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European middle market vies for support amid coronavirus/economic challenges

There is still little certainty over the length or full impact of the coronavirus pandemic on European businesses. But as national governments battle the immediate economic challenges, massive support programmes designed to preserve as much corporate liquidity as possible are being worked through.

Lenders and sponsors in the European mid-market were quick to welcome these efforts. "There has been an immediate reaction from the government in order to alleviate financial stress caused by the total lockdown of businesses, and it's hugely appreciated," one U.K.-based lender said.

State-introduced measures have so far tended to follow a similar pattern. These bring forbearance on one side and protection on the other, with additional support such as payment deferrals, loans and employment benefits.

These measures are designed to be taken in conjunction with commercial options such as drawing on credit lines and sourcing equity support. In this way, everything should come together in order to help companies, sources agree. "I hope the injection of cash from governments is not paving the way for sponsors to hide and not make their own cash injections," one lender said. Sources also raise concerns that much of the support appears to be favorable for small or large (rated) companies, and may ignore "all the upper mid-market in between."

Other questions remain, too. These include how compensation will be paid, what the bureaucratic processes will be, and the timings involved. "I speak to CFOs of my portfolio companies and ask them if there have been delays in payments," another direct lender said. "I have not had any bad news yet, but there are bound to be some cases — and then what happens?"

Trans-Europe express
In terms of specific support, governments across Europe have put in place payment holidays and other relief, but the programs differ from country to country. The following summary therefore looks at measures in France, Germany, Italy and the U.K.

In France, there is a deferral of social contribution payments, extensions on certain VAT payments, and tax rebates. Rent and utility bills are also suspended for vulnerable SMEs.

Germany has put in place a deferral of income and corporate tax payments, a reduction of tax prepayments, and a suspension of enforcement measures and penalties. There are also flexible measures for VAT, insurance, energy and air-traffic taxes.

In Italy, social security contributions are suspended and there is a deferral of all tax collection and controls. There are also other tax-based incentives to encourage corporates to sell impaired receivables.

Back in the U.K., VAT payments are deferred and there is a business-rate holiday for companies in the retail, hospitality, nurseries, and leisure sectors, which have been hardest hit by the pandemic.

"The main problem we see with deferral payments is that in six months’ time you will have to pay them again, and then we will once again have a cash-flow problem," one lender said. "So either we cancel everything, or we just delay the problem."

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Liquidity measures
State-owned banks are the primary channel each country is using through which to inject cash into their most vulnerable companies. "The reason why the lower end of SMEs and the rated companies are protected now is because smaller companies are most vulnerable and the very big ones, if they collapse, could generate a systemic collapse of the economy altogether," one London-based lender explained.

In France, state bank BPI France (Banque Publique d'Investissement) is providing three- to seven-year loans to SMEs. These come with 12 months of deferred capital amortization, 90% guarantees on new loans and overdrafts, and room to defer interest payments by six months.

In the country's private sector, banks have agreed to offer one- to five-year loans at a 25 basis point margin, up to an amount equivalent to three months of turnover. The loans will include one year of deferred capital amortization.

In Germany, state-controlled bank Kreditanstalt für Wiederaufbau (KfW) is extending a loan program backed by a commitment to provide unlimited additional support. The maximum loan size offered by the bank has been increased from €25 million to €1 billion, and guarantees increased from 50% to 80% for large corporates and 90% for SMEs.

But some question whether even this level of support will be enough. "Who is willing to give the remainder percentages if needed? I can't see any bank doing that," a German banker said. Lending banks also need to be KfW-registered, and this could have an impact on existing loans from foreign banks, the source added.

Welcome mat
These problems notwithstanding, the scheme has been widely welcomed in the country. Last week, GCA Altium released a survey of bankers and direct lenders that found the vast majority strongly support the KfW credit program and would participate if the underlying company qualifies for it. What's more, 63% of debt funds would also support the expansion of a super-senior RCFs through KfW, as ultimately "cash is king," and "they would have to swallow the pill of accepting fresh money sitting in front of them," adds the survey.

In Italy, Cassa Depositi e Prestiti (the CDP) is to provide 80% guarantees on bank loans to large corporates. There is a freeze on revocation of SME credit facilities and loans and a deferral of all loan installments and rental payments due before September 2020.

"Most of these measures are for companies with less than €50 million revenue, and under 250 employees — for bigger companies we are still waiting for the government to express itself," one Italy based lender said. "But to be fair though, smaller SMEs represent the bulk of the industrial fabric in Italy."

In the U.K., the British Business Bank (BBB) is extending an existing scheme for SMEs to provide 80% guarantees on loans of up to £5 million, and to cover fees and interest payable in the first 12 months. Meanwhile, the Bank of England has committed a facility to purchase investment-grade commercial paper at rates prevailing in the market before the crisis. The bank will also extend four-year funding to selected lenders, priced at or close to the Bank Rate. The counter-cyclical capital buffer has also been reduced from 1% to zero percent to support banks providing liquidity.

In addition, the U.K. government is to cover 80% of salaries of furloughed workers (up to £2,500 per month), and 80% of trading profits of self-employed workers whose income is affected by coronavirus (with certain conditions). In addition, SMEs can reclaim up to two weeks of statutory sick pay per employee.

Further help
The U.K. also announced further measures to help the mid-market on Friday, in moves that other countries may follow. Chancellor Rishi Sunak pledged £90 million of business interruption loans for nearly 1,000 firms, and £1.9 billion of corporate finance for companies hit by COVID-19. Furthermore, the government's loan schemes have been extended to benefit more small businesses. Lenders are banned from requesting personal guarantees on loans under £250,000, and the Chancellor emphasized the importance of banks moving quickly to support the economy, jobs and businesses.

"In France and the U.K., the banks pay upfront and then are refunded by the government," said one direct lender. "In Germany the banks are only a 'transmission canal' for state money — we therefore need to see what the most efficient tactic is, and what will create any delay in payments. Everything is still in the early stages, and there is scope for unsatisfactory outcomes."

"These measures will help with much-needed liquidity," says a U.K.-based lender. "We are encouraging our portfolio companies to take everything they can from the government."

Some direct lenders have also suggested their loans could receive similar state guarantees as those from banks. "Not as a massive strategy but as a punctual remedy," explained one lender. "It would be advantageous, especially for the hyper-exposed sectors such as leisure and retail, that there would be a state guarantee. However it may be unrealistic, as I can't see the state 'nannying' direct lenders."

This analysis was written by Francesca Ficai, who covers European Middle Market news for LCD.

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