Commission Notice on the application of Articles 87 and 88 of the EC Treaty to State aid in the form of guarantees
Date: 2008-06-20
Institutions: European Commission
Subjects: State aid, control of State aid, credit guarantee, small and medium-sized enterprises

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Commission Notice on the application of Articles 87 and 88 of the EC Treaty to State aid in the
form of guarantees

(2008/C 155/02)

This Notice replaces the Commission Notice on the application of Articles 87 and 88 of the EC Treaty to
State aid in the form of guarantees (OJ C 71, 11.3.2000, p. 14).

1. INTRODUCTION

1.1. Background

This Notice updates the Commission's approach to State aid granted in the form of guarantees and aims to
give Member States more detailed guidance about the principles on which the Commission intends to base
its interpretation of Articles 87 and 88 and their application to State guarantees. These principles are
currently laid down in the Commission Notice on the application of Articles 87 and 88 of the EC Treaty to
State aid in the form of guarantees (1). Experience gained in the application of this Notice since 2000
suggests that the Commission's policy in this area should be reviewed. In this connection, the Commission
wishes to recall for instance its recent practice in various specific decisions (2) with respect to the need to
undertake an individual assessment of the risk of losses related to each guarantee in the case of schemes.
The Commission intends to further make its policy in this area as transparent as possible so that its deci-
sions are predictable and that equal treatment is ensured. In particular, the Commission wishes to provide
small and medium-sized enterprises (hereafter ‘SMEs’) and Member States with safe-harbours predetermining,
for a given company and on the basis of its financial rating, the minimum margin that should be charged
for a State guarantee in order to be deemed as not constituting aid within the scope of Article 87(1) of the
Treaty. Likewise, any shortfall in the premium charged in comparison with that level could be deemed as the
aid element.

1.2. Types of guarantee

In their most common form, guarantees are associated with a loan or other financial obligation to be
contracted by a borrower with a lender; they may be granted as individual guarantees or within guarantee
schemes.

However, various forms of guarantee may exist, depending on their legal basis, the type of transaction
covered, their duration, etc. Without the list being exhaustive, the following forms of guarantee can be iden-
tified:

— general guarantees, i.e. guarantees provided to undertakings as such as opposed to guarantees linked to a

specific transaction, which may be a loan, an equity investment, etc.,

— guarantees provided by a specific instrument as opposed to guarantees linked to the status of the under-

taking itself,

— guarantees provided directly or counter guarantees provided to a first level guarantor,

— unlimited guarantees as opposed to guarantees limited in amount and/or time. The Commission also
regards as aid in the form of a guarantee the more favourable funding terms obtained by enterprises
whose legal form rules out bankruptcy or other insolvency procedures or provides an explicit State guar-
antee or coverage of losses by the State. The same applies to the acquisition by a State of a holding in an
enterprise if unlimited liability is accepted instead of the usual limited liability,

— guarantees clearly originating from a contractual source (such as formal contracts, letters of comfort) or
another legal source as opposed to guarantees whose form is less visible (such as side letters, oral
commitments), possibly with various levels of comfort that can be provided by this guarantee.

(1) OJ C 71, 11.3.2000, p. 14.
(2) For example: Commission Decision 2003/706/EC of 23 April 2003 on the aid scheme implemented by Germany entitled
‘Guarantee schemes of the Land of Brandenburg for 1991 and 1994’ — State aid C 45/98 (ex NN 45/97) (OJ L 263,
14.10.2003, p. 1); Commission Decision of 16 December 2003 on the guarantee schemes in ship financing — Germany
(N 512/03) (OJ C 62, 11.3.2004, p. 3); Commission Decision 2006/599/EC of 6 April 2005 on the aid scheme which Italy
is planning to implement for ship financing (OJ L 244, 7.9.2006, p. 17).

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Especially in the latter case, the lack of appropriate legal or accounting records often leads to very poor
traceability. This is true both for the beneficiary and for the State or public body providing it and, as a
result, for the information available to third parties.

1.3. Structure and scope of the Notice

For the purpose of this Notice:

(a) ‘guarantee scheme’ means any tool on the basis of which, without further implementing measures being
required, guarantees can be provided to undertakings respecting certain conditions of duration, amount,
underlying transaction, type or size of undertakings (such as SMEs);

(b) ‘individual guarantee’ means any guarantee provided to an undertaking and not awarded on the basis of

a guarantee scheme.

Sections 3 and 4 of this Notice are designed to be directly applicable to guarantees linked to a specific finan-
cial transaction such as a loan. The Commission considers that, owing to their frequency and the fact that
they can usually be quantified, these are the cases where guarantees most need to be classed as constituting
State aid or otherwise.

As in most cases the transaction covered by a guarantee would be a loan, the Notice will further refer to the
principal beneficiary of the guarantee as the ‘borrower’ and to the body whose risk is diminished by the
State guarantee as the ‘lender’. The use of these two specific terms also aims to facilitate understanding of
the rationale underpinning the text, since the basic principle of a loan is broadly understood. However, it
does not ensue that Sections 3 and 4 are only applicable to a loan guarantee. They apply to all guarantees
where a similar transfer of risk takes place such as an investment in the form of equity, provided the relevant
risk profile (including the possible lack of collateralisation) is taken into account.

