Securing and Procuring Liquidity

In the current economic situation, many companies have unforeseen liquidity requirements that need to be resolved in the short term. Depending on the actual circumstances and requirements, various possibilities of procuring coverage come into consideration.

In addition to the capital market, depending on the size and age of the company these include KfW Coronavirus Aid [KfW Corona Hilfen] (until 31 December 2020) and the Economic Stabilization Fund [Wirtschaftsstabilisierungsfonds – WSF].  Details of the support measures of the federal and federal state governments can be found here). The prerequisite for this aid is, in principle, that the applicant did not “run into difficulties” according to the EU definition by 31 December 2019. Larger loans also require a liquidity plan. Based on the company's financial circumstances as of 31 December 2019, the plan must demonstrate that the company is capable of bearing the loans to be taken out to cover the crisis and that it will also continue to be viable post-crisis beyond 31 December 2020 - all this on the assumption that the overall economic situation will return to normal after three months at the latest. Moreover, the majority of these state support measures do not allow for the distribution of profits and dividends.

A.    KfW Special Programs

The key points of the various KfW programs under consideration are as follows.

1. KfW Instant Loans

• Loan volume of up to EUR 800,000 for investments and working capital
• For small and medium-sized enterprises that have been active on the market since at least 1 January 2019 and have made a profit on average over the years 2017 - 2019
• No credit risk assessment
• 100% liability waiver by the KfW for the disbursing bank
• Term 10 years

2. KfW participation in Syndicated Loans

• Loans for investments and working capital
• For medium-sized and large companies 
• The KfW participates on the commercial terms set by the financing partner and assumes 80% of the risk (usually pari passu, in the case of highly leveraged loans also on a "last in, first out" basis), but limited to a maximum of 50% of the total debt 
• KfW’s risk share at least EUR 25 million, limited to: 
      – 25% of the annual turnover in 2019 or 
      – twice the wage costs of 2019, or  
      – the current financing requirements for the next 12 months 
• Maximum term 6 years
• No profit and dividend distributions

3. KfW Unternehmerkredit

• Loan volume of up to EUR 100 million for investments and working capital
• For companies that have been on the market for more than 5 years and have a maximum annual turnover of EUR 2 billion
• The KfW assumes 80% of the risk (or up to 90% for working capital loans of no more than EUR 200 million)
• Maximum credit sum limited to:  
      – 25% of the annual turnover in 2019 or 
      – twice the wage costs of 2019, or
      – the current financing requirements for the next 12 months in case of large enterprises and 18 months for small and medium-sized enterprises, or   
      – (for loans exceeding EUR 25 million) to 50% of the company's total debt   
• Maximum term 5 years
• No risk assessment undertaken by the KfW for loans up to EUR 3 million 
• Simplified risk assessment for loans up to EUR 10 million
• No profit and dividend distributions

4. KfW Start-up Loans Universal

• Loan volume of up to EUR 100 million for investments and working capital
• For founders, freelancers and companies that have been on the market for less than 5 years and have a maximum annual turnover of EUR 2 billion 
• The KfW assumes 80% to 90% of the risk 
• Maximum loan amount, term and risk assessment requirements are the same as for the KfW Entrepreneur Loan
• No profit and dividend distributions

B.   Bridging Loan

Until 31 August 2020, small and medium-sized enterprises can apply for bridging aid from the federal government for up to 3 months and a maximum of EUR 150,000. The prerequisite is that their turnover in April and May 2020 was reduced by at least 60% compared to April and May 2019. Eligible for funding are ongoing, contractually based or officially stipulated fixed costs that cannot be changed unilaterally during the funding period, and the amount of the funding depends on the extent of the drop in sales, which must be substantiated with the help of a tax consultant or auditor.

C.   Economic Stabilization Fund (“WSF”)

Insofar as no other financing options are available, companies in the real economy can apply for funds from the Economic Stabilization Fund [Wirtschaftsstabilisierungsfonds – WSF] if their status as a going concern is threatened and this would have a significant impact on the economic location or the labor market in Germany and if they have met at least two of the following three criteria in the last two financially concluded business years prior to 1 January 2020:

• Balance sheet total of more than EUR 43 million
• Revenues of more than EUR 50 million and/or
• An annual average of more than 249 employees 

In addition, the fund is also targeted in individual cases at companies that are active in one of the sectors listed in § 55 German Foreign Trade and Payments Ordinance [Außenwirtschaftsverordnung – AWV] or that are of comparable importance for security or the economy or that have been valued as start-ups since 1 January 2017 in at least one completed financing round by private investors at a corporate value of at least EUR 50 million.

