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The main liquidity and financial measures addressed to enterprises in the “Coronavirus” decree

The Law Decree no. 18 of 17 March 2020 (hereinafter, the “Decree”) is, at this point, a well-known legislative tool also to the audience of non-experts, considering that it aims at adopting measures which affect almost all national economic sectors to respond to the epidemiological emergency of Covid-19.

The measures contained therein lead to an increase in net debt of around 20 billion euro in 2020 (equal to 1.1 per cent of GDP) and the resources allocated to support enterprises amount to around 7 billion (6.2 for higher expenses and 0.9 in terms of lower revenues), with the main purpose of providing liquidity to enterprises and avoiding credit restrictions.

In addition to purely fiscal measures, the main actions concern the suspension of loans and other facilities expiring in upcoming months and the strengthening and expansion of public guarantee schemes for enterprises’ loans, and also the introduction of an incentive to sell NPLs to third parties, based on the possibility of transforming a portion of deferred tax assets (DTA) into tax credits, for an amount proportional to the value of the NPLs sold.

The main support measures for enterprises established by the Decree will be examined below, also in the light of the memorandum issued by the Bank of Italy, which provides comments on the Decree in view of its conversion into law. Bank of Italy considers, the relevant measures, as well as the extent of the financial commitments, as “appropriate to the current stage of development of the epidemic”. Such opinion has been issued also on the basis of the commitment by the Government to adopt further measures and on the circumstance that the European institutions may consider as fulfilled the conditions to activate the general escape clause of the Stability and Growth Pact (SGP), subject to which deviations from the return path towards the medium-term budgetary objective are allowed.

  1. Guarantee Fund for SMEs

Article 49 of the Decree establishes a Central SME Guarantee Fund, in order to provide a free-of-charge, partial insurance to the credits granted by credit institutions, for a duration of 9 months.

In order to face the foreseeable increase in the Fund’s operations, € 1.5 billion are set aside for 2020.

The maximum guaranteed amount for each enterprise is raised to € 5 million; for direct guarantee interventions, the coverage percentage is equal to 80 percent, and for reinsurance intervention is equal to 90 percent, of the amount of each financing transaction, for a maximum guaranteed amount of € 1.5 million for each transaction.

Loans granted in refinancing transactions are eligible for the guarantee of the Fund, provided that the lender grants to the same beneficiary of additional credit for at least 10% of the amount of the outstanding loan. 

For transactions for which banks or financial intermediaries have agreed to suspend payment of instalments in connection with the effects of COVID-19, the duration of the guarantee of the Fund is extended accordingly.

For real estate investment transactions in the tourism - hotel and real estate sectors, with a minimum duration of 10 years and for an amount exceeding € 500,000, the guarantee of the Fund can be combined with other forms of guarantee acquired on loans.

For guarantees on specific loan portfolios dedicated to companies damaged by the Covid-19 emergency (or belonging, for at least 60 percent, to specific sectors/chains affected by the epidemic), the share of the junior tranche covered by the Fund may be increased by 50 per cent, which can be further increased by 20 per cent in the event of intervention by additional guarantors (Regions, Cassa Depositi e Prestiti, Confidi).

In any case, enterprises that have exposures classified as non performing or UTP are excluded.

Finally, the gratuitous guarantee by the Fund is eligible for a coverage of 80 per cent (90 per cent for reinsurance) for new loans of short-term granted within the limit of € 3,000 to individuals acting in businesses whose activity was damaged by the Covid-19 epidemics (on the basis of a self-declaration).

The Bank of Italy has rightly pointed out that it would be fair to increase the maximum coverage quota of 80 percent set by the Decree for all types of financing, given that the quota is currently comprised between 40 and 60 percent for short-term loans, and the request for new credit is likely to concentrate on such kind of loans in the near future.

  1. Guarantee fund by the Ministry of Economy and Finance

Article 57 of the Decree amends the permanent fund by the Ministry of Economy and Finance aimed at promoting the granting of bank loans, with the support of the Cassa Depositi e Prestiti (CDP).

More specifically, liabilities undertook by CDP (also by way of guarantees) in favour of banks which financed enterprises that suffered a reduction in turnover due to the Covid-19 emergency and that cannot access the Central Fund for SMEs, due to their dimension or to their specific business, may be eligible to the State guarantee for a limit of 80% of the liability undertaken.

This fund, whose functioning will be defined in detail on the basis of an implementing decree, is assigned an initial allocation of 500 million euro for 2020.

The Bank of Italy maintained that this measure is addressed to enterprises that have suffered the negative effects of the epidemiological crisis, but have, on average, better financial conditions and access to new loans than the rest of the production system.

