Project Birch is the UK Government's new emergency assistance plan under which public funding would be made available to strategically important, large companies across all sectors in the UK with the objective of ensuring these survive the financial damage caused by the COVID-19 pandemic. The UK Government has indicated that it is prepared to assist large companies "in exceptional circumstances" and as a "last resort" where an otherwise viable company has "exhausted all options" and its failure would "disproportionately harm the UK economy".
UK's previous initiatives to support the economy
The UK Government has already launched a series of public funded initiatives to provide support to companies during the pandemic, including loan schemes such as the Bank of England’s Covid Corporate Financing Facility, the Coronavirus Large Business Interruption Loan Scheme or the Bounce Back Loan Scheme; deferring of tax payments and business rates relief such as the Expanded Retail Discount; and the Coronavirus Job Retention "Furlough" Scheme, which allows workers to receive 80% of their salary paid by the Government.
However, there are increasing concerns that a number of large companies are still in difficulty even after making use of these options and require further, urgent, public support. Car maker Jaguar Land Rover is reportedly in talks with the UK Government in an attempt to secure a £1 billion loan after sales fell by 31% in the three months to the end of March 2020, a situation further exacerbated by the lockdown. It is reported aviation companies, including Virgin Atlantic, have asked the UK Government for a "long-term investment facility" to help support supply chains. It is highly likely that other businesses with a high cost base have also approached the Government for support at this difficult time.
Types of public funded support available under Project Birch
In an editorial in the Telegraph it was reported that "Project Birch could see the state becoming the “lender of last resort”, initially offering loans on a preferential basis that would see it paid ahead of other creditors. Longer term, it could see the Government take equity stakes in businesses in the hope of a future payout when they are sold once the business recovers."
In a separate article in the same paper it was reported "if Project Birch does come to fruition, then the top contenders are likely to be airlines and aerospace companies whose fates are intertwined along with manufacturers of complex products whose long supply chains extend deep into the economy, and primary manufacturers such as steel businesses".
It seems highly likely that similar support will need to be extended to other sectors with high cost bases, including airports and manufacturers. Ultimately, the key eligibility factor for the Government will be whether the failure of the firm in question would "disproportionately harm the economy". Although it is not yet clear how this would be assessed, any large scale redundancy programme will harm the economy, but the effect is significantly magnified if a "prime" manufacturer suffers, as the effects will reverberate down through the complex supply chains that rely on the same.
The idea of the Government taking equity in businesses was raised earlier in the pandemic and holds the attraction of a future payout when sold once the business recovers. Such a policy would mark a significant change in approach for the UK Government, which has predominantly relied on grant and loan schemes to support companies and jobs.
There is of course precedent for significant interventions of the type contemplated from the banking crisis a decade ago, which saw the State take significant equity stakes in a number of leading banks.
State aid considerations
Although many of the details of Project Birch have yet to be revealed, it is clear that such significant State funded financial intervention will require careful planning to ensure compliance with State aid law. While the UK remains in the Brexit transition period (currently due to end on 31 December 2020) this remains EU State aid law. A spokesperson for the Treasury has stated: "as the British public would expect, we are putting in place sensible contingency planning and any such support would be on terms that protect the taxpayer."
Where a State loan is provided with preferential rates, this is normally considered to constitute State aid (with the aid element being the difference between the market rate interest and the preferential rate over the lifetime of the loan). Equally, buying a stake in a failing business in order to help it survive would also normally fall within the definition of a State aid if the terms of the transaction were outside what an ordinary market investor might reasonably be expected to contemplate.
If however (for instance), the Government could prove that an ordinary market investor might reasonably invest on the same terms and in the same market conditions, then this would exclude the presence of State aid under the Market Economy Investor Principle. Unfortunately this seems unlikely and difficult to prove in the present circumstances, given that the purpose of the investment would be to support a company in at least temporary distress. Therefore, it is likely that the Government will need to consider compatible State aid options.
Temporary Framework: Recapitalisation aid
On Friday 8 May 2020, the European Commission announced a second amendment to the Temporary Framework, allowing State funded equity and part-equity (hybrid) investments into large businesses facing difficulties because of the crisis, but which were fundamentally sound as at 31 December 2019.
