The need for immediate support

Jun 02, 2020
For the Credit Guarantee Scheme for COVID-19 to succeed, the Government must act quickly to enact the necessary legislation, argues Claire Lord.

At a special cabinet meeting on 2 May 2020, the Irish Government agreed to introduce additional measures to support companies that have been negatively impacted by COVID-19. One of these measures is the Credit Guarantee Scheme for COVID-19 (COVID CGS). The COVID CGS is a repurposing of the existing SME Credit Guarantee Scheme.

Under the COVID CGS, the Irish Government will guarantee up to €2 billion of loans granted by Irish banks to small- and medium-sized enterprises (SMEs) with the hope that these companies will be able to access funds from Irish banks.

The participating Irish banks, initially being AIB, Bank of Ireland and Ulster Bank, will make loans of amounts between €10,000 and €1 million to SMEs for terms of between three months and up to seven years.

The guarantee

The credit risk on these loans will be shared between the Government and the participating banks. The Government will guarantee the banks in respect of 80% of losses on each loan, and the banks will be responsible for the other 20%. However, the guarantee provided to the banks will also be subject to a 50% portfolio cap, which means that if a bank needs to call upon the COVID CGS in respect of every such loan made, they will only be guaranteed by the Government in respect of 40% of losses.
There are arguments for and against the limitations on the guarantee being offered by Government in respect of these loans. The preference from the banks’ perspective would clearly be for a 100% guarantee. However, where some element of credit risk rests with the banks, it is arguable that the banks, who will make all decisions on lending, will more stringently assess the creditworthiness of businesses before granting a loan, thereby reducing some element of the associated moral hazard.

Availability of the scheme

A new law must be passed for the implementation of the COVID CGS. This new law will not be finalised until a new Irish government is in place. This unavoidable delay presents an immediate impediment to eligible SMEs accessing funds that could assist them in sustaining their businesses during this period of economic uncertainty.

Eligibility for the scheme

The COVID CGS is available to certain, but not all, SMEs established and operating in Ireland. SMEs that are in financial difficulty, other than cashflow pressure caused by the impact of COVID-19, are ineligible. Also, the Department of Business, Enterprise and Innovation states that SMEs involved in primary agriculture, horticulture and fisheries are excluded from the scheme due to particular restrictions under the De Minimis State Aid rules.

Notwithstanding this exclusion, the Minister for Agriculture, Food and the Marine, Michael Creed T.D., has expressly stated that the COVID CGS will apply to farmers and fishermen. In light of this inconsistency on perceived eligibility, it is hoped that the enabling legislation will set out explicitly the eligibility criteria for the scheme.

Lending criteria

The participating banks will make the necessary assessments to determine if an SME applicant is eligible and to decide whether or not to make a loan available to them. As the intention of the COVID CGS is to support businesses that would not otherwise be able to obtain new or additional funding as they are higher-risk businesses due to COVID-19, banks will need guidance on how to make lending decisions. For example, how might a bank assess the long-term prospects of a business in the current unprecedented economic climate?

Clear lending criteria will be essential to encourage both banks to offer, and SMEs to consider, the COVID CGS as a realistic option.

Survival

The availability of cash is crucial for SMEs that, but for COVID-19, would be trading profitably. Sustaining these businesses through this crisis is vital to enable our economy to restart once more ordinary activities are again permitted.

The COVID CGS can only be of assistance where the scheme is readily available, and the eligibility and lending criteria are sufficiently clear to give lenders confidence to make the loans, and businesses confidence to avail of them.

To be of any assistance in protecting the businesses that the scheme is designed to assist, the enabling law must be published and enacted quickly.

Claire Lord is a Corporate Partner and Head of Governance and Compliance at Mason Hayes & Curran.