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State aid: Commission adopts revised guidelines for supporting firms in difficulty – frequently asked questions

European Commission - MEMO/14/473   09/07/2014

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European Commission

MEMO

Brussels, 9 July 2014

State aid: Commission adopts revised guidelines for supporting firms in difficulty – frequently asked questions

(see also IP/14/795)

What is the purpose of the rescue and restructuring guidelines?

The rescue and restructuring guidelines set out the criteria under which Member States can grant public funding to companies that are in financial difficulty in line with EU state aid rules.

Subsidising companies in difficulty can have a negative impact on the wider economy. Such subsidies keep afloat companies which would otherwise have exited the market. This may not only waste taxpayers' money. It also puts a brake on the normal process by which the most innovative and efficient firms see their market share grow, while their less productive competitors exit the market. That process raises productivity and boosts the economy's ability to deliver growth and jobs on a lasting basis.

Undue support to companies in difficulty can also have negative effects on the Single Market. Protecting national firms does not make the difficulties that a particular business sector is facing go away, but simply shifts them to other producers in other countries. It also keeps markets divided along national boundaries, rebuilding with state aid the trade barriers that the single market has brought down.

Lastly, aid for companies in difficulty may create the wrong incentives. It can persuade the most efficient and innovative companies in the market that there is no point in investing for growth, since their less efficient competitors will be supported by the state. This costs the whole economy growth and jobs.

That is not to say that there are no benefits from rescue and restructuring aid. In the right circumstances, it can be an important tool to avoid the social and economic dislocations that go with the exit of firms from the market. However, since its negative consequences are so serious, it needs to be carefully scrutinised to make sure that they are kept to a minimum and are outweighed by the benefits of the aid. One of the main conditions of this is that aid should be used to make the company viable again, not to keep it artificially alive.

Why was it necessary to review the rescue and restructuring guidelines?

The review of the rescue and restructuring guidelines is a key element of the State Aid Modernisation (SAM) programme. One of the main aims of SAM is to ensure that state aid rules support the provision of “good aid” that promotes economic growth and objectives of common interest, in particular by simplifying the requirements that apply to that type of aid. However, those changes must be backed by strong rules to ensure that potentially harmful aid is still subject to strict controls. That makes strict control of rescue and restructuring aid more important than ever.

Since the previous guidelines were adopted in 2004, the Commission has gained nearly ten years' experience in dealing with rescue and restructuring cases, including perhaps the greatest challenge it has yet faced in this area, the support granted to rescue and restructure banks (which are not subject to these guidelines but to other, specific rules applying to the financial sector, see IP/13/672) and other companies during the financial crisis. That experience has shown that, although the basic principles of the guidelines are still sound, they could be improved in a number of ways, to ensure that aid is better targeted where it is needed most and that it is given in the least distortive form possible.

What are the main changes in the new guidelines as compared to the existing ones?

A basic requirement, if aid is to bring positive effects, is that it contributes to achieving an objective of common interest. The new guidelines strengthen the test of whether aid has beneficial effects by introducing “filters” ensuring that the aid will bring benefits to society, for example by saving jobs.

To ensure that aid is used to maintain viable economic activity and jobs and not to bail out shareholders, the new guidelines require that the owners (including subordinated creditors) of companies that receive aid contribute to the costs of restructuring ("burden sharing"). That means that the firm’s owners will bear any losses first, and that the state – and hence taxpayers – will receive a fair share of any future gains.

Finally, the new guidelines aim to encourage the granting of aid in a way that causes the least harmful effects, for example through loans and guarantees instead of cash grants. To support that aim, the guidelines contain a new concept of temporary restructuring support, which allows loans and guarantees to be granted to SMEs for up to 18 months on simplified terms. This will also allow Member States to better help SMEs address liquidity problems, something that is particularly important in the current economic context.

What is a company in difficulty?

When a company is in financial difficulty – that is, when it is likely that it will go out of business before long unless the State steps in – any state aid it gets can seriously harm the competitive environment. For that reason, companies in difficulty are generally only allowed to receive aid under the rescue and restructuring guidelines.

The guidelines explain what is meant by “difficulty”. This definition has been significantly simplified in comparison with the 2004 guidelines, by removing any subjective elements and putting in their place new, objective criteria. Those criteria are linked to financial ratios that are frequently used by analysts to assess the health of a company, in particular whether its burden of debt is sustainable and whether it generates enough profits to cover its interest payments.

The guidelines also acknowledge that in some exceptional cases, it may be necessary to give liquidity support to businesses that are not in difficulty, but that are facing a liquidity crisis through no fault of their own. For example, a consumer confidence crisis, such as that caused by concerns over avian flu, could lead to a build-up of unsold products that might be impossible to finance on market terms. Where such a financing crisis is genuinely driven by market conditions and not by poor management or inadequate contingency planning by the company concerned, rescue aid or temporary restructuring support could be provided to bridge the gap.

What is rescue aid and under what conditions can it be granted?

As under the 2004 guidelines, rescue aid can be granted for a period of up to 6 months to keep a company afloat, giving it the necessary time to prepare a restructuring plan. Beyond this period the aid must either be reimbursed or a restructuring plan must be notified to the Commission for the aid to be approved as "restructuring aid".

The new guidelines also introduce the possibility for authorities to grant temporary restructuring support to SMEs for a period of 18 months (see below).

What are the basic conditions for approving restructuring aid?

As under the 2004 guidelines, the basic conditions for approval of restructuring aid are based on the three pillars of return to viability, own contribution and measures to limit distortions of competition, as well as compliance with the “one time, last time” principle.

