Bailouts and the Single Market

New criteria for assessing whether companies in financial difficulty are eligible for state aid have been presented by the Commission. Key changes include making it easier for SMEs to apply for – and obtain – state aid, simplifying the definition of a ‘company in difficulty’ and clarifying the conditions under which state aid is compatible with the internal market.

The Guidelines on State Aid for Rescuing and Restructuring Non-Financial Undertakings in Difficulty was presented on 9 July 2014, replacing the 2004 Guidelines and forming part of the Commission’s State Aid Modernisation Initiative launched in 2012.

Scope of the Guidelines

The Guidelines are applicable to all undertakings in difficulty, except those operating in the coal and steel sector and those covered by specific rules for financial institutions. Furthermore the term ‘company in difficulty’ has been simplified. An undertaking can be considered to be in difficulty if at least one of the following circumstances applies: 
• In the case of a limited liability company, more than half of its subscribed share capital has disappeared as a result of accumulated losses. 
• In the case of a company where at least some members have unlimited liability for the debt of the company, more than half of its capital has disappeared as a result of accumulated losses. 
• Where the undertaking is subject to collective insolvency proceedings or fulfils the criteria under its national law for being placed in collective insolvency proceedings.
• In the case of an undertaking that is not an SME, where, for the past two years (i) the undertaking’s book debt to equity ratio has been greater than 7.5, and (ii) the undertaking’s earnings before interest, taxes, depreciation, and amortisation (EBITDA) interest coverage ratio has been below 1.0.
 
Newly created companies do not fall within the scope of the Guidelines (an undertaking is considered as newly created for the first three years following the start of operations). Guidelines will therefore only apply after this period, provided that the undertaking:
• Qualifies as an undertaking in difficulty within the meaning of the Guidelines.
• Does not form part of a larger business group.
 
Rescue aid and temporary restructuring support may be exceptionally granted to an undertaking that is not in difficulty (within the definition of the Guidelines), where it faces acute liquidity needs due to exceptional and unforeseen circumstances.

Type of Aid

The Guidelines deal with three types of aid:
• Rescue aid: Rescue aid is by nature urgent and temporary assistance. It consists of liquidity support aiming at keeping an ailing undertaking afloat for the short time needed to work out a restructuring plan. Rescue aid is limited both in time (6 months) and in the amount that can be given. 
• Restructuring aid: Restructuring aid often follows rescue aid. It involves more permanent assistance to restore the long-term viability of the beneficiary on the basis of a restructuring plan. 
• Temporary restructuring support: The Guidelines introduce a new type of aid, temporary restructuring support. This allows loans and guarantees to be granted to SMEs and smaller State-owned undertakings for up to 18 months on simplified terms.

Conditions of Compatibility

The Guidelines set out the conditions under which state aid to businesses in difficulty is compatible with the internal market.

Contributing to the Common Interest

First of all, state aid must ‘contribute to the common interest’. The Guidelines introduce new tests to ensure that aid will benefit society, for example by preventing social hardship by restoring the long-term viability of the company.

Member States must therefore demonstrate that the failure of a company would likely involve serious social hardship, in particular by showing that:
• The unemployment rate in the region or regions concerned is either higher than the EU average, persistent and accompanied by difficulty in creating new employment in the region or regions concerned, or higher than the national average, persistent and accompanied by difficulty in creating new employment in the region(s) concerned.
• There is a risk of disruption to an important service which is hard to replicate and where it would be difficult for any competitor simply to step in.
• The exit of an undertaking with an important systemic role in a particular region or sector would have potential negative consequences.
• There is a risk of interruption to the continuity of provision of a Service of General Economic Interest (SGEI).
• The failure or adverse incentives of credit market would push an otherwise viable undertaking into bankruptcy.
• The exit of the undertaking concerned from the market would lead to an irremediable loss of important technical knowledge or expertise.
• Similar situations of severe hardship duly substantiated by the Member State concerned would arise.
 
In the case of restructuring aid, the Member State will be requested to provide a feasible, coherent and far-reaching restructuring plan to restore the beneficiary’s long-term viability. The plan may involve for instance the reorganisation and rationalisation of the undertaking’s activities, the restructuration of the existing activities or the diversification towards new and viable activities. The granting of the aid is conditional on implementation of the restructuring plan.

Appropriateness

Aid will not be considered compatible if less distortive measures could meet the same objective. With regard to rescue aid, this means that it should fulfil the following conditions:
• It must consist of temporary liquidity support in the form of loan guarantees or loans.
• The level of remuneration should reflect the underlying creditworthiness of the beneficiary and should provide incentives for the beneficiary to repay the aid as soon as possible.
• Any loan must be reimbursed and any guarantee must come to an end within a period of not more than six months after disbursement of the first instalment to the beneficiary.
• Member States are requested to communicate to the Commission, not later than six month after the authorisation of the aid, proof that the loan has been reimbursed in full and/or that the guarantee has been terminated. The authorisation of the rescue aid will be extended provided that a restructuring plan has been submitted. 
• Rescue aid may not be used to finance structural measures, unless they are required during the rescue period for the survival of the beneficiary.
 
