At a special Cabinet meeting on Saturday 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 was the COVID-19 Credit Guarantee Scheme (CGS). We examined this proposal previously. Following the formation of the new Irish Government, the draft law to implement the CGS was finally published on 15 July 2020. The key provisions of the draft law are dealt with here. We also highlight where further clarifications are needed.
What is the COVID-19 Credit Guarantee Scheme?
The CGS is a scheme where the Irish Government will guarantee up to €2 billion of loans granted by Irish participating banks to SMEs or businesses established in Ireland employing not more than 499 people. The scheme will help businesses access increased funds from participating Irish banks.
The Government is repurposing an existing SME Credit Guarantee Scheme that was first introduced in 2012. Loans between €10,000 and €1 million are to be made available by participating Irish banks - currently AIB, Bank of Ireland and Ulster Bank. These loans will be made available up until 31 December 2020 and will be for a maximum seven year term.
The liabilities associated with these loans will be shared between the Government and the participating bank. The Government will guarantee the participating banks against 80% of losses on each loan. The participating banks will be responsible for the other 20%. Some argue that this Government guarantee does not go far enough and that a 100% guarantee (as is the case in certain other countries) is required. However other critics have highlighted that allocating risk between participating banks and the Government ensures that the participating banks will still stringently assess the credit worthiness of SMEs and businesses and reduces the associated moral hazard risk.
When will loans under the COVID-19 Credit Guarantee Scheme be available?
The Credit Guarantee (Amendment) Bill 2020 which was published on 15 July 2020 will need to be debated and passed before both houses of the Irish legislature, the Dáil and the Seanad, before the Irish President can sign it into law.
Politicians have promised to have the CGS up and running by September or October 2020. Delays with the introduction of the CGS mean that the CGS is not the speedy cash solution that SMEs and businesses currently require to counteract the devastating impact of COVID-19 on their businesses.
Who can avail of the COVID-19 Credit Guarantee Scheme?
The CGS is available to certain SMEs, primary producers and businesses established in Ireland employing not more than 499 people. It was recently clarified that the CGS will be open to primary agricultural, fisheries and aquaculture producers.
How can you apply for the COVID-19 Credit Guarantee Scheme?
Once the CGS is operational, SMEs wishing to avail of the scheme should contact a participating Irish bank. The bank will make the necessary assessments and decide whether it is prepared to grant a loan to the SME. The exact criteria banks will consider have not yet been set out.
The spirit of the CGS is to support businesses that would otherwise not be able to obtain new or additional funding as they are higher risk businesses due to COVID-19. It is likely that banks will require SMEs availing of CGS to be of good financial standing and commercially viable. How banks will assess the long-term prospects of a business in the current uncertain climate is unknown.
The lack of clarity regarding the criteria raises certain queries and challenges for participating banks and businesses. It is important for both SMEs and participating banks that further detail regarding this is provided. Businesses need this information to assess whether they are eligible for the CGS and likely to be granted a loan. The participating banks need this information to ensure they correctly assess applications and that they are aware of the level of risk they are taking on.
Recent press releases suggest that a range of products including overdrafts, term loans and working capital will be made available through the CGS.
What interest rate will apply to these loans?
An amendment to the draft law published on 21 July 2020 provides that monies loaned in accordance with the CGS will be interest free with no repayments for the first 12 months of the loan. It further provides that the interest rate on the loans will be capped at 2.5% with interest only being applied to cover the overheads of administering the scheme. It remains to be seen whether this will be included in the final law.
The availability of quick credit is crucial for SMEs seeking to return to normal trading activities. The publication of the draft law is a welcome development towards the implementation of the CGS but, as set out above, there is still uncertainty regarding how the CGS will operate. Businesses in need of emergency access to funding may not be able to afford to wait until the law has been put in place and may have to look for other solutions which could be more expensive.
The clarity regarding the proposed interest rates and repayment free period will be welcomed by businesses but it remains to be seen how this will be viewed by participating banks.
Those still wishing to avail of the CGS will also require clarity regarding the:
- Criteria banks will consider when assessing whether to make the loan available, and
- Full process for obtaining a loan under the CGS
Our Financial Services team has experience in advising lenders and borrowers on a wide range of matters. Contact us if you require any assistance with the COVID-19 Credit Guarantee Scheme.
The content of this article is provided for information purposes only and does not constitute legal or other advice.