order to benefit from the Fund, the company must meet the following conditions:

(a) It must be a non-financial company with registered office and principal work places in Spain.

(b) Not being considered, as of 31 December 2019, as an "undertaking in difficulty" pursuant to the definition of this term set out in paragraph 18 of section 2 of Regulation (EU) No 651/2014 of 17 June 2014 declaring certain categories of aid compatible with the internal market in application of Articles 107 and 108 of the Treaty ("Regulation (EU) 651/2014").

(c) Not having applied for voluntary insolvency nor having been declared or being insolvent under any applicable proceedings, unless an agreement with creditors has been reached and is effective. The company must also not be subject to judicial intervention or have been disqualified in accordance with the Spanish Insolvency Act. However, the Administration can exclude this requirement where it is considered to be sufficiently justified taking into account, specially, that the insolvency was not declared before 31 December 2019.

(d) In the absence of temporary public support received from the Fund, the applicant would cease its activity or would have serious difficulties in remaining in operation. These difficulties may be demonstrated by the downturn of the debt/equity ratio or by similar indicators.

(e) Proof that a forced cessation of activity would have a high negative impact on economic activity or employment, at national or regional level. The assessment of the economic and employment impact, direct and indirect, will be measured in relation to the situation of the company at the end of the 2019 financial year.

(f) The company must demonstrate its medium and long-term viability, filing for these purposes a Viability Plan describing the projected use of the public support, the environmental risks faced by the company, an action plan to deal with them and the company's energy strategy. Return on capital and credit quality will be used, among other indicators, to asses viability. Any other State aid received or planned will be taken into the equation.

(g) It must submit a repayment schedule including a timetable of amortisation of the nominal investment and interest payment and detailing the measures that would be taken to ensure compliance with the repayment plan.

(h) It will need to report on the public support package that has been benefited in the last ten years, detailing the amount, concept and grantor.

(i) It must not have been sentenced by a final judgment to the penalty of loss of possibility of obtaining public subsidies or aid or for crimes of malfeasance, bribery, misappropriation of public funds, influence peddling, fraud or urban planning crimes.

(j) It must not have been found guilty of any termination event giving rise to the final resolution of any contract entered into with the Administration.

(k) It must be up to date with the reimbursement of subsidies or public aid.

(l) It must be up to date by 31 December 2019 with tax or social security obligations.

5. HOW WILL THE FUND PROVIDE SUPPORT?

5.1 The Fund's support may take the form of any capital and/or hybrid capital instruments. In particular, it may consist of equity loans, convertible debt or the assumption of shares, quotas, holdings or any other capital instrument.

5.2 In addition, the Fund may provide other credit facilities, such as the loans or other privileged, ordinary or subordinated debt instruments, with or without security or guarantees. The conditions of these facilities shall be in accordance with the Spanish Umbrella Scheme for Temporary State aid in the current Covid-19 outbreak approved by the European Commission on 2 April 2020 and will not be subject to the limits applicable to capital or hybrid instruments (unless the credits are capitalised). In case of subordinated debt, its minimum remuneration shall be equal in current net value to the levels foreseen for the loans subsidised in the above-mentioned European Commission Decision plus 200 basis points in the case of large companies and 150 basis points in the case of small and medium-sized enterprises (as defined in Annex I to Regulation (EU) 651/2014). If such subordinated debt exceeds two-thirds of the annual wage bill of the beneficiary and 8.4 % of the beneficiary's turnover in 2019, the provisions relating to hybrid instruments will apply.

6. HOW MUCH WILL EACH BENEFICIARY RECEIVE?

The figure is left open. The maximum amount to be received shall be the minimum necessary to restore the viability of the company and may not involve improvement in the net worth as of 31 December 2019. However, operations financed from the Fund shall be for an amount not less than 25 million per beneficiary, save in duly exceptional and justified cases.

7. WHAT REMUNERATION WILL THE FUND RECEIVE IN EXCHANGE OF THE AID?

7.1 The minimum remuneration for hybrid capital instruments will be adjusted either at present value or as an annual effective rate, at the established reference rates of the EC Temporary Framework (12-month Euribor plus margins set out in the table below). Such instruments may be remunerated by one or several factors that measure the economic performance of the company, such as the profit or turnover, plus fixed or variable interest.

7.2 The conversion rate will be at a level 5% below the notional price without subscription rights in the time of the conversion. If two years after this conversion the State is still in the company, the repayment amount to be paid by the beneficiary for the repurchase of the Fund's participation in the capital will be increased by at least 10%, payable in debt or equivalent instrument.

7.3 Other Fund's investment in capital will be made at a price not exceeding the average market price of the beneficiary's shares during the 15 days preceding the request (for quoted companies) or its market value as determined by an independent expert appointed by the Administration (for non-quoted companies).

8. HOW WILL THE FUND EXIT THE SUPPORTED COMPANIES?

8.1 Repayment of the equity stake acquired by the Fund shall be made by the beneficiary at the higher of:

a) the market price at the time of repayment; or

b) the nominal investment from the Fund plus an annual remuneration equal to the sum of 200 basis points (except in the eighth and subsequent years) and the minimum remuneration set out above, counted from the date of acquisition of the share capital by the State.