Regarding restructuring aid, Member States are free to choose the form that it takes but should ensure that the instrument is appropriate to the issue it is intended to address.

Incentive Effect

In the case of restructuring aid, Member States must demonstrate that in the absence of the aid, the undertaking would have been restructured, sold or wound up in a way that would not have otherwise achieved the identified objective of the common interest.

Proportionality

To be approved aid must not exceed the minimum needed to achieve the objective of common interest. The Commission requires a significant contribution to the restructuring costs be provided by the aid beneficiary, its shareholders, creditors or new investors, this is known as “own contribution”.

For restructuring aid, a sufficient level of “own contribution” to the costs of the restructuring and burden-sharing of at least 50% of the restructuring costs is required. Furthermore, the notion of burden-sharing introduced by the Guidelines requires that aid to cover losses should only be granted on terms which involve adequate burden sharing by existing investors.

State intervention should only take place after losses have been fully accounted for and attributed to the existing shareholders and subordinated debt holders. In addition, any State aid that enhances the undertaking’s equity position should be granted on terms that afford the State a reasonable share of future gains.

Negative Effects

According to the Commission, the negative effects of the aid on competition and trade between Member States should be sufficiently limited in order to keep the overall balance of the measure positive.

This means in particular that the ‘one time, mast time’ principle should be respected. In application of this principle, aid can only be granted to an undertaking in difficulty after at least ten years have elapsed any previous aid was granted or the restructuring period came to an end. Exceptions to this rule are the following:
• Where restructuring aid follows the granting of rescue aid as part of a single restructuring operation.
• Where rescue aid or temporary restructuring support has been granted in accordance with these guidelines and that aid was not followed by restructuring aid if (i) it could reasonably have been believed that the beneficiary would be viable in the long term when the aid was granted and (ii) new rescue or restructuring aid becomes necessary after at least five years due to unforeseeable circumstances for which the beneficiary is not responsible.
• In exceptional and unforeseeable circumstances for which the beneficiary is not responsible.
 
Additionally, the Guidelines request Member States take measure to limit distortions of competition when restructuring aid is granted. This could take the form of structural measures, behavioural measures and market opening measures. 

Transparency

Member States will be required from 1 July 2016 to publish the relevant information about the granting of aid on a comprehensive State aid website. The information would be required to be published after the decision to grant the aid has been taken, and be available for at least 10 years to the general public.

Specific provisions for SMEs

In addition to the general compatibility conditions, the Guidelines provide specific provisions regarding the granting of aid to SMEs and smaller State-owned undertakings. General provisions will be applied to SMEs mutatis mutandis, unless provided otherwise below.

Objective of common interest

According to the Commission, the failure of an individual SME is unlikely to involve the degree of social hardship or market failure required in the general provisions. The Guidelines provide therefore that for SMEs, it is sufficient to determine that the failure of the beneficiary would likely involve social hardship or a market failure, in particular that:
• The exit of an innovative SME or an SME with high growth potential would have potential negative consequences.
• The exit of an undertaking with extensive links to other local or regional undertakings, particularly other SMEs, would have potential negative consequences.
• The failure or adverse incentives of credit markets would push an otherwise viable undertaking into bankruptcy.
• Similar situations of hardship duly substantiated by the beneficiary would arise.

Appropriateness

For rescue aid, the appropriateness condition will be satisfied provided aid is granted for no longer than six months. Before the end of that period, (i) the Member State should approve a restructuring or liquidation plan, or (ii) the undertaking should submit a simplified restructuring plan or (iii) the loan must be reimbursed or the guarantee terminated.

Proportionality of the aid

By way of derogation to the general provisions, an own contribution will be considered to be adequate if its amounts to at least 40% of the restructuring costs in case of SMEs or 25% in the case of small enterprises.

Temporary restructuring support

Given the fact that SMEs are likely to face greater liquidity difficulties than larger firms and that in certain cases, it may be possible for an undertaking to complete restructuring without the need for restructuring aid - provided that it is able to obtain liquidity for a period longer than 6 month, the Guidelines introduce a new concept of aid for SMEs targeting liquidity issues. Temporary restructuring support allows liquidity aid for SMEs for a longer period than six months under the following conditions:
• The support must consist of aid in the form of loan guarantees or loans.
• The remuneration should be set at a rate not less than the reference rate set out in the Commission Communication on the revision of the method for setting the reference and discount rates for weak undertakings.
• Temporary restructuring support must comply with the general compatibility provisions set out by the Guidelines, unless otherwise specified in the SMEs specific conditions.
• Temporary restructuring support may be granted for a period not exceeding 18 months. Before the end of that period, (i) the Member State should approve a restructuring or liquidation plan or (ii) the loan must be reimbursed or the guarantee terminated.
• Not later than six months after disbursement of the first instalment, the Member State should approve a simplified restructuring plan that should, as a minimum, identify the actions that the beneficiary must take to restore its long-term viability.

Next Steps

The Guidelines will be applied with effect from 1 August 2014 until 31 December 2020. Notifications registered by the Commission prior to 1 August 2014 will be examined in the light of the criteria of previous Guidelines.