32000Y0311(03)

Commission Notice on the application of Articles 87 and 88 of the EC Treaty to State aid in the form of guarantees

(2000/C 71/07)

1. INTRODUCTION

1.1. This notice outlines the Commission's approach to State aid granted in the form of guarantees. Guarantees are usually associated with a loan or other financial obligation to be contracted by a borrower with a lender. However, this notice covers all forms of guarantees, irrespective of their legal basis and the transaction covered. Guarantees may be granted as individual guarantees or within guarantee schemes. If aid is involved, this aid in most cases benefits the borrower. However, in certain circumstances, there may also be an aid to the lender.

1.2. This notice applies without prejudice to Article 295 and thus does not prejudice the rules in Member States governing the system of property ownership. The Commission is neutral as regards public or private ownership. This notice does not apply to export credit guarantees.

1.3. In 1989 the Commission addresed two letters on State guarantees to the Member States. In the first letter [1] it pointed out that it regards all guarantees given by a State as falling within the scope of Article 87(1). According to this letter, the Commission must therefore be notified of any plans to give or alter such guarantees in sufficient time to enable it to submit its comments. In the second letter [2] the Commission made it clear that it intended to examine the establishment of State guarantee schemes, and that individual guarantees given under an approved scheme would not need to be notified. In 1993 the Commission adopted a communication [3] which addressed the subject of guarantees as well.

1.4. Experience gained in the meantime suggests that the Commission's policy in this area should be reviewed. This notice replaces the two Commission letters of 1989 and paragraph 38 of the Commission communication of 1993. Its purpose is to give Member States more detailed explanations about the principles on which the Commission intends to base its interpretation of Articles 87 and 88 and their application to State guarantees. The Commission intends in this way to make its policy in this area as transparent as possible, thereby ensuring that its decisions are predictable and that equal treatment is guaranteed.

2. APPLICABILITY OF ARTICLE 87(1)

2.1. Aid to the borrower

2.1.1. Usually, the aid beneficiary is the borrower. The State guarantee enables the borrower to obtain better financial terms for a loan than those normally available on the financial markets. Typically, with the benefit of the State guarantee, the borrower can obtain lower rates and/or offer less security. In some cases, the borrower would not, without a State guarantee, find a financial institution prepared to lend on any terms. State guarantees may thus facilitate the creation of new businesses and enable certain undertakings to raise money in order to pursue new activities or simply remain active instead of being eliminated or restructured, thereby creating distortions of competition. State guarantees thus generally fall within the scope of Article 87(1), if trade between Member States is affected and no market premium is paid.

2.1.2. The benefit of a State guarantee is that the risk associated with the guarantee is carried by the State. This carrying of a risk by the State should normally be remunerated by an apporpriate premium. Where the State forgoes such a premium, there is both a benefit for the undertaking and a drain on the resources of the State. Thus, even if no payments are ever made by the State under a guarantee, there may nevertheless be a State aid under Article 87(1). The aid is granted at the moment when the guarantee is given, not the moment at which the guarantee is invoked or the moment at which payments are made under the terms of the guarantee. Whether or not a guarantee constitutes State aid, and, if so, what the amount of that State aid may be, must be assessed at the moment the guarantee is given.

2.1.3. The Commission also regards as aid in the form of a guarantee, the more favourable funding terms obtained by enterprises whose legal form rules out bankruptcy or other insolvency procedures or provides an explicit State guarantee or coverage of losses by the State. The same applies to the acquisition by a State of a holding in an entreprise if unlimited liability is accepted instead of the usual limited liability [4].

2.1.4. Article 87(1) covers aid granted by a Member State or thourgh State resources. Therefore, in the same way as other forms of potential aid, guarantees given by the State directly, namely by central, regional or local authorities, as well as guarantees given by undertakings under the dominant influence of public authorities, may constitute State aid.

2.2. Aid to the lender

2.2.1. Even if usually the aid beneficiary is the borrower it cannot be ruled out that under certain circumstances the lender, too, will benefit from the aid. In such a case the Commission will certainly pursue the matter accordingly.

