i)

They already exist and are regulated in different European countries, making them a secure instrument for Micro, Small and Medium-Sized Enterprises (MSMEs);

ii)

They are an agile long-term solution, easy to implement, for firms of all sizes, compared to more sophisticated alternatives such as bonds or shares;

iii)

They are a product compatible with family businesses, which account for 60 % of EU firms, as usually these families wish to retain control of their company.

i)

SMEs’ dependency on banks remains high in the Eurozone, with 70 % of external financing being reliant on banks, against 40 % in the US (8).

ii)

63 % of large firms report using funds for fixed investment, compared with 38 % of SMEs, and only 28 % of micro firms (9).

i)

Close the aforementioned financing shortfall in long-term financing to reinforce balance sheets and support investment;

ii)

Provide family businesses with an instrument to boost their long-term investments without giving up control of their firm, as studies show that they are willing to distribute a share of profits and/or issue hybrid instruments (10);

iii)

Be compatible with the practices of the main financial providers (commercial banks, asset managers, the public sector) so it can reach a majority of companies;

iv)

Help to attract institutional investors, such as insurance companies and pension funds, subject to the PRIIPs Regulation (11), who manage savings and are a key player for channelling more assets to the real economy.

i)

Bond issuance is mainly used by large caps and for large emissions. They are complex and expensive. For example, even if the use of corporate bonds has grown considerably in recent years, there are only 2 000 active issuers in total, mainly larger companies (12);

ii)

Private Convertible bonds have the main advantage of being extremely flexible in terms of structure, as they are a private contract. However, that also implies a low level of security for smaller companies, usually with less financial literacy, and a high transaction cost. They are mainly used by sophisticated venture capital providers;

iii)

Dual share schemes refer to the issuance of two classes of shares, one of which usually has limited or no voting rights, while providing equity. Although in some Member States this instrument is allowed (13) (such as the Nordic countries, Poland, Portugal and Italy), in many others (such as Germany, France and Spain) it is not, and a large-scale deployment seems tougher to achieve, since it would require a high degree of adaptation to the company issuing shares;

iv)

Hybrid loans are debt instruments that are deeply subordinated and oriented towards the long term (usually including grace periods). This is an instrument that is regulated in many jurisdictions, giving companies more security, and making the process more agile, since the product is not created in each operation. On top of this, it does not penalise companies in terms of indebtedness, as it ranks last in the repayment order, before equity.

i)

They represent a long-term solution that is easy to implement and provides greater protection to companies, when compared with bonds or shares;

ii)

For MSMEs, it ensures that there is no dilution or loss of control, while having cost-related advantages, such as tax deductibility or lower issuance costs);

iii)

For lenders, it offers an attractive return, with no need to involve holders in corporate decisions;

iv)

Participative loans, a type of hybrid loan, already exist and are regulated in many European countries, such as Spain (préstamos participativos), France, (prêts participatifs), Germany (Partiarisches Darlehen) or recently Portugal (empréstimos participativos) (14).

i)

France has the Relance Programme, an EUR 12,7 billion government-supported subordinated debt programme, targeted at 10 000 firms, mainly SMEs, using participative loans and subordinated bonds. This programme is being distributed by banks and is financed by institutional investors;

ii)

In Spain, the EUR 1 billion Fund for the Recapitalisation of Covid-Affected Firms, for SMEs and midcaps that have solvency issues but are viable, using participating loans;

iii)

Also in Spain, a 15-year, EUR 9 billion total Support Fund for the Productive Industrial Investment (EUR 600 million a year), public financed, using regular debt, participative loans and equity, targeted at companies with industrial investment projects;

iv)

In Valencia, the regional development bank, Instituto Valenciano de Finanzas, has launched several financing programmes that use a participative loan to support SMEs and strategic Midcaps with an investment project, totalling EUR 400 million a year;

v)

The Netherlands launched an EUR 400 million SME subordinated loan support programme.

i)

For the calculation of the debt capital ratio, so it does not add to existing indebtedness or does not have an excessive impact on the debt-to-capital ratio. For example, in France Article 313-14 of the Code monétaire et financier [Monetary and Financial Code] establishes that ‘participative loans are, for the purposes of assessing the financial situation of the companies receiving them, treated as equity capital’;

ii)

For the purposes of capital reduction. This is the case, for example, of the Spanish regulation, which states that participative loans are included in the calculation of equity for the purposes of capital reduction and dissolution of companies, and that early repayment or amortization of participative loans can only happen if it is followed by a capital increase of the same amount (16);

iii)

In the event of insolvency, this hybrid loan should have a subordinated status, ranking behind ordinary debts or common creditors, and before shareholders. Failure to construct the debt in this way would likely undermine firms’ ability to raise debt from traditional sources. One of the aims of the CMU Action Plan is to achieve greater convergence among the different insolvency regimes across EU Member States.