Measures under the WSF fall into two categories: federal guarantees to secure loans and capital market products and recapitalizations to directly strengthen equity. To the extent the volume does not exceed EUR 100 million, standardized conditions apply; above this amount, individual structures are applied.

The measure is granted differently, depending on its type and volume:

• Decisions on guarantees of up to EUR 100 million are taken by the KfW 
• Decisions on guarantees with a volume of between EUR 100 million and EUR 500 million and on recapitalizations of up to EUR 200 million are taken by mutual agreement between the German Federal Ministry for Economic Affairs and Energy [Bundesministerium für Wirtschaft und Energie – BMWi] and the German Federal Ministry of Finance [Bundesfinanzministerium – BMF]
• Decisions concerning all measures going beyond this shall be taken by an inter-ministerial WSF committee

Besides a prohibition of distributions, the stabilization measures are also subject to further restrictive conditions:

• No increase in the management’s remuneration compared with 31 December 2019 until at least 75% of the measure has been repaid.
• No payment of bonuses or other variable compensation to members of governing bodies and managers and no severance payments that are not legally required
• No repurchase of shares
• No debt rescheduling
• No regular repayments on bank loans until the end of 2021
• Existing credit lines are to be fixed until at least the end of 2022
• A shareholder contribution is generally required
• (in the case of silent partnerships) no aggressive expansion strategy

D.    Other Liquidity

In view of the restrictions on dividend payments, remuneration, business strategy, etc. associated with state support measures, many companies will try to secure liquidity elsewhere as far as possible, even if the financing costs are higher.

1. Existing credit lines

Existing and not fully utilized credit lines can be drawn upon to procure liquidity (possibly as a precautionary measure). However, many companies affected by the pandemic will have already drawn available credit lines at the beginning of the crisis, with the result that the room for manoeuvre will often be correspondingly limited.

2. New financing 

Companies with sufficient (remaining) creditworthiness can continue to use the capital market for at least part of their financing requirements. Bonds, loans from institutional lenders and debt funds, and also promissory notes (possibly also "green" or "ESG-linked") can be used (possibly as a precautionary measure) to provide capital to help overcome the crisis. The crisis caused by the fight against the pandemic has so far not been a financial crisis, but a crisis of the real economy. Liquidity is available on the market, even though global corporate debt had already reached a peak of US$ 8.3 trillion in 2019; this year, a further increase of US$ 1 trillion is forecast, not least because of Corona.[1]

3. Sale of receivables, ABL, federal state guarantees

For companies in the real economy, the sale of receivables (e.g. through factoring or reverse factoring) can be a means of improving cash flow. This naturally presupposes that corresponding receivables are generated despite the corona crisis. For companies with substantial machinery or vehicle fleets, "asset-backed" financing such as a sale and leaseback can be a way of obtaining liquidity. Federal state guarantees may also come into consideration. 

In principle, all of these measures can also be used by companies that had already run into difficulty on 31 December 2019 and therefore do not meet the conditions for KfW loans.

4. Equity capital

As opposed to burdening the balance sheet through additional financial liabilities, it is also possible under certain circumstances to apply for subsidies as equity capital, for example as silent partnerships. Small businesses can apply for up to EUR 75,000 from the Micro-Mezzanine Fund, for example. Higher amounts are also possible (up to EUR 800,000, depending on the federal state). 

5. Waiver

In the case of existing credit relationships, a breach of contract, for example due to non-compliance with financial ratios, might need to be prevented; if such a breach is imminent due to falling turnover, this should be discussed with the lenders as early as possible. A suspension of the tests for a certain period of time ("financial covenant holiday") or a temporary increase of the affected ratios can remedy this situation. 

6. Adaptation of the existing financing structure

Whatever the nature of the additional financial resources, they must fit into the existing financing and collateral structure of the company in question. If existing credit documents restrict or prohibit new borrowings or the provision of collateral, an agreement must be reached with the lenders concerned. This also applies to loans from the KfW. The WSF also stipulates that repayments on existing bank loans must be suspended at least until the end of 2021 and existing credit lines must be fixed at least until the end of 2022, which in each case requires the approval of the existing lenders.

E.    Outlook

A complete global opening after the crisis is currently not in sight. In many areas, the economy is still rather sluggish and in some cases is not even moving. Although the suspension of the obligation to file for insolvency has been extended in some cases, a wave of insolvencies is also expected in the autumn, which in turn will have a negative impact on the customers and suppliers of the companies affected. The topic of liquidity procurement and preservation therefore remains topical. Which of the various measures comes into consideration (whether individually or in combination - in addition to the measures listed above, there are a number of other potential possibilities) depends on the individual circumstances of the company concerned. We would be pleased to advise you.

[1] Janus Henderson Corporate Debt Index Edition 1 July 2020

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