A 50 billion euro loan guarantee scheme was approved by a Royal Decree dated 14 April 2020 (only available in Dutch and French). Qualifying loans granted by banks are guaranteed by the Belgian State. The scheme, approved by the EU Commission, aims at ensuring the continued supply of short-term liquidity to Belgian borrowers.
The federal guarantee scheme is included in a Royal Decree published on 15 April 2020. The Decree implements the Act of 27 March 2020 authorising the King to provide a state guarantee for bank loans in the fight against the effects of the coronavirus. Under the scheme, the Belgian State assumes the largest part of the losses that Belgian credit institutions book on qualifying loans to non-financial companies, self-employed individuals and non-profit organisations.
The guarantee scheme is complementary to the "Charter voor betalingsuitstel van ondernemingskredieten"/"Charte report de paiement crédit aux entreprises" that was negotiated with the financial sector by the Belgian State. Under the Charter, Belgian banks agreed to grant certain payment extensions to companies in respect of their existing bank loans.
The guarantee scheme applies to new loans. Qualifying loans are short-term facilities of up to 12 months that are granted by Belgian banks between 1 April 2020 and 30 September 2020. Refinancing and renewal of loans granted before 1 April 2020 are out of scope, though it is possible to refinance qualifying loans under the scheme (e.g. borrowers can refinance a loan with an initial duration of six months with another six-month loan). The guarantee is capped at the borrower's liquidity needs for 18 months (for SMEs) or 12 months (for non-SMEs), subject to an absolute cap of EUR 50 million. Borrowers can apply to the Government for a case-by-case exemption from the EUR 50 million cap. Syndicated loans fall within the scope of the scheme, but leasing arrangements, factoring arrangements and consumer loans are excluded, as are loans that are used exclusively to finance foreign activities of the borrower.
Only loans to qualifying borrowers are guaranteed. Companies which, as at 31 December 2019, came within the EU definition of undertakings in difficulty are excluded, as are companies which, either on 1 February or for more than 30 days as at 29 February 2020, were in arrears on their payment obligations under existing loans or on their tax or social security payments, or were subject to a bank restructuring of their existing credit as at 31 January 2020.
Under the scheme, the Federal Government commits to guaranteeing loans with an aggregate principal of up to EUR 50 billion. That overall amount has been allocated among Belgian banks in accordance with their respective market shares as at 31 December 2019.
While banks retain the freedom to decide whether or not to grant a loan, the guarantee scheme is of a mandatory nature: loans that meet the criteria are part of the guarantee scheme by application of law and become guaranteed. There is one exception: banks can deselect up to 15% of their qualifying loans ("opting out" of the scheme). Deselected loans are not guaranteed, and no fee is payable in respect of them.
Guaranteed loans are regulated to a certain extent:
- the interest payable under the loan is capped to 1.25% on an annual basis, which may be increased by the bank by the amount of the fee that it is required to pay to the State. That fee – 25 basis points for loans to SMEs and 50 basis points for loans to other companies – is calculated on the principal of the loan, and is due pro rata according to its duration (for example, a six-month loan to an SME for a principal amount of EUR 1 million will trigger a fee of EUR 12,500);
- a maximum of 10% of the amounts borrowed under a qualifying loan can be used to finance foreign activities of the borrower, but only if the continuity of these foreign activities is crucial for the Belgian activities, the foreign activities are viable on a standalone basis and it has become impossible to structurally finance these foreign activities at normal market rates;
- the loans will lose the benefit of the State guarantee if they are transferred by the lender, it being understood that banks are still allowed to pledge the loans to the National Bank of Belgium in the framework of their activities; and
- both the banks and the borrower are subject to anti-abuse provisions: they are prohibited from (re)structuring their activities with the sole aim of keeping loans outside the scope of the scheme.
The State guarantee applies to losses that a bank suffers on its portfolio of qualifying loans; losses on individual loans are not as such guaranteed. In addition, the guarantee kicks in only for residual losses, i.e. amounts that cannot be recovered by the lender through any other means. The credit institution must call the guarantee by 31 March 2023 at the latest. There is a deductible for the first 3% of losses on a bank's portfolio; the next 2% of portfolio losses is split 50/50 between the bank and the State, and the State also assumes 80% of any additional portfolio losses. This loss-sharing mechanism is aimed at incentivising banks to observe sufficient caution in granting credit.
The scheme was approved by the European Commission on 10 April 2020. The Commission found the scheme to be compatible with the principles of its Temporary Framework for State aid measures to support the economy in the current COVID-19 outbreak (as promulgated on 19 March 2020 and subsequently amended). That Framework defines the conditions under which EU Member States may grant State aid to companies in response to the Covid-19 outbreak, including aid in the form of a guarantee on loans. In its assessment of the Belgian scheme, the European Commission assesses the loss-sharing mechanism positively, and in particular the fact that banks are required to bear the initial losses on their portfolios. The Commission believes that such a mechanism will ensure that banks continue to follow economic logic in their credit policy.