The Notice applies to all economic sectors, including the agriculture, fisheries and transport sectors without
prejudice to specific rules relating to guarantees in the sector concerned.

This Notice does not apply to export credit guarantees.

1.4. Other types of guarantee

Where certain forms of guarantee (see point 1.2) involve a transfer of risk to the guarantor and where they
do not display one or more of the specific features referred to in point 1.3, for instance insurance guaran-
tees, a case-by-case analysis will have to be made for which, as far as is necessary, the applicable Sections or
methodologies described in this Notice will be applied.

1.5. Neutrality

This Notice applies without prejudice to Article 295 of the Treaty and thus does not prejudice the rules in
Member States governing the system of property ownership. The Commission is neutral as regards public
and private ownership.

In particular, the mere fact that the ownership of an undertaking is largely in public hands is not sufficient
in itself to constitute a State guarantee provided there are no explicit or implicit guarantee elements.

2. APPLICABILITY OF ARTICLE 87(1)

2.1. General remarks

Article 87(1) of the Treaty states that any aid granted by a Member State or through State resources in any
form whatsoever which distorts or threatens to distort competition by favouring certain undertakings or the
production of certain goods shall, in so far as it affects trade between Member States, be incompatible with
the common market.

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These general criteria equally apply to guarantees. As for other forms of potential aid, guarantees given
directly by the State, namely by central, regional or local authorities, as well as guarantees given through
State resources by other State-controlled bodies such as undertakings and imputable to public authorities (3),
may constitute State aid.

In order to avoid any doubts, the notion of State resources should thus be clarified as regards State guaran-
tees. The benefit of a State guarantee is that the risk associated with the guarantee is carried by the State.
Such risk-carrying by the State should normally be remunerated by an appropriate premium. Where the
State forgoes all or part of such a premium, there is both a benefit for the undertaking and a drain on the
resources of the State. Thus, even if it turns out that no payments are ever made by the State under a guar-
antee, there may nevertheless be State aid under Article 87(1) of the Treaty. The aid is granted at the
moment when the guarantee is given, not when the guarantee is invoked nor when payments are made
under the terms of the guarantee. Whether or not a guarantee constitutes State aid, and, if so, what the
amount of that State aid may be, must be assessed at the moment when the guarantee is given.

In this context the Commission points out that the analysis under State aid rules does not prejudge the
compatibility of a given measure with other Treaty provisions.

2.2. Aid to the borrower

Usually, the aid beneficiary is the borrower. As indicated under point 2.1, risk-carrying should normally be
remunerated by an appropriate premium. When the borrower does not need to pay the premium, or pays a
it obtains an advantage. Compared to a situation without guarantee, the State guarantee
low premium,
enables the borrower to obtain better financial terms for a loan than those normally available on the finan-
cial markets. Typically, with the benefit of the State guarantee, the borrower can obtain lower rates and/or
offer less security. In some cases, the borrower would not, without a State guarantee, find a financial institu-
tion prepared to lend on any terms. State guarantees may thus facilitate the creation of new business and
enable certain undertakings to raise money in order to pursue new activities. Likewise, a State guarantee
may help a failing firm remain active instead of being eliminated or restructured, thereby possibly creating
distortions of competition.

2.3. Aid to the lender

2.3.1. Even if usually the aid beneficiary is the borrower, it cannot be ruled out that under certain circum-
stances the lender, too, will directly benefit from the aid. In particular, for example, if a State guar-
antee is given ex post in respect of a loan or other financial obligation already entered into without
the terms of this loan or financial obligation being adjusted, or if one guaranteed loan is used to pay
back another, non-guaranteed loan to the same credit institution, then there may also be aid to the
lender, in so far as the security of the loans is increased. Where the guarantee contains aid to the
lender, attention should be drawn to the fact that such aid might, in principle, constitute operating
aid.

2.3.2. Guarantees differ from other State aid measures, such as grants or tax exemptions, in that, in the case
of a guarantee, the State also enters into a legal relationship with the lender. Therefore, consideration
has to be given to the possible consequences for third parties of State aid that has been illegally
granted. In the case of State guarantees for loans, this concerns mainly the lending financial institu-
tions. In the case of guarantees for bonds issued to obtain financing for undertakings, this concerns
the financial institutions involved in the issuance of the bonds. The question whether the illegality of
the aid affects the legal relations between the State and third parties is a matter which has to be
examined under national law. National courts may have to examine whether national law prevents
the guarantee contracts from being honoured, and in that assessment the Commission considers that
they should take account of the breach of Community law. Accordingly, lenders may have an interest
in verifying, as a standard precaution, that the Community rules on State aid have been observed
whenever guarantees are granted. The Member State should be able to provide a case number issued
by the Commission for an individual case or a scheme and possibly a non-confidential copy of the
Commission's decision together with the relevant reference to the Official Journal of the European
Union. The Commission for its part will do its utmost to make available in a transparent manner
information on cases and schemes approved by it.

(3) See Case C-482/99, France v Commission (Stardust) [2002] ECR I-4397.

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3. CONDITIONS RULING OUT THE EXISTENCE OF AID

3.1. General considerations

If an individual guarantee or a guarantee scheme entered into by the State does not bring any advantage to
an undertaking, it will not constitute State aid.