2.2.2. In particular, for example, if a State guarantee is given ex post in respect of a loan or other financial obligation already entered into without the terms of this loan or financial obligation being adjusted, or if one guaranteed loan is used to pay back another, non-guaranteed loan to the same credit institution, then there may also be an aid to the lender, in so far as the security of the loans is increased. Such aid is capable of favouring the lender and distorting competition, and genrally falls within the scope of Article 87(1), if trade between Member States is affected.

3. AMOUNT OF THE AID

3.1. In the case of an individual State guarantee, the aid element must be assessed by reference to the details of the guarantee and loan (or other financial obligation). The relevant factors include in particular the duration and amount of the guarantee and loan, the risk of default by the borrower, the price paid by the borrower for the guarantee, the nature of any security given, how and when the State could be called upon to pay a debt and the means (e.g. declaration of bankruptcy) to be used by the State to recover amounts owed by the borrower once the guarantee has been invoked.

3.2. The cash grant equivalent of a loan guarantee in a given year can be:

- calculated in the same way as the grant equivalent of a soft loan, the interest subsidy representing the difference between the market rate and the rate obtained thanks to the State guarantee after any premiums paid have been deducted, or

- taken to be the difference between (a) the outstanding sum guaranteed, multiplied by the risk factor (the probability of defalut) and (b) any premium paid, i.e. (guaranteed sulm × risk) - premium, or

- calculated by any other objectively justifiable and generally accepted method.

For individual guarantees, the first method should in principle be the standard form of calculation, for guarantee schemes the second one.

The risk factor should be based on the past experience of defaults on loans given in similar circumstances (sector, size of firm, level of general economic activity). The yearly grant equivalents should be discounted to their present value using the reference rate, then added up to obtain the total grant equivalent.

Where, at the time the loan is granted, there is a strong probability that the borrower will default, e.g. because he is in financial difficulty, the value of the guarantee may be as high as the amount effectively covered by that guarantee.

3.3. If a financial obligation is wholly covered by a State guarantee, the lender has less incentive to assess properly, secure and minimise the risk arising from the lending operation, and in particular to assess properly the borrower's creditworthiness. Such risk assessment might also not always be taken over by the guarantor, for lack of means. This lack of incentive to minimise the risk of non-repayment of the loan might encourage lenders to contract loans with a greater than normal commercial risk and could thus increase the amount of higher-risk guarantees in the State's portfolio.

3.4. The Commission suggests that a precentage of at least 20 % not covered by a State guarantee will serve as an appropriate limit for inducing the lender to properly assess the creditworthiness of the borrower [5], to properly secure its loans and to minimise the risk associated with the transaction [6]. The Commission will therefore, in general, examine critically any guarantees covering the entirety (or nearly the entirety) of a financial transaction.

3.5. In the case of State guarantee schemes, the specific features of the individual cases may not be known at the time when the scheme is to be assessed. In these circumstances, the aid element must be assessed by reference to the provisions of the scheme concerning amongst others the maximum amount and duration of loans, the category of enterprise and type of project eligible, the security required from the borrowers, the premium to be paid and the interest rates obtained by them.

4. CONDITIONS EXCLUDING THE EXISTENCE OF AID

4.1. An individual guarantee or a guarantee scheme entered into by the State will be outside the scope of Article 87(1) when there is no aid which favours certain undertakings or the production of certain goods. In such cases, notification by the Member State is not necessary. Also, a guarantee does not constitute State aid under Article 87(1) when the measure does not affect trade between Member States.

4.2. The Commission considers that the fulfilment of all the following conditions ensures that an individual State guarantee does not constitute State aid under Article 87(1):

(a) the borrower is not in financial difficulty;

(b) the borrower would in principle be able to obatin a loan on market conditions from the financial markets without any intervention by the State;

(c) the guarantee is linked to a specific financial transaction, is for a fixed maximum amount, does not cover more than 80 % of the outstanding loan or other financial obligation (except for bonds and similar instruments) and is not open-ended;

(d) the market price for the guarantee is paid (which reflects, amongst others, the amount and duration of the guarantee, the security given by the borrower, the borrower's financial position, the sector of activity and the prospects, the rates of default, and other economic conditions).

