Businesses affected by COVID-19 are frantically seeking help. Direct forms of assistance, such as the financial shield and standstill pay, are extremely popular. Meanwhile, another instrument of the Anti-Crisis Shield has begun operating recently, i.e. loan repayment guarantees granted by Bank Gospodarstwa Krajowego to medium-sized and large enterprises from the Liquidity Guarantee Fund. The programme, worth over PLN 100 billion, is designed to encourage commercial banks to grant new loans for liquidity purposes.
What is a BGK guarantee?
Under the Anti-Crisis Act of 2 March 2020, Poland’s national development bank, BGK, was given the possibility of granting guarantees and sureties for repayment of loans issued by commercial banks for the purpose of providing liquidity to businesses. This way, BGK will assume a significant part of the risk associated with financing the cost of the pandemic from banks, and provide a stimulus to sluggish lending activity.
The guarantees cover only the loan principal (excluding interest and other costs). The maximum amount of the guarantee cannot exceed 80% of the principal. Additionally, a guarantee for a single loan cannot be less than PLN 3.5 million or higher than PLN 200 million.
The BGK guarantees are granted for up to 27 months, but no longer than 3 months after the loan repayment date. As an exception, however, if the borrower and the financing bank agree on an extension of the financing period and the financing bank assesses that repayment of the loan is possible within such period, the BGK guarantee period may be extended up to 72 months.
The BGK guarantees do not require any special security from the borrower. The only new security expected by BGK is the borrower’s blank bill of exchange.
Who is eligible for a BGK guarantee?
The BGK guarantees are granted to banks under guarantee line portfolio agreements concluded between banks and BGK. Therefore, only banks that have concluded such agreements can benefit from the guarantee. The borrower must verify in advance that the bank of its choice can provide loans supported by the guarantee.
A BGK guarantee from the Liquidity Guarantee Fund can only cover a loan granted to a borrower meeting certain criteria concerning the size of the business, the state of its activity before the pandemic, tax residence, and creditworthiness.
Only medium-sized and large enterprises
This type of BGK guarantee is addressed only to medium-sized and large enterprises within the meaning of the European Commission regulations on state aid, in accordance with the conditions for granting these guarantees. Therefore, such guarantees are not addressed to micro and small enterprises; those businesses may take advantage of other types of guarantees granted by BGK (de minimis and Biznesmax guarantees).
No previous problems
These guarantees are intended to provide liquidity to entities whose situation has deteriorated or is likely to deteriorate in connection with COVID-19. They are not intended to save companies that were already in serious financial difficulty before the pandemic. In this context, it should also be pointed out that BGK guarantees constitute state aid accepted by the European Commission as part of counteracting the effects of the pandemic, hence the wording of some conditions results from state aid regulations.
Borrowers who as of 1 February 2020 were entered in a commercial bank database as entities excluded from financing (in particular, entries in the BIK system or the Bank Register) or for which a commercial bank has terminated any credit exposure are excluded from this type of BGK guarantee. Arrears to the financing bank exceeding 30 days (with minor exceptions) or arrears in tax or social insurance contributions exclude the possibility of covering the loan with a BGK guarantee line. Also, BGK does not guarantee exposures at risk or for which there is evidence of impairment as of 31 December 2019.
BGK will also not guarantee obligations of undertakings in difficulty within the meaning of the European Commission state aid regulations. In particular, this means that a guarantee will not be granted to a limited-liability company which is a medium-sized business, where accumulated losses exceed half of the share capital (with the share capital also taking into account agio premiums from share issues). In the case of large companies, difficulty means, among other things, a debt-to-equity ratio above 7.5 or an interest-coverage ratio (against EBITDA) of less than 1.0 over the last two years. Earlier, unrepaid rescue aid will also exclude the entity from a BGK guarantee.
Registered office in Poland
The guarantee is addressed to Polish entities. BGK requires the borrower to be a Polish resident, which in the case of companies means that the borrower must have its registered office in Poland.
The last crucial but obvious BGK requirement is creditworthiness, i.e. the borrower’s ability to repay the loan with interest. Creditworthiness is not assessed by BGK, but by the financing bank in accordance with the rules adopted by that bank. Therefore, BGK uses the analysis of the financing bank, which by granting the loan, in a way confirms to BGK the borrower’s creditworthiness.