In this context, in order to determine whether an advantage is being granted through a guarantee or a guar-
antee scheme, the Court has confirmed in its recent judgments (4) that the Commission should base its
assessment on the principle of an investor operating in a market economy (hereafter referred to as the
‘market economy investor principle’). Account should therefore be taken of the effective possibilities for a
beneficiary undertaking to obtain equivalent financial resources by having recourse to the capital market.
State aid is not involved where a new funding source is made available on conditions which would be accep-
table for a private operator under the normal conditions of a market economy (5).

In order to facilitate the assessment of whether the market economy investor principle is fulfilled for a given
guarantee measure, the Commission sets out in this Section a number of sufficient conditions for the
absence of aid. Individual guarantees are covered in point 3.2 with a simpler option for SMEs in point 3.3.
Guarantee schemes are covered in point 3.4 with a simpler option for SMEs in point 3.5.

3.2. Individual guarantees

Regarding an individual State guarantee, the Commission considers that the fulfilment of all the following
conditions will be sufficient to rule out the presence of State aid.

(a) The borrower is not in financial difficulty.

In order to decide whether the borrower is to be seen as being in financial difficulty, reference should be
made to the definition set out in the Community guidelines on State aid for rescuing and restructuring
firms in difficulty (6). SMEs which have been incorporated for less than three years shall not be consid-
ered as being in difficulty for that period for the purposes of this Notice.

(b) The extent of the guarantee can be properly measured when it is granted. This means that the guarantee
must be linked to a specific financial transaction, for a fixed maximum amount and limited in time.

(c) The guarantee does not cover more than 80 % of the outstanding loan or other financial obligation; this

limitation does not apply to guarantees covering debt securities (7).

The Commission considers that if a financial obligation is wholly covered by a State guarantee, the
lender has less incentive to properly assess, secure and minimise the risk arising from the lending opera-
tion, and in particular to properly assess the borrower's creditworthiness. Such risk assessment might,
due to lack of means, not always be taken over by the State guarantor. This lack of incentive to minimise
the risk of non-repayment of the loan might encourage lenders to contract loans with a greater than
normal commercial risk and could thus increase the amount of higher-risk guarantees in the State's port-
folio.

(4) See Case C-482/99 referred to in footnote 3.
(5) See Commission Communication on the application of Article 92 and 93 of the EC Treaty to public shareholdings (Bulletin
of the European Communities No 9-1984); Joined Cases 296/82 and 318/82, Netherlands and Leeuwarder Papierwarenfabriek
BV v Commission [1985] ECR 809, paragraph 17. Commission Communication on the application of Articles 92 and 93 of
the EC Treaty and Article 61 of the EEA Agreement to State aid in the aviation sector (OJ C 350, 10.12.1994, p. 5),
points 25 and 26.

(6) OJ C 244, 1.10.2004, p. 2.
(7) For the definition of ‘debt securities’, see Article 2(1)(b) of Directive 2004/109/EC of the European Parliament and of the
Council of 15 December 2004 on the harmonisation of transparency requirements in relation to information about
issuers whose securities are admitted to trading on a regulated market and amending Directive 2001/34/EC (OJ L 390,
31.12.2004, p. 38). Directive as last amended by Directive 2008/22/EC (OJ L 76, 19.3.2008, p. 50).

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This limitation of 80 % does not apply to a public guarantee granted to finance a company whose
activity is solely constituted by a properly entrusted Service of General Economic Interest (SGEI) (8) and
when this guarantee has been provided by the public authority having put in place this entrustment. The
limitation of 80 % applies if the company concerned provides other SGEIs or other economic activities.

In order to ensure that the lender effectively bears part of the risk, due attention must be given to the
following two aspects:

— when the size of the loan or of the financial obligation decreases over time, for instance because the
loan starts to be reimbursed, the guaranteed amount has to decrease proportionally, in such a way
that at each moment in time the guarantee does not cover more than 80 % of the outstanding loan
or financial obligation,

— losses have to be sustained proportionally and in the same way by the lender and the guarantor. In
the same manner, net recoveries (i.e. revenues excluding costs for claim handling) generated from the
recuperation of the debt from the securities given by the borrower have to reduce proportionally the
losses borne by the lender and the guarantor. First-loss guarantees, where losses are first attributed to
the guarantor and only then to the lender, will be regarded as possibly involving aid.

If a Member State wishes to provide a guarantee above the 80 % threshold and claims that it does not
constitute aid, it should duly substantiate the claim, for instance on the basis of the arrangement of the
whole transaction, and notify it to the Commission so that the guarantee can be properly assessed with
regards to its possible State aid character.

(d) A market-oriented price is paid for the guarantee.

As indicated under point 2.1, risk-carrying should normally be remunerated by an appropriate premium
on the guaranteed or counter-guaranteed amount. When the price paid for the guarantee is at least as
high as the corresponding guarantee premium benchmark that can be found on the financial markets,
the guarantee does not contain aid.

If no corresponding guarantee premium benchmark can be found on the financial markets, the total
financial cost of the guaranteed loan, including the interest rate of the loan and the guarantee premium,
has to be compared to the market price of a similar non-guaranteed loan.