In order to prevent such interventions from distorting competition in the market in the long term, the Temporary Framework sets out a number of safeguarding conditions for granting the aid and for the behaviour of the companies benefiting from the public funding. These cover both their activity in the market and their governance following the award, and include limitations on dividends and acquisitions. For more detailed information on these conditions, click here.
At this time the UK does not have a State aid scheme which can make use of these new options under the Temporary Framework. However Member States can quickly notify recapitalisation schemes (ie. a general plan and set of principles from which to apply such measures in their territory) or individual aid measures. When approving a scheme, the Commission will request the separate notification of aid to any company where the State investment is above €250 million for individual assessment. In designing such schemes, the Commission has encouraged Member States to align with policy objectives such as the green transition and digital transformation of their economies or the prevention of fraud, tax evasion or aggressive tax avoidance (but has not mandated such). Member States also have certain obligations to publish details on recapitalisation aid for transparency.
Temporary Framework: Subordinated debt
In addition to recapitalisation aid, the second amendment to the Temporary Framework also elaborates on the possibility of aid in the form of subsidised interest rates on loans, to include subordinated debt on favourable terms. This concerns debt instruments that are subordinated to ordinary senior creditors in case of insolvency proceedings, and could provide State aid cover for the Government's initial measure of providing preferential loans. Such aid must fulfil the respective conditions under section 3.3 of the Temporary Framework, concerning subsidised loans.
Temporary Framework: Aid in the form of subsidised interest rates for loans
Section 3.3 of the Temporary Framework states that the Commission considers State aid in the form of subsidies to public loans compatible with the internal market on the basis of Article 107(3)(b) TFEU provided the a series of conditions are met. For example:
- loans may be granted at reduced interest rates which are at least equal to the base rate applicable on 1 January 2020, plus the credit risk margins as set-out in section 3.3 of the Temporary Framework;
- as an alternative, Member States may notify schemes, considering the credit risk margins as basis, but whereby maturity, pricing and guarantee coverage can be modulated (e.g. lower guarantee coverage offsetting a longer maturity);
- loan contracts must be signed by 31 December 2020 and are limited to a maximum of 6 years. There are also limitations on loans with a maturity beyond 31 December 2020;
- loans may relate to both investment and working capital needs;
- loans may only be granted to undertakings that are/ were not in difficulty (within the meaning of the General Block Exemption Regulation) on 31 December 2019 or to those that were not in difficulty on 31 December 2019 faced difficulties or entered into difficulties thereafter as a result of COVID-19.
Rescue and Restructuring State aid Guidelines
As an alternative, the Rescue and Restructuring State aid Guidelines provide an option for the UK Government to notify the aid to the European Commission in order to meet acute liquidity needs and support undertakings facing financial difficulties. This option predates the COVID-19 crisis and is how the many cases of government support for large banks across Europe were handled at the time of the financial crisis of 2008, for example, Northern Rock. Given the administration involved, this tends to be reserved for the largest and/ or deemed most strategically important businesses. It also includes a "one time last time" provision that is designed to prevent any one undertaking making use of this sort of a rescue more than once.
Given the severe impact that the COVID-19 pandemic has left on the UK economy, it is logical that the UK Government will be exploring all options to provide support to strategically important companies, whose failure would "disproportionately harm the economy". Indeed, similar plans were already put in place in the event of a no deal Brexit in the form of Operation Kingfisher. However putting such initiatives in place requires careful consideration in order to comply with State aid law, especially given that some companies have already declared that they will submit State aid complaints and litigate if they see rivals receive apparent bail outs of any sort. We have experience of designing measures to meet the relevant rules and are therefore on hand to provide support to ensure awards of State aid meet the relevant rules.
DWF Law LLP has a considerable depth of expertise in State aid law matters. We are able to draw upon a team of leading experts, in our UK, Brussels and other international offices, who have extensive experience in this area, including working within the UK Government on high profile funding matters, defending projects from recovery and designing projects to meet the rules.