NEWS | Wednesday, 21 May 2008

Commission updates rules on guarantees and provides simplified possibilities for SMEs

The European Commission has adopted a new Notice on state aid in the form of guarantees. The text sets out clear and transparent methodologies to calculate the aid element in a guarantee and provides simplified rules for SMEs, including predefined safe-harbour premiums and single premium rates for low-amount guarantees. The new Notice was foreseen in the State Aid Action Plan.
Competition Commissioner Neelie Kroes said “The new Notice is a significant move to allow for a more transparent use of guarantees, especially in order to facilitate financial support for SMEs”.
State guarantees are an important tool to support the development of companies and to facilitate their access to finance. State guarantees are also appreciated by Member States to leverage the impact of their State budgets. They can increase private loans notably for SMEs without requiring immediate contribution by the State, as the payment of the guarantee is only needed in case of default. The main aim of revising the Commission’s current Notice on Guarantees is to provide additional guidance and legal certainty to Member States and stakeholders when assessing whether a guarantee contains an element of state aid or not.

More transparent methodologies
The new Notice confirms that this assessment should be based on the Market Economy Investor Principle. According to this principle, investments or other funding undertaken by public authorities in companies can be considered to be compatible with EU state aid rules when they are made under conditions that a private market investor would have accepted. As a consequence, the methodologies primarily rely on proper risk assessment through rating. The rating does not have to be provided by one of the international rating agencies, but can be the internal rating of the lending bank, which usually has to rate companies before granting a loan.

Simplified possibilities for SMEs
Guarantees are of particular importance for SMEs, as they often have low share capital and a lack of stable resources. Therefore, the new Notice sets out particular rules for SMEs which will allow them to assess the aid element of a guarantee in a simple way:
Predefined safe-harbour premiums based on rating classes are considered to be market-conform and thus free of aid. They can also be used as a reference to calculate the aid equivalent in case of lower premiums. The safe-harbour-grid is a simplification tool. Member States may decide not to use it if they believe they can demonstrate that lower premiums are market-conform.
A premium of 3.8% per year is applicable, even in the absence of rating, for example for start-up companies.
A single premium can be applied across the board for schemes, when the guaranteed amount remains below €2.5 million per company. This allows for a risk-pooling effect in favour of low-amount guarantees for SMEs.