To combat the Novel Coronavirus (COVID-19), the German Federal Government is taking a wide array of measures. Revisiting a proven instrument to combat economic upheaval, the government has established a EUR 600 billion funds to shield the German economy.
1. The establishment of economic stabilisation funds
On 25 March 2020, the German parliament has adopted the Economic Stabilisation Funds Act (the “Act”) by expedited procedure. The Act was published in the Federal Gazette on 27 March 2020 and entered into force the day after, 28 March 2020.
The final version of the Act can be found here. The Act empowers to issue a total of four statutory orders which will specify conditions, delegate tasks and set requirements for the granting of funds. As further specification will be subject to the approval of the European Commission regarding European state aid provisions, the statutory orders have not yet been issued.
The hereby established Economic Stabilisation Funds (Wirtschaftsstabilisierungsfonds - “WSF”) serves to cushion the economic impact of the Novel Coronavirus (COVID-19) pandemic on certain companies in the real economy. The WSF is modelled after the Special Financial Market Stabilisation Funds (Finanzmarktstabilisierungsfonds – “SoFFin”), which was created 2008 during the financial crisis with the purpose to stabilize and restore confidence in the financial system and was at the time advised inter alia by Bird & Bird lawyers.
In order to meet the WSF’s objective of stabilizing companies in the real economy, it is equipped with stabilisation instruments which shall serve to overcome liquidity bottlenecks by supporting refinancing on the capital market and create framework conditions for strengthening the capital base of companies whose existence is of considerable importance for Germany as a business location or for the labour market.
The WSF addresses bigger companies and supplements the German development bank’s (Kreditanstalt für Wiederaufbau – “KfW”) special programme (please see here for information on the special programme).
Whereas the KfW’s programme is aimed at providing debt instruments for a wide range of companies in need, especially for working capital financing, the WSF’s instruments are aimed at ensuring liquidity and solvability by way of guarantees as well as strengthening capital bases by way of mezzanine and equity instruments.
As set out in the section “Institutional Framework” below, the Act provides for a plethora of competences and possibilities for delegations. With a wider view to state aid measures implemented during the crisis, an accumulation of competences at KfW can be observed. It is to be seen whether and to what extent the competent German Ministry of Finance (“BMF”) and the German Ministry for Economic Affairs and Energy (“BMWi”) will allocate decision-making to KfW and thereby further establish a state-aid hub.
2. What does the WSF provide for?
The following stabilisation instruments are available to the WSF:
2.1 EUR 400 billion in government guarantees for liabilities
The WSF can provide guarantees for debt instruments issued and liabilities entered into between the 28 March 2020 and 31 December 2021 to ensure liquidity and support refinancing on the capital market. An appropriate consideration must be charged for the issuance of the guarantees.
Whereas the risk assumption for KfW-backed loans under the KfW’s special programme ranges between 80% and 90%, guarantees issued by the WSF are fully comprehensive.
The term of the guarantees may not exceed 60 months.
2.2 EUR 100 billion euros for mezzanine and equity instruments
The WSF may provide for direct recapitalization measures to ensure the solvency of companies.
Specific details on the legal and economic conditions of the stabilizing measures will be addressed in a separate statutory order to be enacted by BMF and BMWi.
The stabilisation measures consist of the following:
i) Mezzanine instruments
The provision of subordinated debt, hybrid bonds, profit participation rights, silent partnerships, convertible bonds.
Mezzanine instruments may be of particular for recapitalisation in a crisis. Liabilities which are sufficiently subordinated in accordance with the provisions of German insolvency law are not be taken into account in the over-indebtedness balance sheet, so that it is prevented that the company is again on the verge of insolvency right after the newly introduced suspension of the obligation to file for insolvency due to over-indebtedness expired.
ii) Equity instruments
The acquisition of shares or the assumption of other components of the equity of the company.
A direct participation should only be made if there is an important interest of the Federal Government in the stabilisation of the company and the purpose intended by the Federal Government cannot be achieved better and more economically by other means.
An appropriate remuneration must be agreed for the recapitalisation measures.
2.3 Refinancing of the KfW special programme
The WSF further may grant loans to KfW to refinance the special programmes allocated to it by the Federal Government in response to the Corona crisis.
3. The institutional framework
The Act provides for a differentiated framework of competences and possible delegations of tasks.
Besides the day-to-day management of the funds, the main competences under the Act are
• the decision-making regarding stabilisation measure applications; and
• the operational management of acquired investments.
As far as – inter alia – questions of principle or matters of particular importance are concerned, decisions shall be taken by mutual agreement by an inter-ministerial committee (Economic Stabilization Fund Committee – “WSF-committee”). The WSF-committee will consist of representatives of the Federal Chancellery, BMWi, BMF and of the Federal Ministries of Labour and Social Affairs, of Justice and Consumer Protection and of Transport and Digital Infrastructure. The Committee may appoint a panel of experts regarding industrial holdings.
3.1 Who takes the decisions on applications?
Generally, applications are to be submitted to the BMWi. The Act provides for the BMWi as the main point of contact for the industry.
The decisions about stabilizing measures are then delegated to the BMF, which must confer and mutually agree with the BMWi on every application.
