Strengthen the solvency of SMEs in Europe
AFME (Association for Financial Markets in Europe) released the report "Introducing a New Hybrid Recapitalization Instrument for Smaller EU Corporates", calling for a market solution to provide capital and funding to SMEs, to prevent business defaults and to assure that smaller unlisted companies and midcaps, with the potential to drive economic growth, have financial support and access to capital markets to develop their business projects.
The main characteristics of the new hybrid recapitalization instrument for smaller EU corporates proposed by AFME are as follows:
- A European standardized product or a national tailored one: Both are feasible. Ideally, it should be a hybrid equity-accounted structured product (for instance subordinated debt with no maturity). However, if that isn’t possible due to legal issues, national initiatives adapted to the specific regulation should be promoted, too.
- Public sector support: Necessary to attract private investors in the form of financial guarantees or sized on a pool-specific basis. The instrument could be supported through an instrument such as the European Investment Fund’s Pan-European Guarantee Fund, which is targeted toward COVID-19 support for SMEs and mid-caps; or through “the InvestEU fund”, a wide EU support for SMEs that can also be leveraged by the EU recovery and resilience funds.
- Specific tax features: The instrument must be considered debt for tax purposes, to achieve tax deductibility and avoid periodic interest to be subject to any tax withholding or deduction at source. Additionally, it won’t have voting rights as SMEs do not wish to give up control of their business and they are willing to pay a premium not to dilute their stake. The all in all cost for issuers is estimated between 5%-10%, according to AFME, less than the cost of “traditional” equity with voting rights.