First, the restructuring plan that the company must submit has to show how its long-term viability will be restored without further state support. Second, the company, its owners or external investors have to contribute to the costs of restructuring. Third, the company must take measures to limit the distortions of competition created by the state support, for example by selling off profitable parts of its business.

Finally, restructuring aid may be granted only once over a period of ten years (the 'one time, last time' principle).

Can rescue or restructuring aid be exempted from prior notification to the Commission under so-called "block-exemptions"?

No. Although the scope of block-exempted aid has been vastly expanded in the context of the SAM programme (see IP/14/587), block exemptions are only appropriate where it is possible to set out in advance a set of objective criteria that ensure that when aid is granted, it is “good aid”. Since the assessment under the rescue and restructuring guidelines looks at the whole business of the company concerned, not just one particular project, it is too complex to be reduced to a simple set of criteria.

However, to simplify the process of granting small amounts of aid to companies in difficulty, the guidelines allow Member States to set up aid schemes. Once a scheme has been approved by the Commission, grants of aid to individual companies do not need to be notified for prior authorisation, provided they meet the conditions of the scheme. The new guidelines make clear that schemes are the best way to grant aid to SMEs.

What are the "filters" and how do they work?

The guidelines aim to balance the good and bad effects of aid. Rescue and restructuring aid can have important positive effects, for example by preserving jobs, industrial knowhow or essential services. However, this is not always the case. For example, modern insolvency law should also help sound companies to survive and safeguard jobs.

There are therefore two aspects to the test. First, to ensure that aid is only granted where it is necessary to achieve an objective of common interest, aid-granting authorities have to show that the aid is needed to prevent social hardship or address market failures. The guidelines set out a list of situations in which aid would be justified, for example where the unemployment level in the region concerned is above the national or EU average, persistent and accompanied by difficulty in creating new employment in the region concerned. A separate provision for SMEs applies a less strict standard and identifies situations that are more relevant to the position of SMEs.

Second, the granting of aid must make a difference, as compared to the situation without aid. To demonstrate that, aid grantors have to present a comparison with a credible alternative scenario not involving aid.

What is temporary restructuring support?

SMEs suffer mostly from lack of appropriate access to credit and aid in the form of liquidity support (loans and guarantees) is less damaging to the economy than the provision of cash grants or share capital. Loans have to be repaid with interest, which limits the cost to the taxpayer and provides an incentive for companies to complete restructuring as soon as possible, whereas other types of aid benefit the company permanently and often provide the State with no benefit, even if the company goes on to be very successful.

The new concept of temporary restructuring support for SMEs introduced by the guidelines targets the liquidity issues SMEs face and provides an incentive for companies and aid grantors to prefer liquidity support rather than more harmful forms of aid. Provided that aid is in the form of loans or guarantees with an appropriate interest rate, it can be used to support restructuring for up to 18 months without any requirement for the company to provide a contribution from its own resources or to take measures to limit distortions of competition. To make sure that the company takes steps towards restructuring in that time, and does not simply use the aid to put off the necessary action, it has to produce a simplified restructuring plan explaining what it will do to restore its long-term viability.

The fact that temporary restructuring support can only take the form of loans or guarantees, and that it cannot be given for longer than 18 months, means that it is most suitable for relatively straightforward cases. Where a company’s problems go beyond liquidity difficulties, or where there is a complex business to restructure, temporary restructuring support is unlikely to be the right instrument. For that reason, it is available only to SMEs, which face greater liquidity difficulties than large firms and whose business structure is generally much simpler.

What is burden sharing?

It is reasonable to expect investors in a troubled company – particularly shareholders, who receive the highest returns when the company performs well – to bear a fair share of the cost of restructuring. The Commission’s experience with bank restructuring during the crisis has shown that when investors are required to share the burden, the amount of taxpayers’ money needed can be greatly reduced. Burden sharing can even avoid the need for aid altogether, since investors are more likely to agree to support a private workout of the company’s debts if they cannot expect to be fully bailed out by the State.

The new guidelines therefore require, as a precondition for granting restructuring aid, that losses already incurred by the company are fully allocated to existing shareholders and subordinated creditors (whose rights as investors are similar to those of shareholders). Gains must also be shared fairly: a company that received state support must return a reasonable share of the profits to the state, once it performs well again.

How has the own contribution requirement changed?

As under the 2004 guidelines, companies that are restructured have to meet a reasonable share of the costs of restructuring from their own resources (at least half, for support outside of schemes). However, the new guidelines also look more closely at the form that the own contribution takes. In particular, when it comes from proceeds of asset sales, private investors acquire assets but have no commitment to the future of the company. In such a situation, the taxpayer alone takes a risk on the success of the company’s restructuring. To avoid that type of situation, the new guidelines require that, wherever possible, the own contribution should be in a form that has a comparable effect to the aid granted (for example, through an equity injection if the State also provides capital). Showing that private investors believe in a company’s future should increase the prospects of a successful restructuring.

What happens next?

The Commission will assess aid for companies in difficulty that is notified from 1 August 2014 under the new guidelines. Notifications made before that date will be assessed under the old rules, even if the Commission reaches a decision after 1 August 2014. Member States have six months to bring any existing rescue and restructuring aid schemes into line with the new rules.

See also the Competition Policy Brief:

http://ec.europa.eu/competition/publications/cpb/2014/009_en.pdf

and the text of the new guidelines:

http://ec.europa.eu/competition/state_aid/legislation/horizontal.html#rescue


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