It is too early to tell how many of Spain's small-to-midsize companies the €11 billion in direct aid that the Spanish government has pledged to the private sector will save from collapse. The persistence of the pandemic and the delay in the economic recovery has left many companies vulnerable to failure due to a combination of high debt and weak earnings, as a recent Bank of Spain study confirmed. Most of these companies operate in sectors where social-distancing measures have impinged most on earnings, namely, the tourism and hospitality sectors, as well as the auto, and, to a lesser extent, retail sectors. In S&P Global Ratings' opinion, the evolution of the economic situation both in Spain and abroad will determine whether more support will be needed. Yet for now, the support package, amounting to 1.1% of GDP, is welcome, both among the corporate recipients, and the banks, as it will contain their credit losses.

In establishing the new support package, the Spanish government has shifted its priority from helping companies cope with liquidity shortages, to ensuring that they remain afloat, particularly those whose activities social-distancing measures continue to disrupt. A new approach was needed, not least because having a viable corporate sector with the capacity to invest is key to the economic recovery. The package takes the form of a net transfer from the public to the private sectors. The government will not receive any assets or have any claims on the companies that receive the funds, and the funds will be booked as public expenditure.

The Nature Of The Fiscal Support Has Moved From Implicit And Temporary To Explicit And Permanent

The fiscal measures that the Spanish government launched last spring to shield companies from the economic blow of the pandemic focused on implicit liquidity support, in the form of guarantees on new loans, and temporary support, in the form of tax deferrals and short-term work schemes. Its aim was to provide liquidity assistance during what it expected to be a painful but brief economic shock. However, as Spain grapples with a third wave of the pandemic, and as many companies hold more debt than they can realistically afford due to declining revenues, the government has had to shift to providing explicit and permanent support.

The new €11 billion support package focuses on small-to-midsize enterprises (SMEs) and regions where businesses have suffered the most from the pandemic. It aims to help viable companies bolster their weakened financial structures through direct transfers, loan write-downs, and equity or quasi-equity injections. The bulk of the support--€7 billion of the total €11 billion--will take the form of direct grants to companies or entrepreneurs operating in sectors that the pandemic has hit particularly hard and that have experienced a fall in revenues of over 30% during 2020. The aid will cover a 20%-40% share of the lost revenues. SMEs will likely be the main beneficiaries, as the support cannot exceed €200,000 per beneficiary. Geographically, the Balearic and Canary Islands will receive a larger share of the grants, as these are the two Spanish regions most affected by the pandemic due to the importance of tourism to their local economies. Their GDP fell by 27% and 20%, respectively, in 2020, compared to a reported 11% contraction in the Spanish economy as a whole.

Complementing the measures above will be a €1 billion recapitalization fund run by the government-owned funding institution Cofides. This will provide temporary assistance to SMEs, most likely in the form of equity or quasi-equity, although debt is also a possibility.

Spanish Banks Can Afford The Limited Restructuring Of Existing ICO-Guaranteed Loans That The Plan Contemplates

In terms of its size, the €3 billion share of the package that the government has allocated to help companies restructure their existing loans guaranteed by the Instituto de Credito Oficial (ICO) is the least relevant part of the package. Yet it received close attention and sparked intense market debate in the weeks prior to the launch of the package, due to concerns about the potential effects on the banking system. In its final form, however, we don't believe that the restructuring envisaged will be disruptive for the Spanish banking sector, and even if the restructuring ends up in principal write-downs, the burden on banks will be manageable.

Assuming the government bears 70% of the losses and the banks 30%, the banks would have to assume €1.3 billion in credit losses. This is perfectly affordable for them thanks to the provisioning they undertook last year (€8 billion up to September 2020), and the fact that they are likely to continue provisioning in 2021. In turn, the Spanish government, as guarantor, will just recognize some of the costs it is liable for earlier than it planned. Moreover, it is more likely that the restructuring won't happen until 2022, once the extended grace periods for principal payments end.

While the government will make up to €3 billion available to facilitate the restructuring of ICO-guaranteed loans, as creditors, the banks will opine on the vulnerability of the borrowers and on whether there is a need to restructure their debt to ensure their long-term viability. The banks will also lead the negotiations with borrowers, thereby retaining full control of the decision-making process.

Furthermore, the use of the €3 billion facility to reduce the principal amount of the loans, that is, for partial write-offs, will be a last resort. Before getting to that point, borrowers should extend the maturity of their ICO-guaranteed loans for an additional three years, up to a maximum of eight years, and request another 12-month extension of the grace period. Additionally, banks and borrowers could negotiate the conversion of all or part of their guaranteed loans into quasi-equity participating loans, while maintaining the guarantee on the same terms. Only if these two alternatives are insufficient will debt write-offs be contemplated.

Spain is one of the European countries that has made extensive use of government guarantee schemes during the pandemic. As of end-February 2021, 65% of the €140 billion in approved guarantees had been drawn, resulting in total guaranteed lending of €120.8 billion, or about 21% of the stock of the Spanish banking sector's corporate lending. Spain's greater use of guarantees than other countries probably has to do with the fact that the banks could use the guarantee schemes to back their existing credit exposures. Indeed, the actual increase in the stock of Spanish banks' loans to nonfinancial companies only grew by €40 billion in 2020, just one-third of the €120.8 billion in total guaranteed lending. In net terms, discounting the liquidity that companies deposited back in the banks, the amount would be even lower.