In both cases, in order to determine the corresponding market price, the characteristics of the guarantee
and of the underlying loan should be taken into consideration. This includes: the amount and duration
of the transaction; the security given by the borrower and other experience affecting the recovery rate
evaluation; the probability of default of the borrower due to its financial position, its sector of activity
and prospects; as well as other economic conditions. This analysis should notably allow the borrower to
be classified by means of a risk rating. This classification may be provided by an internationally recog-
nised rating agency or, where available, by the internal rating used by the bank providing the underlying
loan. The Commission points to the link between rating and default rate made by international financial
institutions, whose work is also publicly available (9). To assess whether the premium is in line with the
market prices the Member State can carry out a comparison of prices paid by similarly rated undertak-
ings on the market.

The Commission will therefore not accept that the guarantee premium is set at a single rate deemed to
correspond to an overall industry standard.

(8) Such an SGEI must comply with Community rules such as Commission Decision 2005/842/EC of 28 November 2005 on
the application of Article 86(2) of the EC Treaty to State aid in the form of public service compensation granted to certain
undertakings entrusted with the operation of services of general economic interest (OJ L 312, 29.11.2005, p. 67), and the
Community framework for State aid in the form of public service compensation (OJ C 297, 29.11.2005, p. 4).

(9) Such as Table 1 on agencies' credit ratings to be found in the Bank for International Settlements Working Paper

No 207, available at:
http://www.bis.org/publ/work207.pdf

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3.3. Valuation of individual guarantees for SMEs

As an exception, if the borrower is an SME (10), the Commission can by way of derogation from point 3.2(d)
accept a simpler evaluation of whether or not a loan guarantee involves aid. In that case, and provided all
the other conditions laid down in points 3.2(a), (b) and (c) are met, a State guarantee would be deemed as
not constituting aid if the minimum annual premium (‘safe-harbour premium’ (11)) set out in the following
table is charged on the amount effectively guaranteed by the State, based on the rating of the borrower (12):

Credit quality

Standard & Poor's

Fitch

Moody's

Highest quality

Very strong payment capacity

Strong payment capacity

Adequate payment capacity

Payment
capacity
adverse conditions

is

vulnerable

to

likely
capacity
Payment
impaired by adverse conditions

is

to be

Payment capacity is dependent upon
sustained favourable conditions

In or near default

AAA

AA +

AA

AA –

A +

A

A –

BBB +

BBB

BBB –

BB +

BB

BB –

B +

B

B –

CCC +

CCC

CCC –

CC

SD

D

AAA

AA +

AA

AA –

A +

A

A –

BBB +

BBB

BBB –

BB +

BB

BB –

B +

B

B –

CCC +

CCC

CCC –

CC

C

DDD

DD

D

Annual
safe-harbour
premium

0,4 %

0,4 %

0,55 %

0,8 %

2,0 %

3,8 %

6,3 %

No safe-harbour
annual premium
can be provided

Aaa

Aa 1

Aa 2

Aa 3

A 1

A 2

A 3

Baa 1

Baa 2

Baa 3

Ba 1

Ba 2

Ba 3

B 1

B 2

B 3

Caa 1

Caa 2

Caa 3

Ca

C

No safe-harbour
annual premium
can be provided

(10) ‘SMEs’ refer to small and medium-sized enterprises as defined in Annex I to Regulation (EC) No 70/2001 on the applica-
tion of Articles 87 and 88 of the EC Treaty to State aid to small and medium-sized enterprises (OJ L 10, 13.1.2001, p. 33).
Regulation as last amended by Regulation (EC) No 1976/2006 (OJ L 368, 23.12.2006, p. 85).

(11) These safe-harbour premiums are established in line with the margins determined for loans to similarly rated under-
takings in the Communication from the Commission on the revision of the method for setting the reference and
discount rates (OJ C 14, 19.1.2008, p. 6). Following the study commissioned by the Commission on that topic:
(http://ec.europa.eu/comm/competition/state_aid/studies_reports/full_report.pdf, see pages 23 and 156-159 of
the
study), a general reduction of 20 basis points has been taken into account. This reduction corresponds to the difference in
margin for a similar risk between a loan and a guarantee in order to take into account the additional costs specifically
linked to loans.

(12) The table refers to the rating classes of Standard & Poor's, Fitch and Moody's, which are the rating agencies most frequently
used by the banking sector in order to link their own rating system, as described in point 3.2(d). However, ratings do not
need to be obtained from those specific rating agencies. National rating systems or rating systems used by banks to reflect
default rates are equally acceptable provided they supply the one-year probability of default as this figure is used by rating
agencies to rank companies. Other systems should allow for a similar classification through this ranking key.

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The safe-harbour premiums apply to the amount effectively guaranteed or counter-guaranteed by the State
at the beginning of each year concerned. They must be considered as the minimum to be applied with
respect to a company whose credit rating is at least equal to those given in the table (13).

In the case of a single upfront guarantee premium, the loan guarantee is deemed to be free of aid if it is at
least equal to the present value of the future guarantee premiums as indicated above, the discount rate used
being the corresponding reference rate (14).

As outlined in the table above, companies with a rating corresponding to CCC/Caa or worse cannot benefit
from this simplified methodology.

For SMEs which do not have a credit history or a rating based on a balance sheet approach, such as certain
special purpose companies or start-up companies, the safe-harbour premium is set at 3,8 % but this can
never be lower than the premium which would be applicable to the parent company or companies.

