The Covid-19 crisis has hit small and medium size enterprises (SMEs) hardest, SMEs are crucial to overall growth in the economy and in recognition of this the Irish government is introducing new policy tools to help SMEs.
The Credit Guarantee (Amendment) Act 2020 (the 2020 Act), to implement the Covid-19 Credit Guarantee Scheme (CCGS), was recently enacted to encourage additional lending to SMEs by offering a partial government guarantee (currently 80%) to lenders against losses on qualifying loans to eligible SMEs.
The 2020 Act amends the Credit Guarantee Act 2012 (the 2012 Act) (which provides for an existing SME credit guarantee scheme). The 2020 Act has made two main changes to the 2012 Act, namely: (1) to substantially increase monetary limits on the credit available and potential liability of the State in respect of the CCGS; and (2) extend the classes of SMEs to which the CCGS may apply.
New Monetary Limit
The 2020 Act has implemented an overall maximum credit amount of €2 billion in respect of the CCGS – this is a significant increase on the existing scheme which has a maximum yearly credit amount €150 million. This means that the potential maximum liability for the State under the CCGS is €1.6 billion, the banks will cover the remaining €400 million.
The 2020 Act also provides that there will be no portfolio cap on the CCGS – the existing scheme has a cap of 13%, meaning that under the existing scheme the liability of the State for unpaid loan facilities included in the existing scheme will be 13% of the total amounts lent under such loan facilities. There will be no such portfolio cap on the CCGS.
Class of Enterprises
The 2012 Act defines a qualifying enterprise (i.e. an SME that can apply for the existing credit guarantee scheme) as (i) an enterprise established in the State that employs fewer than 250 people (whether or not working in the State) and (ii) the annual turnover does not exceed €50 million or annual balance sheet total does not exceed €43 million.
The 2020 Act has expanded this definition allowing for an enterprise to qualify for the CCGS where the enterprise meets the requirements above or they employ not more than 499 people (whether or not working in the State). This criteria considerably broadens the scope of business who may qualify for the CCGS, and appears to capture just about anyone.
The intention is to cover all SMEs including producers, farmers, people in the fishing industry and others. The explanatory memorandum of the Credit Guarantee (Amendment) Bill 2020 states that “primary producers are also to be included, but this will be done through the extension of classes of SMEs which qualify for the scheme through the statutory instrument establishing the COVID-19 credit guarantee scheme” and the gov.ie website states that “primary agriculture, fisheries and aquaculture producers may be included”. However, the Department of Business website states that “SME’s that are involved in the primary agriculture, horticulture and fisheries are excluded from the scope of the scheme in the light of particular restrictions under the De Minimis State Aid rules” and accordingly there is some uncertainty as to how exactly primary producers will qualify under the CCGS.
Under the CCGS loans of between €10,000 and €1,000,000 will be made available by participating lenders (currently AIB, Bank of Ireland and Ulster Bank, although other lenders will be able to get involved and there will be an open call in due course) to Irish SMEs for terms of up to six years. Term loans, demand loans / overdrafts and performance bonds will be available. The CCGS will only be available to viable SMEs, i.e. they cannot be in financial difficulty (excluding cash-flow pressures caused by Covid-19) and they will need to demonstrate an adverse impact of a minimum of 15% of actual or projected turnover or profit due to the impact of Covid-19. The CCGS will be open for guarantees to be put in place until the 31st December 2020, or a later date (as the Minister for Jobs, Enterprise and Innovation may order, with the consent of the Minister for Finance and the Minister for Public Expenditure and Reform), but no later than 31st December 2021.
The interest rate charged will be at or below market rates plus a premium to cover the cost of providing the guarantee (gov.ie website states that this premium is currently 0.25% for the first year, 0.5% for years two and three and 1% in years four, five and six). The initial participating lenders (AIB, Bank of Ireland and Ulster Bank) have indicated that an interest rate reduction for facilities will be provided for. This is a work in progress – precise reductions are still under discussion.
Capital or interest moratoria of up to 1 year will be permitted under the scheme – although this will be at the discretion of the lender on a one-to-one basis with their customers.
It is important to note that the CCGS is a partial guarantee only. If a particular loan is not fully repaid, the State will reimburse the lender for 80% of the loss on that loan and the lender will be responsible for the remaining 20% of loss. This is a feature present in the existing credit guarantee scheme and aims to act as a disincentive to reckless lending. The Irish government will play no role in the application or decision-making process as to who will be granted loans, this will be entirely left to the participating lenders. Lenders must still make a credit assessment of anyone seeking to avail of the Scheme but the guarantee will help to mitigate credit risk or the need for collateral.
The 2020 Act was signed into law by President Higgins on 24 July 2020.