4.3. The Commission considers that the fulfilment of all the following conditions ensures that a State guarantee scheme does not constitute State aid under Article 87(1):

(a) the scheme does not allow guarantees to be granted to borrowers who are in financial difficulty;

(b) the borrowers would in principle be able to obtain a loan on market conditions from the financial markets without any intervention by the State;

(c) the guarantees are linked to a specific financial transaction, are for a fixed maximum amount, do not cover more than 80 % of each outstanding loan or other financial obligation (except for bonds and similar instruments) and are not open-ended;

(d) the terms of the scheme are based on a realistic assessment of the risk so that the premiums paid by the beneficiary entreprises make it, in all probability, self-financing;

(e) the scheme provides for the terms on which future guarantees are granted and the overall financing of the scheme to be reviewed at least once a year;

(f) the premiums cover both the normal risks associated with granting the guarantee and the administrative costs of the scheme, including, where the State provides the intial capital for the start-up of the scheme, a normal return on that capital.

4.4. Failure to comply with any one of the above conditions set out in points 4.2 and 4.3 does not mean that such guarantee or guarantee scheme is automatically regarded as State aid. If there is any doubt as to whether a planned guarantee or scheme does constitute State aid, it should be notified.

4.5. There may be circumstances in which it is planned to use State gurantees to enable enterprises, and in particular small and medium-sized enterprises, to obtain loans that the marekt would not supply. The enterprises may be starting up, expanding fast or be small and hence unable to furnish the necessary security to secure a loan or obtain a guarantee. They may fall into the category of high-risk enterprises (expected to move into profitability only in the long term and/or having a particularly high failure rate). This may be the case, for example, with projects concerning new, innovative products or processes. The Commission considers that such circumstances will generally not take State guarantees outside the scope of Article 87(1). State guarantees given in such circumstances should therefore be notified to the Commission in sufficient time, in the same way as State guarantees given in other circumstances.

5. COMPATIBILITY OF STATE AID IN THE FORM OF GUARANTEES WITH THE COMMON MARKET

5.1. State guarantees within the scope of Article 87(1) must be examined by the Commission with a view to determining whether or not they are compatible with the common market. Before such assessment of compatibility can be made, the beneficiary of the aid must be identified. As has been explained under point 2, this can be either the borrower, or the lender, or both.

5.2. In most cases the guarantee contains aid to the borrower (point 2.1). Whether or not this aid is compatible with the common market will be examined by the Commission according to the same rules as are applied to aid measures taking other forms. The concrete criteria for the compatibility assessment have been clarified and detailed by the Commission in frameworks and guidelines concerning horizontal, regional and sectoral aid [7]. The examination will take into account, in particular, the aid intensity, the characteristics of the beneficiaries and the objectives pursued.

5.3. The Commission will accept guarantees only if their mobilisation is contractually linked to specific conditions which may go as far as the complusory declaration of bankruptcy of the beneficiary undertaking, or any similar procedure. These conditions will have to be agreed at the initial examination by the Commission of the proposed guarantee within the normal procedures of Article 88(3), at the stage when it is granted. In the event that a Member State wants to mobilise the guarantee under conditions other than those initially agreed at the granting stage, then the Commission will regard the mobilisation of the guarantee as creating a new aid which has to be notified under Article 88(3).

5.4. Where the guarantee contains aid to the lender (point 2.2), attention should be drawn to the fact that such aid might, in principle, constitute operating aid.

6. CONSEQUENCES OF THE INFRINGEMENT OF ARTICLE 88(3)

6.1. Where Member States do not observe the obligations of prior notification and suspension laid down in Article 88(3), the aid element of the guarantee is to be qualified as unlawful in accordance with Article 1(f) of Council Regulation (EC) No 659/1999 of 22 March 1999 laying down detailed rules for the application of Article 93 of the EC Treaty [8]. As to the consequences of infringement of the third sentence of Article 88(3), various distinctions should be drawn. In the following the position of the aid beneficiary and that of lenders not being a beneficiary will be examined in turn.

6.2. First, where aid has been illegally granted, the beneficiaries of the aid contained in the guarantee will run a risk. The Commission may take interim measures in accordance with Article 11 of Regulation (EC) No 659/1999 pending the outcome of the examination as to the compatibility of the aid. If, after this examination, the Commission finds that the State aid is incompatible with the common market, it shall be recovered from the beneficiary in accordance with Article 14 of Regulation (EC) No 659/1999, even if this means the declaration of bankruptcy of the enterprise.