In certain cases, the processing of applications and decision thereof may be delegated to KfW.
KfW can make use of suitable third parties for this purpose. If applied, this will likely aim at establishing a formalized process as already in place for KfW loans in order to cope with the high number of applications.
Specific details on the delegation of tasks to KfW are to be addressed in a separate statutory order to be enacted by BMF and BMWi.
The legislator accounts for the fact that the technical expertise is located with KfW. However, as the KfW special programme already requires resources within KfW, it remains to be seen whether and to what extent the allocation of tasks may strain KfW’s capacities in the current situation. With view to this, it must be assumed that delegation will be applied to simple cases whereas tailored-fit decisions will be reserved for the BMF and BMWi.
The following criteria must be observed by the deciding authority when exercising discretion regarding the application for stabilizing measures:
• importance of the company for the German economy;
• urgency of stabilizing measures;
• effects on the labour market and competition;
• the principle of the most economical and efficient use of the WSF’s resources
It is apparent that the decision-making process will differ from the loan granting decisions made by KfW with regards to its special programme. Without prejudice to the case that the application process is wholly transferred to KfW, this is due to two reasons: As the declared goal of the WSF is political – to prevent a sell-out of German economic and industrial interests –, the material decision-making process will inherently be influenced by this. Further, apart from a possible panel of experts, there will be only political decision-makers.
The operational management of the investments acquired as parts of stabilisation measures is the responsibility of BMF but may be transferred to KfW by statutory order; this is assumed by the official justification for the Act.
3.2 Management of the WSF
The management of the funds is commissioned to the German Finance Agency (“Finanzagentur”). Established during the financial crisis for the management of SoFFin, this commissioned entity is considered to be equipped to handle the day-to-day business of the WSF, especially regarding risk controlling and reporting/information systems
4. Who is eligible for application?
As stated above, the WSF primarily aims to stabilize businesses of considerable importance for Germany as a business location or for the labour market. Such considerable importance is assumed in cases where the existential threat of a company would have a significant impact on the German economy, technological sovereignty, security of supply, critical infrastructures or the labour market.
There is no legal claim to benefits from the WSF.
Reflecting and enhancing on this, the Act sets out the following criteria which need to be fulfilled for a company to be eligible for stabilisation measures. Eligible are commercial enterprises which are not active in the financial sector (this means in particular enterprises that are neither CRR credit institutions nor CRR investment firms in the meaning of the German Banking Act) and which have fulfilled at least two of the following three criteria in the last two financial years before 1 January 2020 which have already been closed on the balance sheet:
a) a balance sheet total of more than EUR 43 million;
b) more than EUR 50 million in turnover; and
c) more than 249 employees on an annual average.
At the discretion of the WSF-committee, the fund's stabilizing measures are also available to systemically important smaller companies and companies in the critical infrastructure sector.
In addition, start-ups that have been valued by private investors in at least one completed financing round since 1 January 2017 with an enterprise value of at least EUR 50 million, including the capital raised through this round, may be eligible for recapitalization measures.
Neither the legal form nor the country of registered office of the applying enterprise is relevant. Regarding the latter, a foreign entity may be eligible if it – for example – maintains critical infrastructure or is relevant for the maintenance of supplies in Germany.
5. What are the conditions on stabilizing measures?
Companies are only eligible if they have no access to other sources of financing. The practical impact of this lender-of-last-resort requirement is not yet predictable. It might be argued that this requirement must be limited to “no access to other source of appropriate financing”. The question also arises as to how this requirement relates to other state aid measures.
The stabilisation measures must provide a clear independent going concern perspective once the pandemic has been overcome. Companies applying for a measure under this law must not have met the EU definition of "companies in difficulty" by 31 December 2019.
As in the financial crisis, anyone wishing to use state funds must be prepared to subject themselves to considerable restrictions in their corporate management.
On the one hand, benefiting companies must guarantee a sound and prudent business policy. They should contribute to the stabilisation of production chains and to securing jobs. In order to ensure that these requirements are met, conditions may be agreed on with the beneficiaries of the stabilization measure.
On the other hand, and depending on the type and recipient of the stabilisation measure, companies have to fulfil a catalogue of requirements to ensure a sound and prudent business policy, including – inter alia – the use of the funds, dividend distribution, limitation of renumeration and sector-specific restructuring conditions.
These requirements will be specified by way of statutory order and are to be determined individually for every case. Since the granting of funds by SoFFin was subject to comparable requirements, a comparison may be drawn.
In case you consider applying for WSF funds, there are several things to take into account. Besides the question of eligibility according to the set thresholds, your company must substantiate the going-concern perspective and provide documentation which shows the company’s economic sanity before 2020.
Further, you might consider applying even in case the set thresholds are not reached. For smaller companies, the Act provides for the possibility of a political decision on whether a company is “of similar importance for the security or the economy”. The last-minute inclusion of start-up companies shows a pragmatic approach of the German legislator and the readiness to support every part of the economy as is needed to preserve its functioning as a foundation for society.
We are happy to assist your evaluation on whether to apply for the WSF as well as accompany your application process.
6. How long are stabalisation measures available?
The stabilisation measures of the WSF are available until 31 December 2021. After the WSF has completed its task, it will be unwound and dissolved.