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17 July 2009
Role and Functioning of Economic Fund
New Financial Assistance Programmes
Role and Functioning of Economic Fund
As is the case in many other countries, the German government has put a number of measures in place to support financial institutions, manufacturing companies (ie, the so-called 'real economy'), employees and consumers hit by the financial and economic crisis.
In particular, the government intends to facilitate the real economy's access to capital. As such, the government intends to (i) introduce a special programme under which the German public bank, KfW, will provide loans for projects carried out in Germany; and (ii) extend loan guarantees funded by the German federal states and, in certain cases, the central government.
Since the European Commission approved both the KfW loan programme and the loan guarantee programme, loans or loan guarantees in accordance with these programmes need not be notified again to the commission.
To facilitate these programmes the government has established the Economic Fund. This fund administers the provision of loans and loan guarantees with a total value of €115 billion. A steering committee, consisting of a secretary of state of each of the Ministry of Economics, Ministry of Finance and Ministry of Justice and a representative of the Federal Chancellery manages the fund. The fund receives advice from an advisory council of individuals with expertise in economic and financial issues, including lecturers and former politicians. However, the advisory council and steering committee will deal only with specific cases, in particular with loans exceeding an engagement of KfW of €150 million or loan guarantees of more than €300 million. In other cases KfW or the federal state affected will usually decide on its own.
New Financial Assistance Programmes
Within the last few months more than 1,000 companies, including well-known firms such as Arcandor, Opel, Infineon and Heidelberg Druck, have applied for state aid and approximately 400 applications have already been accepted. The aid is granted either in the form of a KfW loan or as a loan guarantee.
KfW loan programme
Under its special programme, KfW may provide loans for projects in Germany to small and medium-sized enterprises with an annual group turnover of less than €500 million and to large companies with a higher turnover. The allocation of loans depends not on the place of incorporation or seat of the company, but only on the implementation of the project in Germany. Companies from other countries may therefore also benefit from KfW loans. The volume of the loan programme amounts to approximately €40 billion – €15 billion for small and medium-sized enterprises and €25 billion for large companies.
The KfW loan programme aims to assist companies in solving their liquidity problems caused directly by the financial and economic crisis. Consequently, KfW grants loans only to those companies which, as of July 1 2008, were not in economic difficulty, as defined in the European Commission's guidelines on state aid for rescuing and restructuring firms in difficulty, and which will most likely regain a viable economic standing once the global financial and economic crisis is over.
KfW loans may be granted to finance investments requiring medium or long-term funding and promising sustainable economic success and which are made in Germany prior to December 31 2010 for operating resources, or – in the case of large companies – for a general need for liquidity without a specific purpose. The maximum amount of a loan for small and medium-sized enterprises is €50 million per project; for large companies it is €300 million per group. In general, the borrower must apply for these loans through its partner bank, which decides internally whether to accept the application, including the security offered, and whether it will grant a loan. KfW usually accepts the partner bank's decision, even if it implies a certain risk (eg, if the security provided by the borrower does not cover the full amount of the loan and interest). When granting a loan through the borrower's partner bank, KfW may assume part of the borrower's insolvency risk (ie, the remainder to be assumed by the partner bank).
Loan guarantee programme
As part of its stimulus package, the federal government has made available further funds for loan guarantees.
The public 'loan banks' of the federal states grant loan guarantees of up to €2 million. Guarantees for loans of up to €10 million (eastern federal states) or €50 miliion (western federal states) are granted by the federal states, and higher guarantees are granted by the federal government in cooperation with federal states.
Application procedures for the loan guarantees vary across the different federal states. However, especially with regard to loan guarantees exceeding €2 million, certain general principles apply. Loan guarantees may serve, among other things, for the financing of investments, working capital or restructuring measures. The guarantee is granted by the federal state in which a company has a permanent establishment or investments shall be made. If a company has permanent establishments with a considerable number of employees in various federal states, these states usually share the risk.
Consequently, the number of authorities involved increases and the process may become more difficult. In general, loan guarantees must not cover more than 80% of the default risk. The remaining risk must be borne by the bank granting the loan and by the company itself. The bank's own exposure in the amount of approximately 10% of the loan is designed to ensure that the bank monitors the company closely. The company must provide as much security as possible.
A wide variety of state measures are in place to support Germany's real economy and improve access to capital. In particular, subsidized loans and guarantees will play an important role in helping struggling enterprises which have been hit by the global credit crunch. As such, the measures outlined above (ie, KfW loans and the loan guarantees) are complementary to other – new or longstanding – aid programmes by national authorities or European institutions such as the European Investment Bank.
Since budgets are limited, and due to the time-consuming, often complex decision-making procedures, applications for loans or loan guarantees by public authorities should be submitted as soon as possible. Moreover, companies seeking state aid and their advisers should contact the competent authorities at an early stage of the application process and cooperate closely with the banks and authorities to avoid any delays or nasty surprises.
For further information on this topic please contact Thomas Voland at Freshfields Bruckhaus Deringer LLP by telephone (+49 40 36 90 62 85), fax (+49 40 36 90 63 81 60) or email (email@example.com).
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