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    ICO loan haircuts: new rules’ voluntary nature helps avoid worst-case scenario
    Elisa Lafuente

    • Market: Credit Desk Strategy
    • Region: Europe, Spain, Spain and Portugal

According to Cinco Días (11 May 2021), yesterday the Spanish government approved the Code of Good Conduct which banks may adhere to in order to facilitate the renegotiation of the state-guaranteed (ICO) loans held by companies in Spain. This code allows for the extension of ICO loans, the conversion of these into participatory loans and the possibility of applying haircuts to reduce the related guaranteed debt. These instruments should help solvent companies that have been affected by the economic crisis due to the pandemic.

In our view, the implementation of ICO loan haircuts as a last resort and the voluntary nature of these new rules will be very reassuring for Spanish banks, as it could dramatically reduce possible losses for the sector.

The new measures help guide the implementation of the already approved EUR11bn support package for SMEs and self-employed individuals (Royal Decree Law approved on 12 March 2021) that has three separate funds: i) a direct aid fund of EUR7bn to provide capital injections; ii) a EUR3bn restructuring fund; and iii) a EUR1bn recapitalisation fund.

The Code of Good Conduct creates a framework for public-private collaboration until December 2022, which could help to guarantee the best use of public resources to help self-employed people and companies. Changes include:

  • Loan extensions. For less precarious loans, the repayment of ICO loans has been extended from eight to ten years, as long as the sales volume of the company in question fell by 30% in 2020. If the minimum drop in sales volume is not met, it will be possible to extend the expiration date via an agreement between the two parties. The grace period has also been extended by two more years.
  • Capital injection via debt-to-equity conversion. Loans can be converted into participatory loans through public guarantees. In addition to alleviating debt burdens, this measure can strengthen companies’ solvency as such loans also have a capital component. To benefit from this measure, the criteria are: i) a company’s sales volume should have fallen by at least 30% in 2020; ii) its post-tax profits should have been negative in 2020; and iii) it should not be bankrupt or have defaulted on any bank loans.
  • ICO loan haircut. As a last resort, the principal amount of some ICO lending may be reduced when other solutions, such as payment extensions or debt-to-equity conversions, are deemed to be insufficient. To be eligible for a haircut of 50%, a company’s sales volumes must have fallen by less than 70% in 2020. For a haircut of 75%, sales volumes must have fallen by more than 70%.

The deadline to apply for these measures is 1 December 2022, as long as the EUR3bn total amount has not been exhausted for the following: i) EUR2.75bn for guarantees managed by the ICO; ii) EUR100mn for CESCE guarantees; and iii) EUR150mn for CERSA guarantees.