Minister Bruton Publishes Credit Guarantee Bill and announces appointment of operator for the Credit Guarantee Scheme

11th April, 2012

11th April 2012

The Minister for Jobs, Enterprise and Innovation, Richard Bruton TD, has today [Wednesday] published the Credit Guarantee Bill 2012, and announced the appointment of an operator for the Temporary Partial Credit Guarantee Scheme.

The announcement represents delivery of key Q1 commitments under the Action Plan for Jobs 2012.

The Scheme aims to provide much-needed credit to job-creating SMEs who currently struggle to get finance from the banks. It is intended to address market failure affecting commercially viable businesses in two specific situations – namely, where businesses have insufficient collateral, and where businesses operate in sectors with which the banks are not familiar – and provide a 75% State guarantee to banks against losses on qualifying loans to firms with growth and job creation potential.

Initially, the scheme will facilitate up to €150m of additional lending per annum to SMEs, in addition to the lending targets set for the pillar banks. The Scheme will be demand-led, and take-up and performance will be closely monitored.

For every €150million of additional lending, the Scheme is expected to benefit over 1800 businesses. The cost of the Scheme per €150million of lending is €6.38million. However this does not take into account benefits to the exchequer this lending will bring in terms of increased tax receipts and decreased social welfare payments. When these benefits are taken into account, the net gain to the Exchequer is over €25million per €150million of lending.

The Bill, which was agreed by Government last Tuesday [3rd April 2012], will provide for the establishment of a targeted Temporary Partial Credit Guarantee Scheme, when enacted. The Bill will now be introduced to the Oireachtas, and it is expected that it will be enacted shortly.

The principle measures in the Bill include:
•Empowering the Minister for Jobs, Enterprise and Innovation, to give a 75% loan guarantee
•Procedures for designating a lending institution as a participating lending institution
•Provision for the payment of a 2% premium charge to the Minister by participating SME borrowers,
•The setting of eligibility criteria for borrowers, in line with the European Commission definition of an SME. A qualifying enterprise must not employ more than 250 persons.
•Provision for review of the scheme at any time. The Government have agreed to review the Scheme after one year of operation.
•Assigning a contractor to oversee the operation of the Scheme.

Minister Bruton also announced that he has awarded a contract for the practical oversight, management and operation of the Guarantee Scheme to Maynooth-based company Capita Asset Services following a competitive tendering process.

Capita Asset Services is part of Capita plc. which is a FTSE 100 Company whose prime area of business activity is the provision of Business Process Outsourcing Services. Capita currently employs over 1,200 staff in the Republic of Ireland and almost 1,800 in total on the island of Ireland.

Capita Asset Services plans to operate the Credit Guarantee Scheme from their site located in Maynooth Business Campus, County Kildare.

The design of the Scheme was approved by the Government in November 2011, and was developed by the UK based organisation ‘Capital for Enterprise Limited’ (CFEL) following a previous tendering process in July 2011.

Making the announcement, Minister Bruton said:

“This Government is determined to improve the conditions for businesses with practical measures that can help them to establish, expand, and create jobs. Access to credit remains a key issue for many businesses, and although we as a Government have moved decisively to restructure the banking system and ensure that it provides credit into the economy every year, we must also act to fill gaps where specific market failures exist. Through the Action Plan for Jobs, we will deliver in 2012 a number of measures to fill these gaps and ensure that businesses do not face unnecessary obstacles as they attempt to expand and create the jobs we so badly need.

“The Credit Guarantee Scheme will benefit innovative, job-creating businesses that face obstacles accessing credit because they do not have enough collateral, or because they operate in sectors which the banks are not familiar with. These are the businesses we need to stimulate our jobs recovery, and this Government is determined to make that process easier where we can”.

Notes for Editors

Temporary Partial Credit Guarantee Scheme

The Scheme will facilitate up to €150 million of additional lending to eligible SMEs lending per annum. The precise requirement could be lower or higher than €150 million, depending on SME credit needs and economic conditions over the duration of the Scheme. Take- up of the Scheme will be closely monitored.

The purpose of the scheme is to encourage additional lending to SMEs, not to substitute for conventional lending that will otherwise have taken place. SMEs are thus enabled to develop a positive track record with the lender with the objective of returning to standard commercial credit facilities in time. It will also place Irish SMEs on a competitive level-footing relative to other trading competitors, who often avail of a guarantee in their own countries.

It is widely recognised that the benefits from small business growth accrue more widely than just to the individual company who has accessed the credit through the Guarantee Scheme. There are positive spill over effects into other businesses, activities, and to society as a whole.

For the Lender, the successful performance of the guaranteed lending helps develop experience of and confidence in undertaking that type of lending and provides evidence to inform the refinement of policies in respect of lending in cases of inadequate security or to novel propositions which may otherwise be outside the Lender’s existing risk appetite and parameters.

Portfolio Approach

The State will enter into an agreement with each Lender and will accredit the Lender to participate. The guarantee will be given to each lender for a collection of loans (a portfolio approach) rather than individually (loan-by-loan basis). The choice of loans which make up the portfolio is at the discretion of the lender, provided the borrowers meet the eligibility criteria.

An annual portfolio claim limit will be set for the aggregate value of loans for each lender, thereby capping the State’s exposure. Once a Lender’s default claims have reached their portfolio claim limit, any further losses must be borne by the Lender and will not be eligible to be reclaimed from the State.

Both the borrower and the bank retain exposure in the event of default. The State is exposed only to the portion of the loan guaranteed up to a pre-specified limit.

The Guarantee rate will be 75%.
•Combined with other variables this will deliver an overall risk share of approx. 50:50 between State and Banks over lifetime of Scheme
•Identical to rate available to Northern Ireland Banks participating in UK scheme.

The period for which the Guarantee is provided (as distinct from the term of the loan) is 3 years.

The Scheme provides a Government guarantee to the lender of 75% on individual loans to viable businesses, which is paid to the lender on the unrecovered outstanding balance on a loan in the event of an SME defaulting on the loan repayments. Payment of the outstanding balance is calculated only on the principal of monies borrowed, and not on interest in respect of the loan.

The individual loan transaction between Lender and Borrower is delivered in an almost identical fashion to any other comparable commercial lending transaction between the parties, with the only difference being the supplementary arrangements necessary for payment of the premium.

The proposed design will operate under the De Minimis State Aid rules.

Premium Charge

The State Aid framework sets the requirement that a premium must be charged to the Borrower iin return for the State guarantee. Recipient businesses will be required to pay the Minister (the Guarantor) an annual premium of 2% on the outstanding balance of the loan, assessed and collected annually in advance.

•Primary production in agriculture, horticulture and fisheries are excluded from the scope of the scheme in the light of particular restrictions under the De Minimis State Aid rules and because the specific market failures identified do not apply to a significant extent in these sectors. The food and drinks sectors will be eligible for the Scheme.
•Refinancing of existing debts will be excluded as the purpose of this Scheme is to facilitate additional lending into the economy. Such arrangements will continue to be dealt with by banks under their current lending arrangements. However in cases where new lending is sought along with refinancing, the availability of a guarantee in respect of the new lending element should be of assistance in providing an overall package of support to the business, including consolidation of existing debts.
•Overdrafts will be excluded from the Scheme.
•Property-related activities will be excluded from the Scheme