Explanatory Memorandum to COM(2020)404 - Amendment of Regulation (EU) 2015/1017 as regards creation of a Solvency Support Instrument - Main contents
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This page contains a limited version of this dossier in the EU Monitor.
| dossier | COM(2020)404 - Amendment of Regulation (EU) 2015/1017 as regards creation of a Solvency Support Instrument. |
|---|---|
| source | COM(2020)404  |
| date | 29-05-2020 |
1. CONTEXT OF THE PROPOSAL
• Reasons for and objectives of the proposal
The Commission is proposing to harness the full power of the EU budget to mobilise investment and frontload financial support in the crucial first years of recovery. These proposals are based on three pillars:
·an increase of the ceilings under the 2014-2020 Multi-Annual Financial Framework to enable the immediate implementation of measures within the Union and beyond in response of the impact of the COVID-19 pandemic;
·an emergency European Recovery Instrument as an exceptional measure, based on Article 122 of TFEU, the financing of which will be based on an empowerment provided in the proposal for the Own Resources Decision. The funds will enable implementation of fast-acting measures to protect livelihoods, increase prevention and strengthen resilience and recovery in response to the crisis;
·a reinforced Multi-Annual Financial Framework for 2021-2027.
In this context, the Commission is proposing to address the negative socio-economic consequences of the Covid-19 pandemic for workers, households and companies in the Union. Many European companies are already facing solvency difficulties because of the crisis and the problems will accentuate as restrictions on economic and social activities remain in place and the distancing rules will continue to impact business activities across many sectors. The difficulties may be long-lasting even beyond the current lockdown and deepen existing economic disparities between and within Member States.
It is difficult to put an exact number on the equity repair needs resulting from the economic impact of the Covid-19 pandemic. Commission estimates derived from firm-level data suggest that these needs could be in the region of EUR 720 billion in 2020 in case the baseline scenario underlying the Spring Forecast were to materialise. These needs would go significantly higher in case the lockdown measures stay in place longer than assumed in the Spring Forecast, or will have to be re-imposed due to a resurge of the outbreak. In a stress scenario, in which 2020 GDP growth would be projected at -15.5%, the direct impact on equity of all incorporated companies (listed and non-listed) in the EU27 could rise to EUR 1.2 trillion. If left unaddressed these capital shortfalls may lead to a prolonged period of lower investment and higher unemployment. The impact of the capital shortfall will be uneven across sectors, regions, industrial ecosystems and Member States, leading to divergences in the Single Market. In general, most European industrial ecosystems rely on complex supply chains spread across Member States in the Single Market.
This is compounded by the fact that the capacity of Member States to provide state aid differs greatly.
This proposal puts forward a temporary equity-based instrument, for which the investment period in relation to the solvency support window runs in general until end-2024 in terms of approvals by the Investment Committee and the governing bodies of EIB/EIF and until end-2026 in terms of signature of the operations. Companies to be supported under the proposal are those with an otherwise viable business model but which are solvency constrained due to the Covid-19 crisis. The purpose is to help them weather this difficult period so that they are in a position to carry the recovery when the time comes.
Another objective of the proposal is to counter-balance the expected distortions in the Single Market, given that certain Member States may not have sufficient budgetary means available to provide adequate support to companies in need. The availability of national solvency support measures for companies may therefore differ substantially across Member States and lead to an unlevelled playing field. Further, as there is a considerable risk that the impact of COVID-19 will be long-lasting, this lack of capacity to help viable companies can lead to systemic distortions, creating new or cementing existing disparities. Given the strong interconnectedness of the European economy, an economic downturn in one part of the EU would have negative spill-over effects on cross-border supply chains and the whole EU economy. Conversely, for the same reason, support in one part of the EU would also have positive spill-over effects on cross-border supply chains and the whole EU economy.
In the context of the economic slowdown induced by Covid-19 where public finances are becoming constrained, it is also important to mobilise private resources to support the solvency of viable companies in the Union to the maximum extent possible.
Those objectives will be implemented by providing a Union guarantee to the European Investment Bank (EIB) under the EFSI Regulation 1 . Solvency support will form a third window under the EFSI – a solvency support window – in order to mobilise private capital to support the solvency of eligible companies. The EIB Group will use the EU guarantee to invest mainly through intermediaries or reduce the risk for private investors of investing in eligible companies, thereby mobilising private resources to their support. The EIB Group will do so by investing in, guaranteeing or financing equity funds, special purpose vehicles, investment platforms, national promotional banks or institutions or, where necessary, through direct investments or other relevant arrangements.
