What about ICO loans?

3 June, 2020

Royal Decree Law 8/2020 of 17th March approved a State Guarantee Line of up to 100 billion euros to facilitate the maintenance of employment and alleviate the economic effects of the health crisis.

Thus, in accordance with the established mechanism, the State guarantees with this amount the financing granted by financial institutions to companies and self-employed, to address the economic and social impact of COVID-19, up to 80% of the amount lent for new financing operations and 70% for the renewal of existing ones.

The Council of Ministers activated four sections of the line by means of agreements dated 24 March, 10 April, 5 May and 19 May, which have been distributed as follows

SMEs and the self-employed: 60,000 million euros

Non-SMEs: 20 billion euros

Conditions of application:

This line of guarantees is managed by the ICO (Institute of Official Credit) through the financial institutions that grant the funding, and are subject to conditions on the use of the funds, so they can only be used for

Salary payments

Outstanding A/P Invoices

Rentals of premises, offices and facilities

Supply costs

Need for working capital

Other liquidity requirements, including those arising from maturities of financial or tax obligations

Loan consolidation and restructuring, as well as the cancellation or early repayment of pre-existing debt, may not be financed from the Guarantee Line.

Non-distribution of dividends:

Guaranteed financing may not be used to pay dividends, or interim dividends, or for any purpose other than that established.

This means, therefore, that those who have received ICO loans may not distribute dividends, in the same way as those who have taken advantage of force majeure ERTEs, for the financial year in which they have requested it, as we commented in our article of 19 May.

In that case, by referring to “the year in which it was requested” it is assumed that dividends from 2019 results could be distributed. However, having requested the ICOs prior to such distribution, such possibility would be limited by the conditions of the granting of such credits.

The financial conditions of the ICOs:

Having said that, let’s start by analyzing what it really means, financially speaking, that the State guarantees 80% or 70% of the loans, depending on the case.

The banks acquire the EURIBOR that they lend; From this point on, some of the management costs are added (which is what the bank will earn) and a percentage of the risk involved in the operation is added, depending on the destination and the borrower (which is why, roughly speaking, mortgage loans are much cheaper than consumer loans, and not to mention the revolving ones – those of the VISA cards – that everyone has without checking the destiny or solvency of those who use them) and that respond to an actuarial calculation, so that good payers, if they do not have a very high rating in the bank that grants them the credit, end up paying for the failures that others produce. This is how it works.

But here, with the ICOs, we find that 70-80% of the credit is guaranteed by the State, which means a 100% collection security, so there is no risk regarding this proportion.

The monthly average of the Euribor price, which stood at -0.266% in March, means that the money costs practically nothing. This has been the case for a long time now and the interest rate is shaped by the profit margin and the risk ratio. Since the latter would only apply to the 20% or 30% not guaranteed by the state, the interest should be very low.

Behaviour of ICO loans:

It is to be expected, then, that the ICO loans will have a very low interest rate – and this is the main purpose and effect that the State’s guarantee must have – and also that they will be quick, since otherwise they would not be effective; but it seems that these effects are not occurring in the desirable way in all cases.

According to the average, the SMEs were to receive the loans at 1.5% and the self-employed, more penalized, at 2.5%, but there have been many differences in interest and it has been set at 3.8% or even 4.2%.

According to data from CISS, a survey conducted by Pimec (the SME employers’ confederation) indicates that 36.6% of the amount of ICO loans is being used to restructure previous debt, so the bank is securing its customers’ debts with a better guarantor, and the debtor gets an extended term with respect to its previous debts, but does not get new financing to address the economic difficulties caused by the Covid.

From what was to be an emergency service in Covid’s time, it appears that the granting of ICO loans has become in an alternative business source to the credit crunch that is looming in housing and consumption. According to the CISS data, 11.5% of SMEs and the self-employed have been forced to take out additional products such as insurances and cards.

With these practices proliferated complaints to the Spanish Central Bank, and that initial “fervor” has been reduced considerably, but remains a significant delay, as it can take almost a month between the request of the ICO and the availability of money. According to the banks, they already have them approved when they send them to the ICO for review, and there they get stuck.

Solvency requirements:

The fact is that there are many applicants, mostly self-employed, who are still waiting for a response, although it seems that the banks themselves have the greatest reticence with them, to avoid the level of default of our last crisis.

Cepyme (another SME employers’ confederation) complains that banks are demanding solvency requirements that are limiting the number of companies that can qualify for ICO loans, despite the state guarantee.

Thanks to the pressure of the employers, some aspects have been improved, in order to increase both the number of favoured companies and the speed in obtaining funds; but, at the end of the day, the reality is still far from the expectations and, above all, from the needs that the situation would deserve.

Juan Núñez  – Lawyer

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