In addition, unlike the SME Fund, this instrument could also guarantee existing loan portfolios, allowing banks to reduce capital requirements accordingly.

  1. Financial aid to SMEs (moratorium of existing loans)

Article 56 introduces financial aid measures to micro, small and medium enterprises (SME), formally recognising COVID-19 epidemics as an event of extraordinary and serious disturbance of economy, so that such enterprises, in relation to their existing indebtedness towards banks and financial intermediaries (provided that such indebtedness does not qualify as impaired exposure and past due), benefit of the following measures:

  1. for credit facilities and loans granted against receivable advances existing at 29 February 2020, amounts granted (used or not) cannot be revoked until 30 September 2020;
  2. for loans with full reimbursement at expiration, which will be due before 30 September 2020, contracts are automatically extended until 30 September 2020 at the same conditions;
  3. for loans and other facilities to be reimbursed in instalments, the payment of instalments or leasing rentals expiring before 30 September 2020 is suspended until 30 September 2020 and the reimbursement plan is deferred so to ensure that no further charges apply to both parties.

The moratorium on loans could be considered the most effective financial support measure among those introduced by the Decree. In fact, in periods of uncertainty, intermediaries not only tend to adopt more restrictive criteria in the granting of new loans, but also to review the contractual conditions of those granted in past, for example by shortening deadlines or reducing the amount.

In the current situation, it is likely that the financial tensions of the enterprises could derive above all from the contractual revision of the existing loans, as the demand for new loans will inevitably be conditioned by the drop in production volumes and by the revision of the investment plans.

The request to benefit of such measure is accompanied by a self-declaration of the company stating the temporary reduction of liquidity as a consequence of the Covid-19 epidemics.

Also, the qualification of enterprises as SMEs implies certain requirements, although the Recommendation of the European Commission 2003/361/CE of 6 May 2003 specifies that in certain cases such requirements must not only refer to the single enterprise, but also to parent companies.  Therefore, it is necessary to check compliance with the above requirements in order to avoid criminal and civil liabilities connected to a false declaration.

The Bank of Italy states that banks are not obliged to verify the truthfulness of the self-declarations received for the requests of moratorium.

Upon request of the lender, such transactions are entitled to benefit of a specific national guarantee fund up to the limit of 33%, based on a plafond of 1.73 billion euro.

The enforcement of the guarantee can be requested by the lenders only if they started enforcement procedures to recover their credit within 18 months following the termination of the aid measures.

According to those measures, it is expected that there will not be any economic loss for the bank as a result of the moratorium. Therefore, the mechanism is “neutral from an actuarial point of view”, i.e. it limits itself to redistributing payments without causing losses for the bank or benefits for the company (except for the one desired, that is to provide relief from a situation of liquidity tension).

On the basis of the applicable laws on non-performing loans, and in perspective also in the context of the new regime for identifying the default (which comes into force on January 1, 2021 and which most of the “significant” banks have already adopted in advance on the impulse of the ECB), moratoriums with this characteristic - whether they are provided by law (as in this case) or agreed on a voluntary basis between the banks and the debtors - do not automatically determine a reclassification of the credit from performing to non-performing (in fact moratoriums can only access debtors classified as performing).

The Bank of Italy specified that the moratorium should not automatically cause the significant increase in credit risk which requires a reclassification.

Such stance has been confirmed also by EBA, which underlined how generic moratoriums applicable to all debtors do not imply the automatic reclassification of the credit as non-performing, forborne or UTP.

Finally, the public guarantee (not working as first-demand) intended to partially cover the exposures concerned, to be activated in the event that the debtor becomes insolvent, shall mitigate the effects on bank balance sheets of a possible significant deterioration in the quality of credit at the end of the moratorium period.

The guarantee should allow to reduce losses of the banks on NPLs, on average, from 70 to 37 per cent.

  1. Tax credit for assignment of defaulted claims

Lastly, article 55 introduces the possibility for enterprises assigning defaulted  claims (past due for more than 90 days) to transform a portion of deferred tax assets (DTA) into tax credits for an amount proportional to the value of defaulted claims that are transferred to third parties.

In this way, it is possible to anticipate the use of the lower taxes corresponding to these DTAs, which otherwise the companies would have used in subsequent years, by determining an immediate reduction in the liquidity requirement associated with the payment of taxes.

For more details, also on other tax reliefs, please see our newsletter below Coronavirus Tax Relief Measures


Portrait of Paolo Bonolis
Paolo Bonolis
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Gianfabio Florio