Spain Considers Debt Relief for Companies as Virus Pain Persists
(Bloomberg) -- Spain’s government is considering debt relief for companies as extended pandemic restrictions and a slow European vaccine rollout tip the economy into another downturn, according to officials.
One proposal would excuse a portion of the debt borrowed through Spain’s state-backed loan guarantee program for companies that stand a good chance of surviving after the pandemic, the officials said. They asked not to be identified because the talks are confidential and no decision has been reached.
Another action being contemplated is to use state guarantees to encourage banks to offer companies what are known as participatory loans, the officials said. Such subordinated debt is treated as similar to equity and improves the financial situation of a company by reducing its debt ratio. France has proposed something similar.
A spokeswoman for the government of Socialist Prime Minister Pedro Sanchez declined to comment.
So far, the timing of any announcement or the estimated cost is unclear because staff at several government ministries and institutions are still hashing out the details. There are disagreements on how to ensure a new round of measures would help companies without putting too much strain on the administration’s finances, the officials said.
Like its peers, Spain has ramped up spending to keep companies and jobs afloat during the crisis. Still, public debt probably climbed to nearly 120% of gross domestic product in 2020 and is expected to drop only slightly this year, provoking concern over long-term sustainability.
The government focused aid in 2020 on a furlough program and a state-backed loan guarantee program that gave thousands of companies access to cheaper loans, and has extended the interest-only period and maturity on those loans to ease the burden for firms. But there’s a growing awareness throughout Europe that the fiscal response will have to change as the crisis drags on.
“We need to continue implementing measures in the coming weeks to ensure that liquidity problems don’t become solvency problems for viable companies,” Economy Minister Nadia Calvino said last week.
Many companies are unwilling to take on more debt because they’ve struggled with depressed revenue and sporadic closures for most of the past year, and the short-term economic outlook is increasingly uncertain. Spain’s bankruptcy procedures are cumbersome and many firms don’t survive the process, giving an additional incentive for measures to avoid insolvencies.
That’s one reason to discuss debt relief, the officials said. The amount by which companies would be allowed to reduce the loans they’ve taken out under the state-backed guarantee program is still being discussed, they said.
One of the officials said the impact on banks’ balance sheets is expected to be manageable because the debt relief would only apply to viable companies, and the state is likely to assume most of the debt relief.
A key point is how to define a “viable” business. A group of Spanish banks has hired Oliver Wyman to propose a framework on how to make such a determination, taking into account the debt burden, for instance, two of the people said. A spokesman for Oliver Wyman declined to comment.
Spanish companies, mainly small- and medium-sized firms, have borrowed 116 billion euros ($140 billion) since the state-backed loan program was launched in March 2020 during the first lockdown. Businesses take the loans from a commercial bank and the state guarantees between 70% to 80% in the event of a default. The lender typically assumes the rest of the risk.
The proposal on participatory loans could see the government guarantee a portion of them in order to reduce the risk to banks. It would assume some of the losses suffered if a rescued firm still fails, one official said.
Neighboring France is planning a program that would spin off a large portion of such equity loans into a separate fund that would be partially guaranteed by the government. The country is awaiting approval from the European Commission.
It’s unclear if Spain would follow that lead in creating such a fund or manage those instruments in a different way. It already has some experience in participatory loans -- they are one of the tools available through a government fund launched last year to invest in large, strategic companies that are struggling during the pandemic.
Spain is working to ensure that any debt-relief measures wouldn’t run afoul of European Union rules on state aid, one official said.
The administration could end up rolling out various measures, one of the people said, tailoring the new fiscal aid to companies based on their size and the likelihood that they’ll survive post-pandemic.
Participatory loans, for instance, might be more effective for medium-sized companies and debt haircuts could be more efficient for the thousands of small business that took out state-backed loans, the person said.
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