Recapitalisation measures added to the Serbian state aid framework for COVID-19 crisis

Since the beginning of the COVID-19 crisis, the Government of Serbia has adopted several state aid measures aimed at helping the economic entities preserve jobs and liquidity. In this respect, the Government took the lead from the European Commission and its measures adopted within the scope of the Temporary Framework to support the economy in the context of the coronavirus outbreak. The Temporary Framework is designed to remedy a serious disturbance in the economy on the basis of Article 107(3)(b) of the Treaty on the Functioning of the European Union. It introduces new types of compatible aid to complement the possibilities already available to Member States in line with EU State aid rules.

The Temporary Framework, initially adopted on 19 March 2020, was amended four times, last time on 13 October 2020 to extend all new measures until 30 June 2021 and the section on recapitalisation support until 30 September 2021, and introduce additional measures, such as support for uncovered fixed costs of eligible companies, rules on exit of the state from state-owned companies, and extension of the temporary waiver of the prohibition of providing state supported export-credit insurance for marketable risks.

In line with the Temporary Framework, the Serbian Government adopted on 10 April 2020 the Decree on the conditions and the criteria for state aid compatibility for the purpose of removal of adverse consequences caused by the epidemic of infectious disease COVID-19, and the Decree on the conditions and the criteria for state aid compatibility for the purpose of removal of serious disturbance in the economy caused by the epidemic of infectious disease COVID-19. Both decrees were amended on 22 October 2020 to reflect the four amendments to the Temporary Framework. The Government also adopted the Decree on conditions and criteria for state aid compatibility through recapitalisation of undertakings for the purpose of removal of adverse consequences caused by the epidemic of infectious disease COVID-19.

Recapitalisation measures for undertakings

Recapitalisation measures under the Recapitalisation Decree allow the State to take stakes in non-financial companies affected by the outbreak by means of recapitalisation or subordinated debt instruments, in order to prevent their market exit.

Recapitalisation can only be granted to beneficiaries which were not in difficulty before the start of the crisis (31 December 2019) and would go out of business or face serious difficulty in maintaining operations absent the measure. Exceptionally, micro or small businesses which were in difficulties on 31 December 2019 can be recapitalized by the state, provided that they are not subject to bankruptcy proceedings or beneficiaries of rescue or restructuring aid. A further condition is that recapitalisation has also to be in the “state interest”. The Recapitalisation Decree gives some examples of ‘state interest’, such as prevention of social hardship and significant loss of employment, prevention of the exit of an innovative or systemically important company from the market, tackling the risk of discontinuation of the supply of important goods or services, etc. A company is not eligible for recapitalization support if it there is financing available on the market on affordable terms. Furthermore, recapitalisation support is available only if no other horizontal measure (sector-agnostic measure) is sufficient to allow the undertaking to remain viable. If the aid to individual beneficiary exceeds EUR 250 million, additional criteria apply related to the necessity, adequacy, and proportionality of state aid. A beneficiary wishing to receive recapitalization aid must submit a substantiated request to a grantor and the grantor must notify the request to the State Aid Control Commission.

Recapitalisation by the state can take the form of any of the following measures or a combination thereof:

  1. equity instruments, such as the issuance of new common or preferred shares, or any other instrument giving right to a direct stake in the capital; or
  2. hybrid instruments, such as the right to participate in the profits through silent partnership interest that does not give management rights, convertible secured or unsecured bonds, warranty obligations.

The aggregate amount of the recapitalisation aid and any other COVID-19-related aid must not go beyond restoring the capital structure of the beneficiary that was in place before 31 December 2019 (putative date of the outbreak).

