COVID-19: Spanish government explains how the solvency support fund for strategic companies works

Spain - 07 / 28 / 2020

Spain Restructuring & Insolvency Alert

The Council of Ministers approved on July 21, 2020 (and published on July 24) the decision on the functioning of the solvency support fund for strategic companies (FASEs, after its initials in Spanish), requirements to be eligible for the support, restrictions regarding beneficiary companies and reporting obligations on received support.

The solvency support fund for strategic companies is a protection tool of last resort, set up by the government to shore up strategic companies in distress where it is confirmed that they cannot keep their businesses afloat in the absence of public support, despite efforts to restore equity or carry out financial restructurings. Certain of its main features are as follows.

Temporary protection: the temporary support transactions may be granted until June 30, 2021, or on any later date that may be determined within the Temporary Framework established by the European Commission in a communication issued on March 19, 2020, relating to the state aid measures to support the economy in the context of the current COVID-19 outbreak (“the Temporary Framework”).
Express application: companies’ legal representatives have to send their application for support to the solvency support fund for strategic companies and, as applicable in each case in the decision by its managing board, sign a temporary public support agreement, along with a shareholders’ agreement or management agreement. These agreements may determine that the beneficiary’s strategic decisions require the fund’s prior authorization.
Compatibility of the scheme with the European Union internal market. The grant of aid out of the fund is conditional on a prior declaration of compatibility of the scheme by the European Commission. The notification of individual aid under the Temporary Framework is required for protection involving amounts higher than €250 million per beneficiary. Transactions not eligible for the Temporary Framework will also have to be notified as required in the state aid rules.
Eligibility criteria:

Non-financial company, domiciled and having its main workplaces in Spain.
Company outside the definition of “undertaking in difficulty” determined in the European rules on the compatibility of public aid with the internal market.
Provide evidence that, in the absence of support from the FASEs fund:

The company would cease operating or experience serious difficulties to keep afloat.
A mandatory cessation of operations would have a high negative impact on economic activity or employment, nationally or regionally.
The company would not be viable in the medium to long term. The application for support must be accompanied with a viability plan for surviving its difficulties.

The company has not made a voluntary petition for an insolvency order, been declared insolvent, had an insolvency order issued on it (unless an arrangement has been approved), is not subject to court supervision or had its powers removed in an insolvency proceeding, and the removal period has not ended. Exceptionally the fund may provide protection in cases where the insolvency proceeding was later than December 31, 2019.
It has not had a penalty imposed on it consisting of forfeiture of the chance to obtain subsidies or public aid or for crimes against public property or urban development offenses.
It has not breached any government contract, which had given rise to termination of the contract for fault.
It has no outstanding payments in respect of refunds of public subsidies or public aid.
It has no outstanding tax or social security obligations as of December 31, 2019.

SEPI must verify satisfaction of the applicable requirements and assess, with the assistance of independent experts if necessary, the validity and sufficiency of the information provided.

Types of instruments: participating loans, convertible debt, subscription to shares or any other equity instruments, provision of loans or subscription to preferred ordinary or subordinated debt, secured or without security.

In the case of credit facilities, any restrictions in the following six sections are only applicable if these credit facilities are ultimately converted into equity, and are subject to the restrictions regarding hybrid instruments from when they acquire that nature.
Minimum and maximum amounts: unless there are exceptional circumstances, transactions funded out of the fund must amount at least to €25 million. There is no maximum amount, which will be the minimum amount necessary to return the company to viability, without increasing net equity above the level recorded as of December 31, 2019.
Remuneration for transactions: the minimum remuneration will be the rates approved by the European Commission for the Temporary Framework, plus certain spreads. The maximum remuneration may be determined at fixed or variable rates by reference to factors such as, for example, income or volume of sales.
Exit of the government: the interest acquired by the fund has to be repaid at a repurchase price that is the higher of either: (i) the market price or (ii) the face value of the original investment, increased by annual remuneration equal to 200 basis points plus the minimum remuneration approved by the European Commission for the Temporary Framework. This total remuneration may be increased by reference to the time that has passed since the fund acquired an interest and the change in value of the interest held, as well as whether or not the beneficiary is listed.
Early repayment: any equity interest acquired by the fund may be repurchased and any granted loans and hybrid instruments may be redeemed early, on the terms and conditions that will be determined in each case.
Assignment to third parties / Preferred right of shareholders: it may be decided to assign the instruments and rights used to carry out the fund's transactions, through an open process for potential purchasers, ensuring equal treatment, or by sale on an organized market. If the government sells its interest below a certain price, the beneficiary may also be subject to certain restrictions.
Restrictions on companies receiving support from the fund: until the fund receives full repayment, the beneficiary companies will be subject, generally, to the following restrictions:

Prohibition on advertising for commercial purposes that they are beneficiaries.
Not engaging in an aggressive expansion of the business funded out of public aid or assuming excessive risks.
Not acquiring shares representing more than 10% of companies operating in the same sector or in ascending or descending markets, unless 75% of the support has been repaid or they qualify as “large companies”.
Separate accounts to prevent the temporary public support being used for activities in difficulties prior to December 31, 2019.
Prohibition on distributing dividends, paying non-mandatory coupons or acquiring treasury stock.
Until 75% of the support received from the fund is repaid, the remuneration of board members, of directors, or of anyone in senior positions of responsibility at the company, cannot go above the fixed part of its remuneration as of the 2019 fiscal year end.

Transparency: within three months from performance of the restoration of the company's equity, the government and the beneficiaries must publish relevant information, such as the identity of the company, the face values of the amounts of aid granted and their terms.
Governance: the fund will be managed by the managing board, which is an inter-ministry collective body attached to the Spanish Ministry of Finance and having the following members:

Secretary of State for Economy and Business Support,
Sub-Secretary for Finance,
General Secretary for Industry and for Small and Medium-Sized Companies, and
Secretary of State for Energy.

The managing board has to submit all applications for temporary public aid out of the fund for approval by the council of ministers.

The managing board has been set up indefinitely, although the temporary support transactions covered in the agreement may be granted until June 30, 2021 (or any alternative date that may be provided in the Temporary Framework).