8.2 The amount of the reimbursement for the Fund's stake shall be increased by at least 10%, payable in debt or equivalent instrument, if after five years from the capital contribution the initial participation has not been reduced by at least 40%. If the Fund maintains participation after seven years from the capital injection, the amount of the reimbursement shall be increased additionally by at least 10%, payable in debt or equivalent instrument, on the participation then outstanding. In the case of quoted companies, such increases in the reimbursement amount shall occur after four and six years respectively on terms to be determined in each case.

9. WHEN CAN THE BENEFICIARY REPURCHASE THE CAPITAL OR REPAY THE HYBRID OR DEBT INSTRUMENTS?

The beneficiary will at all times have the possibility of repurchasing the stake in the capital acquired by the State or early repaying the loans and hybrid instruments granted or subscribed to by the State, as well as the remuneration accrued. The conditions for this will be established in the agreement to be entered into in each case (please see ‎11.3 below).

10. CAN THE FUND TRANSFER ITS STAKE OR CREDITS TO A THIRD PARTY?

10.1 The Fund may freely transfer to a third party the securities and rights obtained pursuant to the implementation of the support measures hereby described, through an open process, ensuring equal treatment, or through a sale on an organised market. It may, where appropriate, offer preference in acquisition to the company's shareholders or members.

10.2 If the State sells its stake at a price lower than that set out in previous paragraph ‎8.1, the restrictions mentioned in section ‎11 below shall apply for four years from the date on which the State support is granted.

11. WILL THE SUPPORT ENTAIL ANY RESTRICTIONS FOR THE BENEFICIARIES?

11.1 Until the definitive reimbursement of the temporary public support received from the Fund, the beneficiary will be subject to the following restrictions (with the adaptations that the Temporary Framework may subsequently make):

a) It may not carry out any advertising for commercial purposes its condition as Fund's beneficiary.

b) It must avoid engaging in aggressive commercial expansion or taking excessive risks.

c) As long as at least 75 % of the recapitalisation measures in the context of the Covid-19 Crisis have not been amortised, the beneficiary will be prevented from acquiring holdings of more than 10 % in companies active in the same sector or in upstream or downstream markets, unless the beneficiary is not a "large undertaking" within the meaning the Regulation (EU) 651/2014 or has been authorised by the European Commission at the request of the Fund.

d) It may not distribute dividends, pay non-compulsory coupons or acquire own shares, except for those held by the State on behalf of the Fund.

e) Until 75 % of the temporary public support from the Fund is repaid, the remuneration of the members of the Board of Directors, the Directors or those with the highest corporate responsibility in the company may not exceed the fixed part of their remuneration in force at the end of the 2019 financial year. Those persons who acquire the above-mentioned conditions at the time of the recapitalisation or thereafter will be remunerated on terms comparable to those with a similar level of responsibility. Under no circumstances will bonuses or other elements of variable remuneration or equivalent be paid.

11.2 Furthermore, the following obligations will apply:

a) Integrated companies will establish a separation of accounts to ensure that the temporary public support received from the Fund does not revert in activities in crisis situation as of 31 December 2019.

b) Beneficiaries shall ensure strict compliance with all the requirements established by the applicable labour regulations.

c) Beneficiaries shall comply with all the commitments set out in the Viability Plan and, in particular, those relating to investment in productive capacity, innovation, ecological transition, digitalisation, increased productivity and human capital.

11.3 There might be additional restrictions or obligations imposed on the beneficiary in the agreement which will have to be signed before receiving any support. This agreement may also provide additional details regarding the terms and conditions of the support and may be complemented, if relevant, by the signing of the appropriate shareholders agreement (or equivalent instrument) and the amendment of the company's by-laws.

12. IS THERE ANY SPECIAL TREATMENT FOR PREVIOUS STATE-PARTICIPATED COMPANIES AND/OR WHEN OTHER SHAREHOLDERS ALSO CONTRIBUTE SIGNIFICANTLY TO THE COMPANY?

12.1 The provisions of ‎8.2 will not apply if:

a) the State participated in the beneficiary's capital before the Fund's intervention and subscribes a share capital increase in the same terms and conditions as the other shareholders, on a pro rata basis or at a rate lower than its share;

b) the contribution of the private members or shareholders to that share capital increase is significant and in any event exceeds 30 %; and

c) the public contribution constitutes State aid.

12.2 Furthermore, the restrictions mentioned in paragraphs ‎11.1c)‎11.1e) above will only be in force for three years.

12.3 Finally, the prohibition on distributing dividends of paragraph ‎11.1d) shall not apply to the shares resulting from the capital increase or to existing shares provided that the stake of previous shareholders is, after the increase, less than 10 %. In other cases, the said prohibition shall be limited to a period of three years from the granting of the support. This will apply also where the State or one of its bodies or entities acquires a stake from the Fund or makes a capital increase on the same terms as the other partners or shareholders, in special circumstances constituting State aid, and the requirements of subparagraphs ‎12.1b) and ‎12.1c) are met. In any event, the remuneration of hybrid instruments and credit facilities from the Fund shall be paid before any dividend.