Redemption of recapitalisation should include the entire amount of the State’s investment at the end of the investment period plus the amount of appropriate renumeration to the state. The amount of remuneration to the state for its investment is gradually increased in order to converge with market prices, with the aim of incentivizing the beneficiary and its other shareholders to redeem the state recapitalisation measure as soon as possible and thus minimise the risk of distortions of competition. Each recapitalisation measure must explicitly provide for such a step-up mechanism. The increase in remuneration can take the form of additional shares granted to the State or another mechanism, and must correspond to a minimum of 10% of the State’s equity injection that has not been repaid, for each of the following situations:

  1. if the State has not sold at least 40% of its equity participation resulting from the equity injection within four years after the granting of state aid through recapitalisation (five years for beneficiary which is not a publicly listed company); and
  2. if the State has not sold in full its equity participation resulting from the State’s equity injection six years after the granting of state aid through recapitalisation (seven years for beneficiary which is not a publicly listed company).

Grantors may apply alternative renumeration mechanisms, provided they lead to the same outcome with regard to the incentivization of the State exit and have the same overall impact on the State’s remuneration.

When designing hybrid recapitalisation instruments, such as convertible secured or unsecured bonds, warranty obligations or silent partnerships, grantors must take into account especially the characteristics of the chosen instrument, its level of subordination, risk, payment modalities, exit incentives and mechanisms, as well as the reference interest rate. The Decree sets out requirements related to minimum remuneration rates until conversion of hybrid instruments into equity instruments, minimum conversion rates, and mandatory step-up mechanisms to incentivise beneficiaries to buy back the State’s capital investment.

The recapitalisation framework also contains the rules related to governance and prevention of undue distortions of competition related to the State participation in the capital of private companies. When a company with significant market power on at least one relevant market requires recapitalisation exceeding EUR 250 million, grantor must propose additional measures to preserve effective competition in the affected, such as structural or behavioural measures. All beneficiaries must refrain from aggressive commercial expansion financed by State aid, and from excessive business risks in general. In addition to that, the beneficiaries are subject to the following limitations:

  1. ban on advertising the receipt of the recapitalisation support;
  2. Except with respect to micro businesses and SMEs, ban on acquisitions of more than 10% of a stake in competitors or other operators in the same line of business, including upstream or downstream operation, as long as at least 75% of the State’s recapitalisation measures are not redeemed. Exceptionally, beneficiary may acquire more than 10% of a stake in an operator upstream or downstream to its area of operation, if the acquisition is necessary to maintain the beneficiary’s viability, and subject to a prior approval of the grantor;
  3. Ban on cross-subsidisation of the economic activities of integrated undertakings that were in difficulty on 31 December 2019;
  4. Ban on distribution of dividends, profit, remuneration increases and bonuses, and ban on buy-back of shares other than those acquired by State through recapitalisation. As long as at least 75% of the State’s recapitalisation measures remains unredeemed: (i) the remuneration of the beneficiary’s management cannot exceed fixed part of their renumeration on 31 December 2019, and (ii) beneficiaries may not pay bonuses or other variable or comparable remunerations to its employees.

Beneficiaries, other than micro businesses and SMEs that have received recapitalisation of more than 25% of equity at the moment of intervention, must demonstrate a credible exit strategy for the State, unless the State’s intervention is reduced below the level of 25% of equity within 12 months from the date of the granting of the aid.

The Recapitalisation Decree also contains certain exceptions from, and modifications of, the foregoing limitations if the State was an existing shareholder in the beneficiary prior to the granting of recapitalisation measures.

All beneficiaries are subject to strictly prescribed annual reporting obligations on the implementation of the repayment schedule and compliance with the conditions from the Recapitalisation Decree.

If the State capital acquired through recapitalisation is not reduced below 15% of the beneficiary’s equity within six years (seven years in case of non-listed companies, micro businesses, and SMEs) from the recapitalisation, a restructuring plan in accordance with the State Aid Control Act must be notified to the State Aid Control Commission for approval. Such restructuring plan must include the beneficiary’s obligations regarding the fulfilment of national goals related to green and digital transformation, and a plan for the exit of the State from the company without distortion of competition.

Taking into account all the foregoing restrictions, the undertakings concerned will certainly explore all other options available under the state aid framework before applying for recapitalisation aid.

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