These margins may be revised from time to time to take account of the market situation.

3.4. Guarantee schemes

For a State guarantee scheme, the Commission considers that the fulfilment of all the following conditions
will rule out the presence of State aid:

(a) the scheme is closed to borrowers in financial difficulty (see details in point 3.2(a));

(b) the extent of the guarantees can be properly measured when they are granted. This means that the guar-
antees must be linked to specific financial transactions, for a fixed maximum amount and limited in
time;

(c) the guarantees do not cover more than 80 % of each outstanding loan or other financial obligation (see

details and exceptions in point 3.2(c));

(d) the terms of the scheme are based on a realistic assessment of the risk so that the premiums paid by the
beneficiaries make it, in all probability, self-financing. The self-financing nature of the scheme and the
proper risk orientation are viewed by the Commission as indications that the guarantee premiums
charged under the scheme are in line with market prices.

This entails that the risk of each new guarantee has to be assessed, on the basis of all the relevant factors
(quality of the borrower, securities, duration of the guarantee, etc). On the basis of this risk analysis, risk
classes (15) have to be defined, the guarantee has to be classified in one of these risk classes and the
corresponding guarantee premium has to be charged on the guaranteed or counter-guaranteed amount;

(e) in order to have a proper and progressive evaluation of the self-financing aspect of the scheme, the
adequacy of the level of the premiums has to be reviewed at least once a year on the basis of the effec-
tive loss rate of the scheme over an economically reasonable time horizon, and premiums adjusted
accordingly if there is a risk that the scheme may no longer be self-financing. This adjustment may
concern all issued and future guarantees or only the latter;

(f) in order to be viewed as being in line with market prices, the premiums charged have to cover the
normal risks associated with granting the guarantee, the administrative costs of the scheme, and a yearly
remuneration of an adequate capital, even if the latter is not at all or only partially constituted.

As regards administrative costs, these should include at least the specific initial risk assessment as well as
the risk monitoring and risk management costs linked to the granting and administration of the guar-
antee.

(13) For example, a company to which a bank assigns a credit rating corresponding to BBB-/Baa3 should be charged a yearly
guarantee premium of at least 0,8 % on the amount effectively guaranteed by the State at the beginning of each year.
(14) See the Communication referred to in footnote 11 providing that: ‘The reference rate is also to be used as a discount rate, for
calculating present values. To that end, in principle, the base rate increased by a fixed margin of 100 basis points will be used’ (p. 4).

(15) See further details in footnote 12.

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As regards the remuneration of the capital, the Commission observes that usual guarantors are subject
to capital requirement rules and, in accordance with these rules, are forced to constitute equity in order
not to go bankrupt when there are variations in the yearly losses related to the guarantees. State guar-
antee schemes are normally not subject to these rules and thus do not need to constitute such reserves.
In other words, each time the losses stemming from the guarantees exceed the revenues from the guar-
antee premiums, the deficit is simply covered by the State budget. This State guarantee to the scheme
puts the latter in a more favourable situation than a usual guarantor. In order to avoid this disparity and
to remunerate the State for the risk it is taking, the Commission considers that the guarantee premiums
have to cover the remuneration of an adequate capital.

The Commission considers that this capital has to correspond to 8 % (16) of the outstanding guarantees.
For guarantees granted to undertakings whose rating is equivalent to AAA/AA- (Aaa/Aa3), the amount
of capital to be remunerated can be reduced to 2 % of the outstanding guarantees. Meanwhile, with
regard to guarantees granted to undertakings whose rating is equivalent to A+/A- (A1/A3), the amount
of capital to be remunerated can be reduced to 4 % of the outstanding guarantees.

The normal remuneration of this capital is made up of a risk premium, possibly increased by the risk-
free interest rate.

The risk premium must be paid to the State on the adequate amount of capital in all cases. Based on its
practice, the Commission considers that a normal risk premium for equity amounts to at least 400 basis
points and that such risk premium should be included in the guarantee premium charged to the benefi-
ciaries (17).

if

the underlying capital

If, as in most State guarantee schemes, the capital is not provided to the scheme and therefore there is
no cash contribution by the State, the risk-free interest rate does not have to be taken into account.
Alternatively,
is effectively provided by the State, the State has to incur
borrowing costs and the scheme benefits from this cash by possibly investing it. Therefore the risk-free
interest rate has to be paid to the State on the amount provided. Moreover, this charge should be taken
from the financial
income of the scheme and does not necessarily have to impact the guarantee
premiums (18). The Commission considers that the yield of the 10-year government bond may be used
as a suitable proxy for the risk-free rate taken as normal return on capital;

(g) in order to ensure transparency, the scheme must provide for the terms on which future guarantees will
be granted, such as eligible companies in terms of rating and, when applicable, sector and size,
maximum amount and duration of the guarantees.

3.5. Valuation of guarantee schemes for SMEs

In view of the specific situation of SMEs and in order to facilitate their access to finance, especially through
the use of guarantee schemes, two specific possibilities exist for such companies:

— the use of safe-harbour premiums as defined for individual guarantees to SMEs,

— the valuation of guarantee schemes as such by allowing the application of a single premium and avoiding

the need for individual ratings of beneficiary SMEs.