This proposal is part of the overall recovery initiative announced by the Commission. It is essential that such an instrument is put in place as soon as possible in 2020, at the latest by the start of October 2020, and that it can be deployed at full capacity quickly in the course of 2021.
The Solvency Support Instrument will be open to all Member States and to all the sectors covered by the EFSI Regulation, with a focus on those Member States whose economies have been most affected by the effects of the Covid-19 pandemic and/or where the availability of State solvency support is more limited. The purpose is to help restore the viability of companies and unlock their growth potential, whilst contributing towards Union priorities, such as the green and digital transition or the support to cross-border activity in the Union as well as strengthening the social dimension and convergence of the Union. The support will be available to benefit all the objectives of the Regulation.
To aid the roll-out of the Instrument, Member States can (i) establish national special purpose vehicles that could apply for support under the solvency support window; (ii) invest in line with State aid rules alongside the EIB Group guarantee or investment either directly or via a national promotional bank or institution into funds or special purpose vehicles; and (iii) facilitate the creation of equity funds or special purpose vehicles by engaging with institutional investors.
The Commission should be able to participate in a possible capital increase (in one or more rounds) of the European Investment Fund (EIF), which will play a key role in supporting the economic recovery through issuing guarantees, undertaking securitisation operations and supporting equity investments throughout the Union. A financial envelope of up to EUR 500 000 000 should be reserved in the revised Multiannual Financial Framework for the current period for this purpose so that the Union, represented by the Commission, will be able to maintain its overall share in the EIF capital.
The governance structure of the EFSI will be maintained and will apply to the third window. Under the solvency support window, the Investment Committee will approve each EIB financing or investment operation, i.e. it will decide on the granting of the EU guarantee to financing, guarantee or investment in a fund, special purpose vehicle, national promotional bank or institution or other vehicle. For operations to be conducted by the EIF, the Investment Committee is consulted on the financial products that the Steering Board and the Managing Director have approved under which the EIF will conclude the individual operations. Individual decisions to select the companies, which will receive intermediated support will be made by the fund or vehicle manager in line with the criteria established in the EFSI Regulation and the relevant contractual arrangements signed with the EIB. The Investment Committee may also retain the right to approve underlying sub-operations in line with the EFSI Regulation in case of EIB financing or investment operations. Member States are not involved in the decision-making over the granting of the EU guarantee. Once the Investment Committee under the proposed InvestEU Regulation 2 has taken up its functions, the tasks of the Investment Committee under the EFSI Regulation shall be performed by the former.
In line with the current EFSI Regulation, no geographical quotas will be established. The climate action target is maintained.
However, the Steering Board shall define specific geographical concentration limits for the solvency support window, in line with the principles set out under this Regulation in order to ensure, respectively, that the majority of the EU guarantee under the solvency support instrument supports eligible companies in Member States and sectors which have been economically most adversely affected by the Covid-19 pandemic and that the majority of that guarantee supports eligible companies in Member States, where the availability of State solvency support is more limited. This would ensure that the EU guarantee is steered as needed in a flexible manner. The limits can be updated over time in view of the Covid-19 impacts, whilst avoiding that support from the Instrument would be concentrated in a limited number of Member States.
The Solvency Support Instrument will support companies in the Union which, while viable, would face solvency risks due to the economic crisis caused by the Covid-19 pandemic (excluding those considered to have been in difficulty in State aid terms 3 at the end of 2019) with a view to bringing them back to and enhancing a sustainable and profitable business track. Further criteria on equity and hybrid financing will be set out in the investment guidelines or will be established in the guarantee agreement. To avoid that companies with access to equity financing benefit from the Instrument and ensure its additionality, the equity financing should be provided on commercial terms or according to terms similar to the State Aid Temporary Framework 4 (such as remuneration and exit strategy), while paying due regard to the European nature of the Instrument and to the funds’ and other vehicles’ independent management, and take into account the disparity of equity markets across the Union. The due diligence on the funds or other intermediary vehicles will be done by the EIB or EIF in line with their rules and procedures and the objectives of the Solvency Support Window, with the due diligence on the underlying companies done by the funds or other vehicles.
Contents
• Consistency with existing policy provisions in the policy area
The proposal complements the investment support and access to finance available under the EFSI Regulation and the proposed InvestEU Regulation for the Multiannual Financial Framework 2021-2027 by providing support to companies, which have a viable business model but may face solvency issues due to the Covid-19 crisis. The Solvency Support Instrument allows such companies to weather the impact of the crisis via temporary solvency support.
