Companies and Covid-19: Direct grants and management of insolvencies

The IEAF/FEF publishes the report "Banking non- performing loans management in the Coronavirus crisis”, elaborated by Antonio Carrascosa, former General Director of the Fund for Orderly Bank Restructuring (FROB), in which he analyzes the challenges arising from a potential increase in business non performing loans as a result of the covid-19 crisis, such as the need for direct aid, the debt recovery model, the determination of business model viability or the different recapitalization instruments.

The report offers the following main conclusions and recommendations: 

• The financial sector has been part of the solution “by providing very relevant financing to the economy despite the existing uncertainties”.
• Banking sector alone cannot solve the problem that many companies will face as a result of the economic crisis of Covid-19, specially “if a very large proportion of an economic sector is practically closed and there are no reliable forecasts about its opening”.
• More public aid will be needed, “the phase of public guaranteed loans for companies must be replaced by one with more direct aid for companies in certain sectors. This policy has been followed by main European countries“.
• Recapitalization instruments for SMEs of a certain size and large companies. For the smallest companies direct grants. "It seems clear that debt conversion is an exercise that must be quantitatively limited to make it manageable. Debt-to-equity strategies should be targeted at SMEs of a certain size. For microenterprises in the sectors most affected by the pandemic, only direct grants is appropriate”. The report points out the possibility of using the “European Recovery and Resilience Fund” for the recapitalization of companies, as a possibility already contemplated in its regulation.
• A General framework of best practices to address refinancing and restructuring operations. Given the foreseeable increase in debt together with a drop in income in many companies, it would be desirable for banks to agree on a general framework “in order to avoid the application of disparate criteria in the refinancing and restructuring of SMEs loans, when their situation is similar”.
• To promote sales of non-performing portfolios, the report proposes to develop the Italian and Greek model for securitization of non-performing loans with public guarantee to the senior tranche, which has worked very well in both countries.