(16) Corresponding to the capital requirements laid down in Article 75 of Directive 2006/48/EC of the European Parliament
and of the Council of 14 June 2006 relating to the taking up and pursuit of the business of credit institutions (OJ L 177,
30.6.2006, p. 1) read in conjunction with Annex VI (paragraph 41 onwards) thereto.

(17) For a guarantee to a BBB rated company amounting to 100, the reserves to be constituted thus amount to 8. Applying
400 basis points (or 4 %) to this amount results in annual capital costs of 8 % × 4 % = 0,32 % of the guaranteed amount,
which will impact the price of the guarantee accordingly. If the one-year default rate anticipated by the scheme for this
company is, for instance, 0,35 % and the yearly administrative costs are estimated at 0,1 %, the price of the guarantee
deemed as non-aid will be 0,77 % per year.

(18) In that case, and provided the risk-free rate is deemed to be 5 %, the annual cost of the reserves to be constituted will be,
for the same guarantee of 100 and reserves of 8 to be constituted, 8 % × (4 % + 5 %) = 0,72 % of the guaranteed amount.
Under the same assumptions (default rate of 0,35 % and administrative costs of 0,1 %), the price of the guarantee would
be 0,77 % per year and an additional charge of 0,4 % should be paid by the scheme to the State.

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The conditions of use of both rules are defined as follows:

Use of safe-harbour premiums in guarantee schemes for SMEs

In line with what is proposed for simplification purposes in relation to individual guarantees, guarantee
schemes in favour of SMEs can also, in principle, be deemed self-financing and not constitute State aid if the
minimum safe-harbour premiums set out in point 3.3 and based on the ratings of undertakings are
applied (19). The other conditions set out in points 3.4(a), (b) and (c) as well as in point 3.4(g) still have to
be fulfilled, and the conditions set out in points 3.4(d), (e) and (f) are deemed to be fulfilled by the use of
the minimum annual premiums set out in point 3.3.

Use of single premiums in guarantee schemes for SMEs

The Commission is aware that carrying out an individual risk assessment of each borrower is a costly
process, which may not be appropriate where a scheme covers a large number of small loans for which it
represents a risk pooling tool.

Consequently, where a scheme only relates to guarantees for SMEs and the guaranteed amount does not
exceed a threshold of EUR 2,5 million per company in that scheme, the Commission may accept, by way of
derogation from point 3.4(d), a single yearly guarantee premium for all borrowers. However, in order for the
guarantees granted under such a scheme to be regarded as not constituting State aid, the scheme has to
remain self-financing and all the other conditions set out in points 3.4(a),
(b) and (c) as well as in
points 3.4(e), (f) and (g) still have to be fulfilled.

3.6. No automatic classification as State aid

Failure to comply with any one of the conditions set out in points 3.2 to 3.5 does not mean that the guar-
antee or guarantee scheme is automatically regarded as State aid. If there is any doubt as to whether a
planned guarantee or guarantee scheme constitutes State aid, it should be notified to the Commission.

4. GUARANTEES WITH AN AID ELEMENT

4.1. General

Where an individual guarantee or a guarantee scheme does not comply with the market economy investor
principle, it is deemed to entail State aid. The State aid element therefore needs to be quantified in order to
check whether the aid may be found compatible under a specific State aid exemption. As a matter of prin-
ciple, the State aid element will be deemed to be the difference between the appropriate market price of the
guarantee provided individually or through a scheme and the actual price paid for that measure.

The resulting yearly cash grant equivalents should be discounted to their present value using the reference
rate, then added up to obtain the total grant equivalent.

When calculating the aid element in a guarantee, the Commission will devote special attention to the
following elements:

(a) whether in the case of individual guarantees the borrower is in financial difficulty. Whether in the case
of guarantee schemes, the eligibility criteria of the scheme provide for exclusion of such undertakings
(see details in point 3.2(a)).

The Commission notes that for companies in difficulty, a market guarantor, if any, would, at the time
the guarantee is granted charge a high premium given the expected rate of default. If the likelihood that
the borrower will not be able to repay the loan becomes particularly high, this market rate may not
exist and in exceptional circumstances the aid element of the guarantee may turn out to be as high as
the amount effectively covered by that guarantee;

(19) This includes the provision whereby for SMEs which do not have a credit history or a rating based on a balance sheet
approach, the safe-harbour premium is set at 3,8 % but this can never be lower than the premium which would be applic-
able to the parent companies.

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(b) whether the extent of each guarantee can be properly measured when it is granted.

This means that the guarantees must be linked to a specific financial transaction, for a fixed maximum
amount and limited in time. In this connection the Commission considers in principle that unlimited
guarantees are incompatible with Article 87 of the Treaty;

(c) whether the guarantee covers more than 80 % of each outstanding loan or other financial obligation

(see details and exceptions in point 3.2(c)).

In order to ensure that the lender has a real incentive to properly assess, secure and minimise the risk
arising from the lending operation, and in particular to assess properly the borrower's creditworthiness,
the Commission considers that a percentage of at least 20 % not covered by a State guarantee should be
carried by the lender (20) to properly secure its loans and to minimise the risk associated with the trans-
action. The Commission will therefore, in general, examine more thoroughly any guarantee or guarantee
scheme covering the entirety (or nearly the entirety) of a financial transaction except if a Member State
duly justifies it, for instance, by the specific nature of the transaction;

(d) whether the specific characteristics of the guarantee and loan (or other financial obligation) have been
taken into account when determining the market premium of the guarantee, from which the aid
element is calculated by comparing it with the premium actually paid (see details in point 3.2(d)).

