Supporting SME Funding as part of the COVID-19 economic recovery
Over the past few months, in the face of a global pandemic, Ireland’s health care systems and citizens have been tested by uncertainty and scarcity. As the new Irish coalition government ‘beds in’ and the economy begins to reopen, businesses now face a similar uncertainty and scarcity. But for Ireland’s economy what is the equivalent of flattening the curve? How do we prevent Corona’s economical impact from peaking and spreading?What resources and technologies do we need for the economy to recover?
Political moves afoot
The political vacuum in Ireland, since the general election has to some extent delayed a response to tactically addressing the funding and liquidity crisis facing SME’s in Ireland. While the SME credit guarantee scheme for banks and the COVID-19 wage subsidy scheme have provided an economic ‘stop gap’, as promised in the programme for government, a more comprehensive support package is needed and is expected to be announced in the form of a ‘medium term roadmap’ as part of the July stimulus plan.
Last week in Dublin the “Special Committee on COVID-19 Response”, debated potential SME measures (grants, free / low interest rate loans) as part of a fact finding exercise to inform politicians ahead of the finalisation of the stimulus plan in July.
Meanwhile in Europe not all EU Leaders are in accord and will meet next week to hammer out details of the EU Recovery plan, with the so-called Frugal Four nations Denmark, Austria, the Netherlands and Sweden already opposed to the idea that recovery monies could be dispersed as grants to SME’s, rather than loans.
In both Dublin and Europe both sets of discussions struggle to ‘square the circle’ and ‘walk a fine line’ between providing grant-like capital injections to businesses and debt- like support where companies over time have to repay loans albeit at low interest rates.
It’s clear at both an EC and Irish level, that discussions still have a way to go before a final framework is in place.
From working many years in structured finance, I know that at the best of times SME financing is not easy. Unlike mortgages, or senior CRE loans the number of variables involved in assessing SME credit make it stubbornly resistant to a ‘one size fits all’ approach, compounding the challenge facing politicians wanting to kickstart the economy, while minimising costs and losses they will bear.
All of which is exercising the minds of senior civil servants, politicians and interest groups alike as the government seeks to ‘right the economic ship’. A joined up approach that links up an Irish domestic SME financing support framework with funding supports and guarantees expected as part of the EC Recovery Plan, is what the country needs.
The Irish central bank estimates the country’s small and medium-sized enterprises (SMEs) will need funding of €5.7 billion to cover costs (although some contributors at last week’s committee think that number will be higher), recognising the important role they play in terms of driving economic growth and employment. In May the government pledged a €6.5bn package of new support to help businesses in the gradual recovery phase. The supports include a €2bn credit guarantee scheme that will require new legislation to implement, and up to €2bn of equity and other investment available to medium and larger companies through re-purposing and changing the role of the Irish Strategic Investment Fund or ISIF.
Now that an Irish coalition government is finally in place, it will face pressure to pass the legislation required to put into action the extended SME Credit Guarantee Scheme that was proposed at the start of May. The scheme offers guaranteed loans (80%) of between €10,000 and €1 million for terms of up to seven years. As it stands, the loans will be available through the Bank of Ireland, AIB and Ulster bank.
The Irish government is also arguing for a change in the way funds will be distributed to EU members from the recovery package. The current proposal is based on recent economic growth and employment which would reduce the amount available to Ireland due to its strong performance over the last few years.
How will SMEs receive all the funding they need on top of the government’s pledge?
As discussed, SMEs will be one of the main focal points of the upcoming stimulus plan. The plan will include a new SME taskforce to help small and medium businesses to recover from the losses they have seen due to COVID-19 as well as a plan to make the public procurement process more accessible to SMEs. Currently, Irish SMEs lack options when it comes to accessing finance.
The plan post-COVID is likely to outline the enactment of legislation that will make cheaper financing options available to SMEs.
The Irish government currently relies on traditional channels to distribute urgent funding to SMEs. But what if SMEs had a funding framework that would encourage institutional investment in Irish SMEs while lowering the cost of capital? The SBCI, or regional bodies like the European Investment Fund, or European Investment Bank, could then invest in the collateralised loans to boost liquidity. The US Treasury used a similar mechanism, known as the Troubled Asset Relief Program, during the 2008 financial crisis. Converting loans into fungible securities frees up money on a lender’s balance sheet that they can deploy elsewhere. This flexibility is especially important for Ireland right now.
CrossLend notes have ISIN’s and can therefore be sold on a bi-lateral basis, giving qualified investors an exit strategy where risks can be distributed efficiently within the financial ecosystem, matching the respective risk taking capacity. With interest rates at historic lows, and once risk premia have dissipated, demand should be high from institutional investors such as pension funds and insurance companies with liabilities to meet. A bonus would be the introduction of Irish SME debt as an asset class to institutional investors and the potential development of a new source of funding over the medium to long term.
As the French novelist Victor Hugo wrote: ‘Nothing is stronger than an idea whose time has come’. As countries around the world try to restart their economies after an unprecedented period of lockdown, the Irish government has an opportunity to lead the way.
Securitisation: active management option to boost Luxembourg hub
The overhaul of Luxembourg’s securitisation laws introduced a number of changes, notably allowing for active management and a broader [...]
A fast-growing trade finance platform, Lenderwize specialises in invoice financing in the digital economy. Currently its platform provides its [...]
Digital lending emerges as an important sub-segment of private debt
Amid increasing breadth within the private debt asset class, specialised investors can allocate capital to sub segments in a bid [...]