22.04.2020

Update on corona aid schemes: start of the KfW instant loan

On 6 April 2020, the German Chancellor had already discussed further immediate relief packages with the ministers of her "Corona Cabinet", which could help to provide urgently needed liquidity to small and medium-sized enterprises. The background to this was that the previous KfW Special Programme 2020 and immediate relief packages provided for the assumption of risk by the relationship banks amounting to at least 10% of the loan volume. Too many ailing applicants failed the continued strict creditworthiness checks of their relationship banks, not least because of the uncertain forecasts of the imminent reopening of the German economy. In a white paper, the Corona Cabinet therefore developed the so-called "instant loan", which allows KfW to release the relationships banks from up to 100 per cent of the default risk.

Background

We have already reported on the first immediate relief measures at national level as well as the level of the regions of Berlin and Brandenburg here and on further national schemes here. Immediately afterwards, the application servers were completely overloaded and no longer accessible. The funds made available also became scarce within a very short time in view of the rush and the low requirements for application approvals. In the media one read and heard about numerous applicants who had applied for liquidity aid in vain and ultimately not received it. In Berlin alone, more than EUR 17 million from approved immediate relief funds provided have now been returned.

What amount has since been paid out across all credit institutions due to the coronavirus is not yet certain. Demand is still high and it is not likely to decrease in view of the announcements of a gradual, cautious and, in parts, still completely open return to entrepreneurial normality. Increasingly, company and industry associations are giving vent to the displeasure of their members. The demand for life-sustaining minimum operation - whatever this might look like - is becoming louder. Meanwhile, affected small and medium-sized enterprises, especially in the catering and tourism industry, continue to struggle for their existence. Whether and under what conditions they can now claim further assistance depends on the circumstances of each individual case, which is the correct approach. Nevertheless, the Corona Cabinet recognises: without a quick injection of liquidity, it will be difficult for significant parts of the German medium-sized companies to survive the summer. Therefore, it now launched another KfW-supported funding scheme, the so-called "instant loan".

Funding criteria in detail

The instant loan also bears the name "loan with extended release from liability", which means that KfW now completely covers any default risks and thus eliminates the biggest stumbling block for many applicants in previously available immediate relief loans granted by the relationship banks.

The instant loan is aimed solely at promoting medium-sized enterprises, which are broadly defined in the funding guidelines as having between 11 and 249 employees. The instant loan is therefore not intended for self-employed persons without employees, so-called “Solo-Selbständige”, and micro
enterprises with up to 10 employees.

The instant loan will not help start-ups that have not yet achieved a verifiable profit from their business model in the sum of the years 2017-2019 (or in the case of younger companies within a shorter comparison period). This makes sense in view of the fact that the instant loan is not intended to promote business ideas that would not have had positive prospects even without the corona crisis. The basis for the granting of funds is therefore rather a retrospective approach.

At the very least, companies must have been active on the market on the cut-off date of 1 January 2019, i.e. they must have started their business activities and have generated their first revenues at the latest on that date. The company may not have experienced financial difficulties before 31 December 2019 and is required to demonstrate that its financial conditions was in order at that point in time, which means that no economic difficulties may have existed without the effects of the corona pandemic. This information must be assured when the application is submitted. An instruction text explains the civil and criminal liability risks of a false assurance. The bank checks the information provided, in particular past turnover and profits and the current number of employees.

In the event of premature repayment, the otherwise customary prepayment penalty shall not apply. Loans granted must be drawn down within one month - also in instalments. Repayment is made in equal instalments over 10 years. For a period of up to 2 years no repayment of the principal is required. For the time being, the instant loan is limited in time: the last possible date for disbursement is currently 31 December 2020.

With a view to EU state aid law, the Federal Government had already created the necessary conditions within the "Temporary Framework for State aid measures to support the economy in the current COVID-19 outbreak" for the instant loan (as was already the case with the KfW Special Programme 2020).