4.2. Aid element in individual guarantees

For an individual guarantee the cash grant equivalent of a guarantee should be calculated as the difference
between the market price of the guarantee and the price actually paid.

Where the market does not provide guarantees for the type of transaction concerned, no market price for
the guarantee is available. In that case, the aid element should be calculated in the same way as the grant
equivalent of a soft loan, namely as the difference between the specific market interest rate this company
would have borne without the guarantee and the interest rate obtained by means of the State guarantee after
any premiums paid have been taken into account. If there is no market interest rate and if the Member State
wishes to use the reference rate as a proxy, the Commission stresses that the conditions laid down in the
communication on reference rates (21) are valid to calculate the aid intensity of an individual guarantee. This
means that due attention must be paid to the top-up to be added to the base rate in order to take into
account the relevant risk profile linked to the operation covered, the undertaking guaranteed and the
collaterals provided.

4.3. Aid element in individual guarantees for SMEs

For SMEs, the simplified evaluation system outlined in point 3.3 can also be applied. In that case, if the
premium for a given guarantee does not correspond to the value set as a minimum for its rating class, the
difference between this minimum level and the premium charged will be regarded as aid. If the guarantee
lasts more than a year, the yearly shortfalls are discounted using the relevant reference rate (22).

Only in cases clearly evidenced and duly justified by the Member State concerned may the Commission
accept a deviation from these rules. A risk-based approach still has to be respected in such cases.

4.4. Aid element in guarantee schemes

For guarantee schemes, the cash grant equivalent of each guarantee within the scheme is the difference
between the premium effectively charged (if any) and the premium that should be charged in an equivalent
non-aid scheme set up in accordance with the conditions laid down in point 3.4. The aforementioned theo-
retical premiums from which the aid element is calculated have therefore to cover the normal risks

(20) This is based on the assumption that the corresponding level of security is provided by the company to the State and the

credit institution.

(21) See the Communication referred to in footnote 11.
(22) See further details in footnote 14.

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associated with the guarantee as well as the administrative and capital costs (23). This way of calculating the
grant equivalent is aimed at ensuring that, also over the medium and long term, the total aid granted under
the scheme is equal to the money injected by the public authorities to cover the deficit of the scheme.

Since, in the case of State guarantee schemes, the specific features of the individual cases may not be known
at the time when the scheme is to be assessed, the aid element must be assessed by reference to the provi-
sions of the scheme.

Aid elements in guarantee schemes can also be calculated through methodologies already accepted by the
Commission following their notification under a regulation adopted by the Commission in the field of State
aid, such as Commission Regulation (EC) No 1628/2006 of 24 October 2006 on the application of Arti-
investment aid (24) or Commission Regulation (EC)
cles 87 and 88 of the Treaty to national regional
No 1857/2006 of 15 December 2006 on the application of Articles 87 and 88 of the Treaty to State aid to
small and medium-sized enterprises active in the production of agricultural products and amending Regu-
lation (EC) No 70/2001 (25), provided that the approved methodology explicitly addresses the type of guar-
antees and the type of underlying transactions at stake.

Only in cases clearly evidenced and duly justified by the Member State concerned may the Commission
accept a deviation from these rules. A risk-based approach still has to be respected in such cases.

4.5. Aid element in guarantee schemes for SMEs

The two simplification tools outlined in point 3.5 and relating to guarantee schemes for SMEs can also be
used for aid calculation purposes. The conditions of use of both rules are defined as follows:

Use of safe-harbour premiums in guarantee schemes for SMEs

For SMEs, the simplified evaluation system outlined above in point 3.5 can also be applied. In that case, if
the premium for a given category in a guarantee scheme does not correspond to the value set as a
minimum for its rating class (26), the difference between this minimum level and the premium charged will
be regarded as aid (27). If the guarantee lasts more than a year, the yearly shortfalls are discounted using the
reference rate (28).

Use of single premiums in guarantee schemes for SMEs

In view of the more limited distortion of competition that may be caused by State aid provided in the frame-
work of a guarantee scheme for SMEs, the Commission considers that if an aid scheme only relates to guar-
antees for SMEs, where the guaranteed amount does not exceed a threshold of EUR 2,5 million per
company in this given scheme, the Commission may accept, by way of derogation from point 4.4, a valua-
tion of the aid intensity of the scheme as such, without the need to carry out a valuation for each individual
guarantee or risk class within the scheme (29).

(23) This calculation can be summarised, for each risk class, as the difference between (a) the outstanding sum guaranteed,
multiplied by the risk factor of the risk class (‘risk’ being the probability of default after inclusion of administrative and
capital costs), which represents the market premium, and (b) any premium paid, i.e. (guaranteed sum × risk) – premium
paid.

(24) OJ L 302, 1.11.2006, p. 29.
(25) OJ L 358, 16.12.2006, p. 3.
(26) This includes the possibility whereby SMEs which do not have a credit history or a rating based on a balance sheet
approach, the safe-harbour premium is set at 3,8 % but this can never be lower than the premium which would be
applicable to the parent company or companies.

