Covid-19 : Suspension of payments under bank credits and state guarantee scheme

Scope and outstanding issues

1. The general support package

On 22 March 2020, the Minister of Finance and the Belgian financial sector, through the Belgian financial sector federation (Febelfin), announced a series of measures to support lending to Belgian businesses and individuals to deal with the immediate fall-out of the Covid-19 crisis.^[1]

The support package consists of two pillars:

• Payment suspension - suspension of payment obligations under existing credits for businesses (principal only) and mortgage loans for individuals (principal and interest) impacted by the corona crisis, free of charge, until 31 October 2020; and 
• State guarantee scheme - State guarantee for credits that would be granted to businesses up to 30 September 2020 (subject to extension) with a maximum duration of 12 months (subject to extension).

2.  Payment suspension

On 31 March 2020, Febelfin published a charter on the deferral of payments under business credits^[2] (the “Business Credits Charter”) and a charter on the deferral of payments by individuals under mortgage loans^[3] (the “Mortgage Loans Charter”).

The key features of the Business Credit Charter are the following:

• suspension may be requested by non-financial businesses, self-employed professionals and non-profit organisations “permanently established in Belgium” (not by public authorities);
• suspension may be requested up to 31 October 2020;
• suspension only applies to principal, not interest;
• suspension does not apply to overdue payments;
• suspension automatically entails an extension of the maturity of the credit;
• suspension only applies to bank-type financings; factoring and leasing are excluded;
• the borrower must be impacted by COVID-19 (decrease of turnover, unemployment or forced closing of business);
• the borrower must have had (i) no payment default as of 1 February 2020 (credits, tax or social security contributions) or (ii), if a payment default existed as of 29 February 2020, it does not exceed 30 days; and
• the borrower must not have been in any breach under any bank credit in the period of 12 months up to 31 January 2020, nor be in “active credit restructuring” at the time of application.

The key features of the Mortgage Loans Charter are the following:

• suspension may be requested by any individual affected by COVID-19 (unemployment, related disease, closing of business or temporary measures);
• suspension may be requested by 31 October 2020;
• the following conditions must be met: (i) no default under the mortgage loan as of 1 February 2020, (ii) the mortgage loan relates to the main residence, and (iii) the borrower’s total assets held in current and savings accounts as well as in investment portfolios (excluding pension savings) is lower than EUR 25,000;
• suspension applies to principal and interest payments;
• suspension dos not apply to overdue payments;
• suspension automatically entails an extension of the maturity of the credit; and
• the loan does not bear interest during the suspension period if the borrower’s (household’s) monthly net revenue is lower or equal to EUR 1,700.

3. The State guarantee scheme

On 26 March 2020, the Belgian Federal Parliament passed a law empowering the Government to grant a State guarantee for certain credits in the fight against the consequences of the coronavirus (the “Law”).^[4]

The Law provides for the key terms of the State guarantee scheme and empowers the Government to tailor the scheme by Royal decree (the “RD”). The RD is expected in the coming days. The scheme will enter into force upon publication of the RD.

The key terms of the State guarantee scheme defined in the Law are as follows:

Qualifying lenders

• Belgian credit institutions, Belgian branches of foreign credit institutions and other institutions to be determined in the RD; the RD may limit the access to the scheme to lenders having a minimum volume of lending activity.

Qualifying credits

• New credits granted between 1 April and 30 September 2020 (unless extended by Royal decree because of the severity of the crisis);
• Maximum term of credits: 12 months (unless extended by Royal decree because of severity of the crisis);
• Maximum amount of guaranteed credits: EUR 50 billion.

Qualifying borrowers

• Type of borrowers: non-financial undertakings, SMEs, self-employed workers and  non-profit organisations;
• Key requirement: the borrower must be "viable" (“levensvatbaar”/”viable”), which shall be determined by the RD, taking the onset of the crisis as a starting point.

Based on the Febelfin announcement, following the expiration of the State guarantee scheme, aggregate losses will be measured at portfolio level and allocated between the financial sector and the Government as follows:

• first losses up to 3% will be supported by the financial sector;
• losses between 3% and 5% will be split 50/50 between the financial sector and the State; and
• losses over 5% will be absorbed at 80% by the State.

4.  Outstanding issues

Many questions are left at this stage in relation to the support package, for the guarantee scheme in particular. Some - but not all - of them may be clarified by the RD.

Here are some examples:

Payment suspension

Business Credit Charter - Limited scope of the measure

• The measure does not deal with the other contractual obligations of the borrower, such as (financial covenants) that would be breached due to the COVID-19 crisis, including in particular required levels of EBITDA. Such breach could allow the bank to accelerate the credit. Does the suspension protect the borrower from such acceleration, whatever the type of covenant that has been breached?

State guarantee scheme

Scope

• Which will be the lenders to whom the Guarantee scheme will be extended?
• Refinancings are announced to be excluded. What about refinancing loans with another bank? What about refinancing bonds, factoring or leasing arrangements that arrive at their stated maturity or are reduced or terminated otherwise?

Security interest / insurance

• How does the guarantee interact with security interests granted at the level of the bank (so called “all sums security interests”), in particular in respect of the loss allocation following expiration of the scheme?
• What is the interaction with credit insurance?

What at the end of the 12-month maturity?

• How will a "loss" be established? Must the bank first take recovery actions against the borrower and any guarantor and/or enforce collateral?
• What if the credit is not fully repaid after 12 months? Will the bank have an incentive to terminate the credit so it can qualify as a loss under the guarantee scheme, while the bank would otherwise agree to formally or de facto extend it because it considers that the default is temporary? This would to a certain extent defeat the purpose of the system. If the guarantee is lost in case of extension, depending on the overall amount and breakdown of defaults within the credit portfolio, banks may refrain from granting extensions. In addition, how would a potential extension of the scheme impact this issue?
• In connection with the previous comment, if potential borrowers fear to see a default on 30 September 2021 "crystalised", with banks not applying their normal judgement on possible extensions, they may refrain from entering into the system.
• Will banks accept granting credits outside the scheme, if borrowers wish to avoid the above problems?

Approval by existing lenders

• Taking up an additional financing is in most - if not all - cases subject to prior approval by existing lenders, which may request subordination of the new bank or related measures. New banks may be reluctant to accept subordination for these new credits, which are likely to bear a higher credit risk.

Control by the State

• When will compliance of a particular credit with the conditions of the State guarantee be tested (e.g., “viable” status of the borrower)? Will banks need to take the risk of refusal of the Guarantee at the time of default?

We are closely monitoring the evolutions and implementation of the payment suspension and the State guarantee scheme. If you have any questions on the impact and implementation, please do not hesitate to reach out.

^[1] In Dutch: https://www.febelfin.be/nl/journalisten/artikel/banken-en-overheid-treffen-maatregelen-om-bedrijven-en-particulieren and in French: https://www.febelfin.be/fr/journalistes/article/les-banques-et-les-pouvoirs-publics-prennent-des-mesures-pour-aider-autant-que

^[2] In Dutch: https://www.febelfin.be/nl/consumenten/artikel/charter-betalingsuitstel-ondernemingskredieten and in French: https://www.febelfin.be/fr/consommateurs/article/charte-report-de-paiement-credit-aux-entreprises

^[3] In Dutch: https://www.febelfin.be/nl/consumenten/artikel/charter-betalingsuitstel-hypothecair-krediet and in French: https://www.febelfin.be/fr/consommateurs/article/charte-report-de-paiement-credit-hypothecaire

^[4] In Dutch and French: 
https://www.lachambre.be/FLWB/PDF/55/1108/55K1108004.pdf