The Solvency Support Instrument is complementary to other Union programmes that are focused on mitigating the impacts of the Covid-19 crisis or relaunching the economy as the Covid-19 crisis eases. It complements in particular support to SMEs that will be provided through (i) the recovery assistance for cohesion (REACT-EU), which will provide frontloaded support also for SMEs; and (ii) the Pan-European Guarantee Fund in response to Covid-19 crisis being established by the EIB underpinned by a guarantee from the Member States. Also, the SME window being reinforced under InvestEU will provide additional support from 2021.
• Consistency with other Union policies
The Solvency Support Instrument is consistent with the relevant Union policies such as the European Green Deal, Sustainable Europe Investment Plan and the sectorial policies that relate to investment support.
The conditions of the financing and investment operations under the solvency support window should be consistent with State aid rules to ensure a level playing field and to facilitate possible combinations with support provided directly by Member States. In addition, due regard is given to the European nature of the Solvency Support Instrument and to the funds’ and other vehicles’ independent management.
The EU guarantee will be set to avoid any undue distortion of competition, as it would be limited to addressing the challenge of restoring the capital position of companies, which were not in difficulty before the Covid-19 outbreak and which are facing significant solvency risks because of the crisis. Moreover, private investors will be crowded in and the emergence of new funds and vehicles will be encouraged. Commercial logic will be applied in decisions on financing and independent commercially-run fund managers will select companies with adequate return prospects.
2. LEGAL BASIS, SUBSIDIARITY AND PROPORTIONALITY
• Legal basis
The proposal amends the EFSI Regulation, so the same legal basis is applicable.
• Subsidiarity
The objectives of the proposal cannot be sufficiently achieved by the Member States and can be better achieved by the Union. Due to the disparities in Member States' fiscal capacity to act, action at Union level can better achieve the objectives pursued, by reason of its scale and effects. More specifically, action at the Union level will allow to counterbalance distortions in the internal market caused by the different fiscal capacity of individual Member States to provide State aid for solvency support to their companies and also allowing for inter-connected supply chains in internal market to function with less disruption by avoiding bankruptcies of viable companies. Moreover, it will allow for economies of scale in the use of the Union budget guarantee in combination with the EIB Group financing by catalysing private investment in the whole Union.
• Proportionality
The proposal does not go beyond what is necessary to achieve the objectives pursued. It is intended to support companies and projects that suffer from the economic consequences of the Covid-19 pandemic, which affects all Member States. Mobilising private funds for solvency support alongside public funds leverages budgetary resources in an efficient and proportionate manner.
3. RESULTS OF EX-POST EVALUATIONS, STAKEHOLDER CONSULTATIONS AND IMPACT ASSESSMENTS
This proposal is part of the package to counter the negative economic consequences of the Covid-19 pandemic and is a crisis measure.
• Stakeholder consultations
Due to the urgency to prepare the proposal so that it can be adopted in a timely manner by the European Parliament and the Council, a stakeholder consultation could not be carried out.
• Impact assessment
Due to the urgent nature of the proposal, no impact assessment was carried out.
4.BUDGETARY IMPLICATIONS
The EU guarantee provided under the EFSI Regulation will be increased from EUR 26 billion to EUR 92,4 billion. In accordance with the estimated riskiness of the portfolio to be created under the solvency support window the portion of the EU guarantee attributed to that third window is estimated to necessitate provisioning at 50 %, reflecting the higher risk of the targeted investments in the current economic circumstances. Moreover, the considerable size of the EU guarantee and the types of interventions envisaged also point to a need for a conservative provisioning approach. This means that the additional provisioning in relation to the increased EU guarantee will be EUR 33,2 billion. Overall the EU guarantee fund's provisioning rate will accordingly be brought to 45,8 % of total EU guarantee obligations. Consequently, the EFSI guarantee fund should be increased by EUR 33,2 billion, thus reaching EUR 42,3 billion in total.
The additional resources will be mobilised through an increase of the ceilings under the 2014-2020 Multi-Annual Financial Framework and financing made available through the European Recovery Instrument based on empowerment provided in the new Own Resources Decision.
A specific amount of EUR 100 million will be needed to cover costs relating to establishing and managing the structures (equity funds, special purpose vehicles, investment platforms and others) through which the support under the solvency support window is to be provided and for related advisory services and technical assistance, notably to support the green and digital transformation of companies financed under the solvency support window.