(27) This calculation can be summarised, for each risk class, as the outstanding sum guaranteed multiplied by the difference
between (a) the safe-harbour premium percentage of that risk class and (b) the premium percentage paid, i.e. guaranteed
sum × (safe-harbour premium – premium paid).

(28) See further details in footnote 11.
(29) This calculation can be summarised, irrespective of the risk class, as the difference between (a) the outstanding sum guar-
anteed, multiplied by the risk factor of the scheme (‘risk’ being the probability of default after inclusion of administrative
and capital costs), and (b) any premium paid, i.e. (guaranteed sum × risk) – premium paid.

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5. COMPATIBILITY WITH THE COMMON MARKET OF STATE AID IN THE FORM OF GUARANTEES

5.1. General

State guarantees within the scope of Article 87(1) of the Treaty must be examined by the Commission with
a view to determining whether or not they are compatible with the common market. Before such assessment
of compatibility can be made, the beneficiary of the aid must be identified.

5.2. Assessment

Whether or not this aid is compatible with the common market will be examined by the Commission
according to the same rules as are applied to aid measures taking other forms. The concrete criteria for the
compatibility assessment have been clarified and detailed by the Commission in frameworks and guidelines
concerning horizontal, regional and sectoral aid (30). The examination will take into account, in particular,
the aid intensity, the characteristics of the beneficiaries and the objectives pursued.

5.3. Conditions

The Commission will accept guarantees only if their mobilisation is contractually linked to specific condi-
tions which may go as far as the compulsory declaration of bankruptcy of the beneficiary undertaking, or
any similar procedure. These conditions will have to be agreed between the parties when the guarantee is
initially granted. In the event that a Member State wants to mobilise the guarantee under conditions other
than those initially agreed to at the granting stage, then the Commission will regard the mobilisation of the
guarantee as creating new aid which has to be notified under Article 88(3) of the Treaty.

6. REPORTS TO BE PRESENTED TO THE COMMISSION BY THE MEMBER STATES

In accordance with general monitoring obligations (31), in order to further monitor new developments on
the financial markets and since the value of State guarantees is difficult to assess and changes over time, the
constant review, pursuant to Article 88(1) of the Treaty, of State guarantee schemes approved by the
Commission is of particular importance. Member States shall therefore submit reports to the Commission.

For aid guarantee schemes, these reports will have to be presented at least at the end of the period of validity
of the guarantee scheme and for the notification of an amended scheme. The Commission may however
consider it appropriate to request reports on a more frequent basis, depending on the case.

For guarantee schemes, for which the Commission has taken a non-aid decision, and especially when no
solid historic data exists for the scheme, the Commission may request, when taking its non-aid decision for
such reports to be presented, thereby clarifying on a case-by-case basis the frequency and the content of the
reporting requirement.

Reports should include at least the following information:

(a) the number and amount of guarantees issued;

(b) the number and amount of guarantees outstanding at the end of the period;

(c) the number and value of defaulted guarantees (displayed individually) on a yearly basis;

(d) the yearly income:

1.

income from the premiums charged;

2.

income from recoveries;

3. other revenues (e.g. interest received on deposits or investments);

(30) See Competition law applicable to State aid in the European Community:
http://ec.europa.eu/comm/competition/state_aid/legislation/legislation.html
For sector specific State aid legislation, see for agriculture:
http://ec.europa.eu/agriculture/stateaid/leg/index_en.htm
and for transport:
http://ec.europa.eu/dgs/energy_transport/state_aid/transport_en.htm

(31) Such as those laid down in particular by Commission Regulation (EC) No 794/2004 of 21 April 2004 implementing
Council Regulation (EC) No 659/1999 laying down detailed rules for the application of Article 93 of the EC Treaty
(OJ L 140, 30.4.2004, p. 1). Regulation as last amended by Regulation (EC) No 271/2008 (OJ L 82, 25.3.2008, p. 1).

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(e) the yearly costs:

1. administrative costs;

2.

indemnifications paid on mobilised guarantees;

(f) the yearly surplus or shortfall (difference between income and costs); and

(g) the accumulated surplus or shortfall since the beginning of the scheme (32).

For individual guarantees, the relevant information, mainly that referred to in points (d) to (g), should be
similarly reported.

In all cases, the Commission draws the attention of Member States to the fact that correct reporting at a
remote date presupposes correct collection of the necessary data from the beginning of the use of the
scheme and their aggregation on a yearly basis.

The attention of Member States is also drawn to the fact that for non-aid guarantees provided individually or
under a scheme, although no notification obligation exists, the Commission may have to verify that the
guarantee or scheme does not entail aid elements, for instance following a complaint. In that case, the
Commission will request information similar to that set out above for reports from the Member State
concerned.

Where reports already have to be presented following specific reporting obligations established by block
exemption regulations, guidelines or frameworks applicable in the State aid field, those specific reports will
replace the reports to be presented under the present guarantee reporting obligation provided the informa-
tion listed above is included.

The Commission invites Member States to adjust their existing guarantee measures to the stipulations of the
present Notice by 1 January 2010 as far as new guarantees are concerned.

7. IMPLEMENTING MEASURES

(32) If the scheme has been active for more than 10 years, only the last 10 annual amounts of shortfall or surplus are to be

provided.