Frankfurt More than four months after the first draft law on the Economic Stabilization Fund (WSF), there are new details on government guarantees for corporate debt. Accordingly, the WSF issues guarantees for up to 90 percent of the nominal value of bank loans and other non-subordinated capital market instruments, such as bonds. This emerges from a presentation by the Federal Ministry of Economics published last week.
With a volume of 400 billion euros, the state guarantees for corporate debt make up the largest part of the 600 billion euro rescue package. They are open to larger companies with total assets of EUR 43 million or more, sales of EUR 50 million or 250 employees. The companies must also have got into financing difficulties due to the corona pandemic and no longer have any other options to get new money on the free market. The state bank KfW issues guarantees for smaller companies.
The WSF guarantees are available for new bank loans from five million euros. However, the money must be spent on working capital and investments – state aid must not be used to pay off outstanding debts.
From a financing requirement of 100 million euros, the company works with the experts from the WSF to develop an “individual structure” for state aid. However, the “standard case” refers to bank loans and loans or credit lines for which guarantees are given. This suggests that the state rescue is organized in cooperation with the banks – and not through the capital market.
The WSF justifies the limitation of the guarantees to 90 percent of the nominal value with EU state aid rules. These are likely to result in government-guaranteed corporate bonds not being issued or only being issued in exceptional cases. It is true that the WSF presentation explicitly lists them as a possibility. But Matthias Schell, bond expert at Landesbank Baden-Württemberg, doubts that such a securities issue would be feasible:
“A state guarantee that does not cover the full nominal amount would significantly increase the default risk for investors and have a complex risk profile.” The securities would probably be too complicated for the capital market: investors would have to take the loss of part of the amount into account when determining the price of the bond.
In addition, companies that are already active on the bond market have had little difficulty in collecting fresh liquidity recently. In the first half of the year, European companies issued more bonds than ever before. Even some companies without an investment grade rating were active in the market. The risk premiums for European corporate bonds versus safe Bunds have also fallen significantly since mid-March, from 2.3 to 1.2 percentage points.
More: How companies get through the crisis without government aid