The participation of the Union in a possible forthcoming capital increase (in one or more rounds) of the EIF will need a financial envelope of up to EUR 500 million in the revised Multiannual Financial Framework for the current period. This relates to the Union share of the paid-in part of a capital increase. The Union should be able to maintain its overall share in the EIF capital.
Further budgetary information is provided in the legislative financial statement accompanying this proposal.
5. OTHER ELEMENTS
• Implementation plans and monitoring, evaluation and reporting arrangements
The EIB, directly or through the EIF, will implement the Solvency Support Instrument. The monitoring and reporting arrangements will be laid down in the guarantee agreement and will be in line with the existing requirements. The monitoring will include key performance indicators to track the progress towards achieving the objectives of solvency support window.
• Detailed explanation of the specific provisions of the proposal
The specific provisions are explained by relevant Chapter of the EFSI Regulation.
A third window (solvency support window) is established under the EFSI.
The criteria for the use of the EU guarantee under the solvency support window define that the companies and projects that are eligible to benefit from the EU guarantee under the window must not have been in difficulty in State aid terms at the end of 2019, so that the EU guarantee is directed to provide solvency support to help them to recover from the crisis caused by the Covid-19 pandemic. Companies also encompass special purpose vehicles, project companies and public-private partnerships.
The support is provided through investments or funds, special purpose vehicles, investment platforms or through other intermediated means. Cooperation with national promotional banks or institutions is encouraged.
To be eligible for solvency support, companies need to be established and operating in the Union.
It is foreseen that both EIB and EIF can carry out operations under the solvency support window.
The general objectives of the EFSI are complemented by a reference to the European Green Deal and the Strategy on shaping Europe’s digital future and to the need of avoiding regional disparities resulting from asymmetric recovery in the aftermath of the COVID-19 pandemic.
The Steering Board shall set any necessary requirements relating to the control of intermediaries (funds, special purpose vehicles and others) in the light of any applicable public order or security considerations.
The support can be channelled through a variety of instruments and products, including through national promotional institutions and banks in compliance with the applicable State aid and international rules.
The EU guarantee in relation to the solvency support window amounts to EUR 66,4 billion. Its introduction brings the total EU guarantee to maximum EUR 92,4 billion. The corresponding provisioning (at 50 % provisioning rate as regards the increase of the EU guarantee) amounts to EUR 33,2 billion, bringing the EFSI guarantee fund to EUR 42,3 billion in total. Consequently, the overall provisioning rate is adjusted to 45,8 %.
The investment period in relation to the solvency support window runs in general until end-2024 in terms of approvals by the Investment Committee and the governing bodies of EIB/EIF and until end-2026 in terms of signature of the operations. However, 60 % of the financing and investment operations must have been approved already by end-2022.
The Investment Committee approves the use of the EU guarantee under the solvency support window as is currently the case for the other two windows. In the case of operations conducted by the EIF, the Investment Committee is consulted on the financial products. Once the Investment Committee under the proposed InvestEU Regulation is in place, it will be in charge of granting of the EU guarantee also for the solvency support window in order to avoid duplication of structures.
The target is to mobilise up to EUR 300 billion in the real economy under the solvency support window.
A separate amount of EUR 100 million is foreseen to cover costs, advisory services and technical assistance linked to the set-up and management of funds, special purpose vehicles, investment platforms and other vehicles for the purposes of the solvency support instrument. It shall also support the green and digital transformation of companies financed under the solvency support window.
The Commission will manage this support. It may also entrust tasks to the European Investment Advisory Hub (EIAH), if appropriate.
Annex II provides more technical details on the instruments and products to be used and on the financing structures under the solvency support window and refers to the setting of specific geographic concentration limits by the Steering Board.
The participation of the Union in forthcoming capital increase(s) of the EIF is foreseen in this Chapter.
Technical assistance and advisory support will be available from the Commission or via the EIAH to support Member States to establish funds, special purpose vehicles or other vehicles that would meet the requirements of the Union guarantee, especially for Member States with undeveloped equity markets. This support may also cover costs for the setting up and managing of the funds or other vehicles.
Specific reporting requirements regarding financing and investment operations under the solvency support window shall be laid down in the guarantee agreement with the EIB.
In order to ensure fast operationalisation of the Solvency Support Instrument, the EIB may propose to the Investment Committee granting of the support of the EU guarantee under the solvency support window for guarantees or financing it has provided in the period between the adoption by the Commission of this legislative proposal and the signature of the amended guarantee agreement between the Commission and the EIB. To qualify for such “warehousing” the relevant guarantees or financing must fulfil the criteria of the solvency support window. The EIB shall present such proposal once the amended EFSI Regulation is in force.