COFIDES will manage a Recapitalisation Fund focused on strengthening the solvency of businesses affected by the pandemic.

Written on 26 May 2021

The Council of Ministers has approved the creation of the Fund for the Recapitalisation of Companies Affected by COVID-19 (the "FREAC"), which will be funded with 1,000 million euros and will be managed directly by COFIDES. The purpose of the FREAC is to provide a temporary public support under criteria of profitability, risk and impact on sustainable development, in order to strengthen the solvency of medium-sized companies with registered offices in Spain.

The Royal Decree-Law 5/2021, of 12 March, on urgent measures to support corporate solvency in response to the COVID-19 pandemic, provides assistance to medium-sized Spanish companies whose long-term viability and competitiveness are affected by the current pandemic. The law implements the FREAC, funded with 1,000 million euros and is intended to cover the niche of companies that have been left out of the target of the Solvency Fund for Strategic Companies (FASEE) attributed to SEPI.

Assigned to the Ministry of Industry, Trade and Tourism, the FREAC will provide temporary support, exclusively through debt, equity (profit participative loan is expected to be used frequently) and hybrid instruments, or a combination of these, to non-financial companies that have applied for assistance. Nevertheless, the companies that had viability problems prior to the COVID-19 crisis or that are considered non-viable in the future will not be eligible.

The intention of the FREAC is not to grant non-refundable subsidies, but to invest selectively and temporarily in order to (i) strengthen the productive fabric until a vaccination rate is achieved that allows for the recovery of confidence and economic activity in the sectors that still face restrictions and (ii) protect direct and indirect jobs, and related suppliers. These are not, therefore, measures to rescue companies that were not viable before the outbreak of the COVID-19 crisis, but rather a form of investment in favour of the recovery and growth of those companies that, despite experiencing financial difficulties, are viable because they have a feasible medium-term plan and a suitable business model. For its part, the Treasury will integrate the amount of dividends, interest, capital gains and any other remuneration resulting from the investments mentioned above, as well as the results of divestments and repayments made.

Furthermore, the FREAC also plans to alleviate the difficulty that medium-sized companies are currently facing in the private debt markets or in accessing SEPI's aid because they do not meet the minimum threshold of funding for SEPI (25 million euros). Consequently, the goal of the FREAC is to strengthen the viability of companies for a limited period, aiming to support temporarily but not to keep a long lasting management, through an exit strategy set for 8 years. SME companies are crucial, as this group is the backbone of the Spanish economy, generating in 2019 around 16% of direct employment and being the driving force of the productive fabric in Spain.

This support plan will operate in a similar way to those managed by other European Union countries such as Germany, France or Italy.

However, the regulatory development of the FREAC, eligibility thresholds, instruments and financing conditions have yet to be defined by the Council of Ministers and will have to be approved by the European Union in order for them to be consistent with the Temporary Community Framework for State Aid. At Osborne Clarke, we will follow up and keep you promptly informed of the progress of the procedure for the presentation of the corresponding applications for support, which seems to be operating by the end of June, and which we foresee will be very similar to that established for SEPI's Solvency Fund.