Comparison of KfW's "loans with extended release from liability”

1.    KfW Special Programme 2020 - Changes in accordance with the Corona Cabinet white paper

  • Who: SME and large enterprises
  • What is granted: Loans with a volume of up to EUR 1,000 million, limited to the company-specific 25% of annual sales or twice the wage costs in 2019 and the current financing requirements for the next 18 months in case of SME or 12 months in case of large companies or 50% of the company's total debt for loan amounts exceeding EUR 25 million.
  • How: KfW's assumption of risk in the granting of loans by relationship banks is intended to increase the company's chances of obtaining a loan commitment from its relationship bank (in practice this has not been the case, so far):
    • assumption of up to 90% of the risk in case of SME
    • assumption of up to 80% of the risk in case of large companies
    • no risk assumption in case of start-up companies.
  • Purpose: Investments and financing.
  • When: Starting now.
  • Where: Applications for loans are to be submitted to the relationship banks; these carry out a risk assessment and, if necessary, demand collateralisation of the loans according to their own specifications.
  • Other requirements:
    • No liquidity problems before 31 December 2019.

 

2.    KfW Special Programme "Instant Loan”

  • Who: German medium-sized enterprises, i.e. trades with operating sites in Germany with 11-249 employees.
  • What is granted:
    • Up to EUR 500,000.00 in case of up to 50 employees
    • Up to EUR 800,000.00 in case of 51-249 employees
    • Limited to up to 3 monthly turnovers in 2019
    • Interest terms: A current interest rate of 3 per cent p.a.
    • A term of 10 years
  • How: Loan is granted by the relationship bank. However, the 100% risk assumption by KfW facilitates approval. The relationship banks no longer carry out their own risk assessment. In addition, collateralisation may no longer be required.
  • Purpose: Intended in particular for working capital and investments;
    • It may not be used to reschedule or repay credit lines.
    • As in the KfW Special Programme 2020, profit and dividend distributions during the term of the loan are not permitted, apart from distributions and withdrawals at arm’s length for business owners who are natural persons.
  • Cannot be combined with other KfW loans or the instruments of the Economic Stabilisation Fund (prohibition of cumulation).
  • When: As of now
  • Where: The granting of a loan must be applied with the relationship bank.
  • Other requirements: Information to be assured and verified by the bank:
    • Sales generated as of 1 January 2019
    • Profits over the last three years, i.e. 2017-2019. If information on profits is available only for 2019, this shorter period shall be used as the basis. The relationship bank carries out the check on the basis of the income statement and payroll accounting documents.
    • No liquidity shortfall on the reporting date 31 December 2019:
      1. No unsettled payment arrears of more than 30 days,
      2. No duty to file for insolvency and no application to file for insolvency intended within the next three months,
      3. The company was not subject to bankruptcy, composition or liquidation proceedings,
      4. no parallel applications for other liquidity support were submitted.
The release from liability - a suicide mission?

The granting of loans should no longer fail because of risk-averse relationship banks. KfW is now guaranteeing this, releasing the banks from 100 per cent of their liability. It eliminates the default risk of the relationship banks. A shift of the crisis from medium-sized enterprises to the banking sector is thus averted for the time being. In return, the relationship bank must/may waive any collateralisation and the usual own risk assessment with the exception of the assessment of the three parameters already mentioned: Sales generated as of 1 January 2019; profit in the last three years or in the whole year 2019, number of employees. By checking the applicant's details on "sales", "profits" and "employees", the bank aims to rule out any misuse of the loans and keep the probability of default low. The 100% indemnity waiver is tied to the precondition that the relationship bank ensures the usual processing of claims in case of default. If it fails to do so, it is no longer released from liability. The relationship banks remain obliged to collect the receivables.

However, a risk assessment is not carried out by KfW itself, neither. This is the only way to achieve the intended speed of granting the loans. That comes at a price. The increased default risk of the instant loan is to be financed by higher interest margins compared to the KfW Special Programme 2020: 3% p.a. with at an assumed refinancing rate for the banks of 0% p.a.

This means that the guarantee framework for this scheme will have to be increased to EUR 150 billion in case of an expected high demand. The fact that the KfW instant loan can only be applied for if aid from other KfW loan programmes has not already been used, could dampen demand. The higher interest rates are also intended to further limit the number of companies making use of this loan. The next days and weeks will show whether this strategy actually works.

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