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German state expected to support sponsor-backed, leveraged issuers in coronavirus stimulus package

Private equity-backed and highly leveraged companies are expected to be included in the German government package of measures to mitigate the economic impact of the coronavirus outbreak, according to three German bankers.

The third pillar of the German government’s four-pillar plan is “liquidity aid for companies through additional loan facilities”, which will be provided by the state-owned development bank Kreditanstalt für Widerbau (KfW).

It will be provided through KfW’s existing loan programmes and at least two new programmes, the details of which are not yet announced, according to its website.

In the UK, the Bank of England published details of the Covid Corporate Financing Facility on 17 March. Law firm Allen & Overy issued an announcement explaining that their interpretation of this guidance is that it makes the funding inaccessible for companies with leveraged financing in place.

“We’ve been in discussions with KfW and we are not expecting an exclusion for private equity-backed or leveraged companies,” said the first banker.

“Everyone’s eyes are firmly glued to the KfW website but the guidance we’ve received so far is that there won’t be an exclusion specific to private equity or leverage. The question still outstanding is whether there could be a minimum rating,” the second banker said.

Private equity firms are encouraging their portfolio companies to look into all the options and make full use of the credit facilities already available to them, all three bankers and two executives at mid-cap PE firms said.

“I don’t think maxing out the revolver is even seen as aggressive now. Maybe a couple of weeks ago it was but now the state is guaranteeing 80% of it so I think the banks are happy for them to do it,” said one of the PE executives, referring to one of the already active programmes, the KfW Unternehmerkredit or “Entrepreneur Loan”. It states: “Assumption of risk (liability waivers) of up to 80% for the on-lending financing partners (usually the regular banks) for working capital loans with a volume of lending of up to EUR 200m.”

Kurzarbeit

The first pillar of the government response is: increasing the flexibility of short-time working allowance (Kurzarbeitergeld). This programme allows companies to temporarily lay off staff or put them on part time schedules while the state picks up their full time wages.

This measure was previously expanded following the financial crisis and is therefore well known to corporate Germany and has been quickly adopted again, according to the third source.

However, the first banker questioned whether the measures went far enough, particularly for companies in the worst affected sectors. “I don’t think credit is the correct solution for smaller companies, especially in sectors like travel and retail where they’re operating on tiny margins anyway. Kurzarbeit is useful and tax relief is great but in some situations it’s going to have to be more drastic than that,” they said.

by Oscar Geen in London

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