6.3. Moreover, aid beneficiaries also run a risk at national level, inasmuch as the third sentence of Article 88(3) has direct effect. The Court of Justice of the European Communities has repeatedly confirmed that it is the duty of national courts to safeguard the rights of the individuals concerned, such as competitors of firms receiving illegal aid, against breaches of the third sentence of Article 88(3). National courts have to draw all the appropriate conclusions from the illegality of State aid granted in breach of the procedural rules of the Treaty. If a national court is requested to order recovery of the unlawful aid, it must normally grant that application [9].

6.4. Secondly, guarantees differ from other State aid measures, such as grants or tax exemptions, in the sense that in the case of a guarantee the State also enters into a legal relation with the lender. Therefore, consideration has to be given to whether the fact that a State aid has been illegally granted also has consequences for third parties. In the case of State guarantees for loans, this concerns mainly the financial lending institutions. In the case of guarantees for bonds issued to obtain financing for undertakings, this concerns the financial institutions involved in the issuance of the bonds.

6.5. The question whether the illegality of the aid affects the legal relations between the State and third parties is a matter which has to be examined under national law. National courts may have to examine whether national law prevents the guarantee contracts from being honoured, and in that assessment the Commission considers that they should take account of the breach of Community law. Accordingly, lenders may have an interest in verifying, as a standard precaution, that the Community rules on State aid have been observed, whenever guarantees are granted. The Member State should be able to provide a case number issued by the Commission for an individual case or a scheme and eventually a non-confidential copy of the Commission's decision together with the relevant reference to the Official Journal of the European Communities. The Commission for its part will do its utmost to make available in a transparent manner information on cases and schemes approved by it.

7. REPORTS TO BE PRESENTED TO THE COMMISSION BY THE MEMBER STATES

7.1. As there may be new developments on the financial markets and as the value of State guarantees is difficult to assess, the constant review pursuant to Article 88(1) of State guarantee schemes approved by the Commission is of particular importance. In addition to the usual data on expenditure, the reports to be presented annually to the Commission should give (for schemes and individual guarantees as well) data on the total amount of State guarantees outstanding, the total amount paid in the preceding year by the State to defualting debtors (net fo any funds recovered), and the premiums paid for State guarantees in the same year. This information will help in calculating the rate of default and will be used to reassess the value of future guarantees and, if necessary, the premium to be paid in the future.

7.2. The Commission does not intend to use information supplied in the abovementioned reports and not known or foreseeable when it took an earlier decision, in order to revise its initial conclusions concerning the existence or scale of aid contained in State guarantee schemes. The Commission may, however, use such information to propose appropriate measures to a Member State under Article 88(1) in order to alter an existing State guarantee scheme.

[1] Commission letter to the Member States, SG(89) D/4328 of 5 April 1989.

[2] Commission letter to the Member States, SG(89) D/12772 of 12 October 1989.

[3] Commission Communication to the Member States on the application of Articles 92 and 93 of the EEC Treaty and of Article 5 of Commission Directive 80/723/EEC to public undertakings in the manufacturing sector (OJ C 307, 13.11.1993, p. 3).

[4] See footnote 3, paragraph 38.1 and 38.2.

[5] This is under the assumption that the same level of security is provided by the company to the State and the credit institution.

[6] From the answers to the questionnaire on State guarantees it can be seen that several Member States alredy apply this rule. The percentage covered varies widely from 20 % to 100 %. Nevertheless, a multitude of guarantees cover the full amount of the underlying financial operation, thereby exempting the lending institution from the necessity to assess properly the creditworthiness of the beneficiary in its own interest.

[7] See Competition law in the European Community, Volume IIA, Rules applicable to State aid, published by the Office for Official Publications of the European Communities. Certain texts have also been published in the Official Journal of the European Communities and are available on the Internet.

[8] OJ L 83, 27.3.1999, p. 1.

[9] See Case C-39/94 Syndicat Français de l'Express International (SFEI) and Others v La Poste and Others [1996] ECR I-3547.

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