The Irish Government agreed to introduce additional measures to support companies that have been negatively impacted by COVID-19 at a special Cabinet meeting on 2 May 2020. One of these measures is the COVID-19 Credit Guarantee Scheme (CGS). In this article we answer key questions on this scheme. We also highlight certain inconsistencies between the Government’s announcements regarding the CGS and the guidance published by the Department of Business, Enterprise and Innovation (DBEI) and the Strategic Banking Corporation of Ireland. It has been acknowledged that a new law will need to be introduced to deal with the CGS. We discuss why it is important for this to be published and introduced quickly.
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 banks to small and medium size enterprises (SMEs). The scheme will help companies get access to funds from Irish banks.
The Government is repurposing an existing SME Credit Guarantee Scheme that was first introduced in 2012. Loans of €10,000 up to €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 for terms between three months and six years. It may also be possible to avail of a three to six month interest only period.
The risks associated with these loans will be shared between the Government and the banks. The Government will guarantee the banks against 80% of losses on each loan. 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. This means that if the banks’ credit risk experts get things wrong and they need to call upon the CGT in respect of every loan, they will only be guaranteed against 40% of losses. Some argue that this Government guarantee does not go far enough and that a 100% guarantee is required. However other critics have highlighted that allocating risk between banks and the Government ensures that banks still stringently assess the credit worthiness of businesses and reduces the associated moral hazard.
When will loans under the COVID-19 Credit Guarantee Scheme be available?
A new law needs to be passed for the implementation of the CGS. This new law will not be finalised until a new Irish Government is in place. Commentators have suggested that it will be at least four weeks before a new Irish Government is formed. Unfortunately, this means that the CGS is not the speedy cash solution that businesses hoped for.
Who can avail of the COVID-19 Credit Guarantee Scheme?
The CGS is available to certain SMEs established and operating in Ireland. There is currently uncertainty regarding whether certain SMEs are eligible. Minister for Agriculture, Food and the Marine, Michael Creed TD expressly stated that the CGS will apply to farmers and fishers. However, SMEs involved in primary agriculture, horticulture and fisheries are currently on the DBEI’s list of SMEs that are excluded from the CGS. We expect the new law to change the eligibility criteria but clarity regarding this is required.
How can you apply for the COVID-19 Credit Guarantee Scheme?
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 banks and businesses. It is important for both businesses and 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. Banks need this information to ensure they correctly assess applications and that they are aware of the level of risk they are taking on.
The DBEI has stated that businesses should use CGS loans to “support changes they need to make to their businesses in response to COVID-19”. This is a very specific purpose. It’s suggests that CGS loans cannot be used for standard working capital purposes.
What interest rate will apply to these loans?
The Government press release stated that the CGS loans will be made available at below market interest rates. Despite this, the information available on the DBEI website and from some participating banks states that the interest rate is the standard SME interest rate plus a premium which is currently 0.5%. To ensure that both businesses and banks can decide if this is a viable solution, clarity regarding the interest rate is required.
The availability of cash quickly is crucial for SMEs seeking to return to normal trading activities. The effectiveness of the CGS is nullified due to the fact that a new law needs to be passed and this will not be passed quickly. Businesses in need of emergency access to funding may not have the ability to wait until the law has been put in place and will have to look for other solutions.
Those still wishing to avail of the CGS will require clarity regarding:
The interest rates that will apply
The criteria banks will consider when assessing whether to make the loan available
Whether SMEs involved in primary agriculture, horticulture and fisheries can avail of the scheme, and
What the funds can be used for
Our Banking and Financial Services team has experience in advising lenders and borrowers on a wide range of matters. Contact us to discuss any aspect of 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.