What loans are guaranteed by BGK?
First, as mentioned above, the purpose of these guarantees is to promote liquidity. This concept should be understood broadly, as BGK accepts working capital loans which serve not only to finance current business activity but also loans financing capital expenditures, provided that they contribute to improving the liquidity of the business.
Second, the loan must be “new,” i.e. originally granted or renewed after 1 March 2020 in accordance with the approval of the European Commission, which is linked to the timing of the first economic impact of the pandemic and relief measures. Interestingly, although the act itself which enabled BGK to grant such guarantees states that BGK is to grant such guarantees “in connection with the effects of COVID-19,” this condition has not been specified in any way. In practice, this means that the impact can be understood broadly, i.e. as either direct (e.g. decrease in shopping centre revenue as a result of termination of some leases on the basis of the Shield) or indirect (e.g. decrease in demand for furniture caused by a change in consumer behaviour).
Third, the guarantee can secure not only a loan linked to a current account, but also other forms of financing included in a credit line, e.g. guarantees, letters of credit, and reverse factoring.
Fourth, the guarantee can only secure a loan in PLN. This is a serious limitation for some types of companies, as well as a complication when securing a revolving loan, which might have been granted in the past in many currencies (which often applies especially to LMA standard loans).
Fifth, a loan secured by such a guarantee may not be used to repay existing credit or an existing loan. This means, in particular, a ban on refinancing loans from shareholders.
Sixth, it is prohibited to secure the same loan with different BGK guarantees. Furthermore, the total amount of loans secured by this type of guarantee may not exceed PLN 250 million. In the case of a loan granted for a period longer than until the end of the year, additional restrictions may apply, depending on the number of employees and the decrease in revenue.
How to apply for the BGK guarantee and how much does it cost?
In order to obtain a BGK guarantee, the borrower must submit an application on the form attached to the loan agreement. This is where the borrower’s role ends (it only has to issue the aforementioned bill of exchange). The entire procedure is carried out by the commercial bank, based on its framework agreement with BGK. The guarantee itself is granted when the commercial bank enters the loan in a special register, and there is no separate document for each guarantee. The commercial bank must also ensure that the loan agreement includes the provisions required by BGK: mainly the borrower’s consent and confirmation of the details of the guarantee and its execution. As may be seen, BGK is not technically involved at the stage of granting individual guarantees, although it has the right to take certain actions, e.g. it may object to an attempt to enter a loan in the loan register if the loan does not meet the conditions and cannot be secured with such a guarantee.
The cost of the guarantee is obviously attractive. BGK commission fees are precisely described in the terms and conditions for granting such guarantees, which ensures price transparency.
Effects of payment of the guarantee by BGK
The act introducing the possibility of granting these guarantees explicitly states that if BGK pays out the guarantee, BGK “enters into the rights of the guarantee beneficiary up to the amount of the payment made.” This is not a mechanism specific only to guarantees from the Liquidity Guarantee Fund, but applies to all BGK guarantees granted in accordance with the Act on Sureties and Guarantees Granted by the State Treasury and Certain Legal Persons of 8 May 1997.
To enter into the rights of the commercial bank means, in particular, to enter into security rights. This may cause complications, considering that the loan is only partially secured by the BGK guarantee (which means that the bank will always be only partially satisfied). The entry of a new secured creditor of the borrower may cause even more controversy in the case of joint collateral securing a number of loans, of which only one (a special-purpose revolving loan in PLN) was secured by the BGK guarantee. In this context, it should also be noted that the issue of the distribution of amounts collected from the borrower is determined by EU regulations, which provide for a proportional reduction of losses of the commercial bank and BGK.
The BGK guarantees are designed to encourage commercial banks to finance borrowers’ liquidity in times of uncertainty caused by the pandemic. They are a simple and quick instrument, but they are not always attractive for financing banks due to complications related to the distribution of collateral from BGK if it is necessary to draw on the guarantee.
Artur Bednarski, attorney-at-law, Patrycja Polasz, attorney-at-law, Banking & Project Finance practice, Wardyński & Partners