Prague University of Economics and Business
Bachelor’s Thesis
2021 Tomáš Meloun
Prague University of Economics and Business
Faculty of Business Administration
Bachelor´s Field: Corporate Finance and Management
Title of the Bachelor´s Thesis:
Initial analysis of the available support programs for medium and large enterprises
during the Covid-19 pandemic
Author: Tomáš Meloun
Supervisor: Ing. Heřman Kopkáně
Prague, August 24, 2021
A c k n o w l e d g m e n t
I would like to express my sincere gratitude to my thesis supervisor and mentor, Ing. Heřman Kopkáně. Without his guidance, supervision, and experience, this thesis would never be
possible.
Title of the Bachelor´s Thesis:
Initial analysis of the available support programs for medium and large enterprises during the Covid-19 pandemic
Abstract:
The Covid-19 pandemic was an event on a global scale that had a negative impact on almost every society and economy of the world. The various governmental safety precautions and the economic crisis meant that many businesses had no way of generating income. Governments worldwide introduced financial support programs to help businesses survive. This paper aims to describe the programs that were available to Czech medium and large enterprises in the beginning months of the pandemic. The author also analyzes these programs by looking at available data and comparing them to similar programs in other countries. However, not all companies were eligible to receive financial aid. Correspondingly, the author also describes intercompany solutions to improve a company’s overall liquidity position. The author then presents case studies and summarizes the programs’ efficiency on a macroeconomic scale.
Finally, the author concludes the discussed topics and briefly presents his outlook on the future economic situation.
Key words:
Liquidity, Financial Support, Grants, Loans, Restructuring
Table of Contents
1. Introduction ... 4
2. Theoretical ... 6
2.1 Methodology ... 9
2.2 State financial support programs ... 11
2.2.1 Employee retention programs... 11
2.2.2 Grants ... 14
2.2.3 Tax reliefs ... 17
2.2.4 Comparison ... 17
2.3 Bank-offered loans... 20
2.3.1 COVID loans ... 20
2.3.2 COVID Plus ... 22
2.3.3 Comparison ... 23
2.4 Intercompany funding ... 25
2.4.1 Intercompany loans ... 25
2.4.2 Recapitalization ... 26
2.4.3 Loss carryback ... 27
3 Practical ... 29
3.1 Orea Hotels, s.r.o. ... 30
3.1.1 Antivirus programs ... 30
3.1.2 Grants ... 31
3.1.3 Loans ... 32
3.1.4 Restructuring ... 32
3.2 Plzeňský prazdroj, a.s. ... 35
3.3 Smartwings, a.s. ... 37
3.3.1 Grants ... 37
3.3.2 Loans ... 39
3.3.3 Restructuring ... 40
3.4 Macroeconomic overview ... 41
4 Conclusion... 46
5 Glossary ... 49
Bibliography... 50
Appendices ... 67
List of figures
Figure 1 – Timeline of important events and the introduction of related support programs .... 8
Figure 2 – Czech Republic GDP growth and unemployment rate ... 11
Figure 3 – Expected vs. Actual loans to entrepreneurs ... 24
Figure 4 – ‘Spread’ of tax loss, if the taxpayer’s taxable period is a calendar year ... 28
Figure 5 – Smartwings structure as of 2019 ... 38
Figure 6 – Annex 2: Czechia and EU unemployment rates ... 69
Figure 7 – Annex 6: Carryforward before the 2020 amendment ... 71
Figure 8 – Annex 7: Article 36 of the Czech Act N. 240/2000 Coll. legislation ... 71
List of tables
Table 1 – Market cap data for different industries ... 6Table 2 – Antivirus employee retention programs description ... 12
Table 3 – Number of provided Antivirus supports in March through October 2020 ... 13
Table 4 – Czech government grants and subsidies in 2020 (1/2) ... 14
Table 5 – Czech government grants and subsidies in 2020 (2/2) ... 15
Table 6 – COVID Plus prominent applicants ... 22
Table 7 – Offered support as of July 31, 2021, in relation to the C-19 pandemic (1/3) ... 42
Table 8 – Offered support as of July 31, 2021, in relation to the C-19 pandemic (2/3) ... 43
Table 9 – Offered support as of July 31, 2021, in relation to the C-19 pandemic (3/3) ... 44
Table 10 – Annex 1: Market cap and revenues table for all industries expanded (1/2) ... 67
Table 11 – Annex 1: Market cap and revenues table for all industries expanded (2/2) ... 68
Table 12 – Annex 3: COVID - Sport II allocation overview of various grant limits ... 70
Table 13 – Annex 4: COVID – Accommodation allocation of resources ... 70
Table 14 – Annex 5: COVID – Bus allocation of resources explained per 1 bus seat ... 70
List of abbreviations
BIL Banque Internationale à Luxembourg
C-19 COVID - 19
CARES Coronavirus Aid, Relief, and Economic Security Act
ČMZRB Českomoravská záruční a rozvojová banka (Czech-Moravian Guarantee and Development Bank)
Coll. Collection of Laws
ČSA České aerolinie (Czech Airlines)
ČTK Česká tisková kancelář (Czech News Agency)
CZK Czech koruna
DJIA Dow Jones Industrial Average DSCR Debt Service Coverage Ratio
ECB European Central Bank
EET Elektronická evidence tržeb (Electronic Register of Sales) EGAP Exportní garanční a pojišťovací společnost
EIDL Economic Injury Disaster Loan
EU European Union
EUR Euro
GDP Gross Domestic Product
IC Intercompany
IMF International Monetary Fund IRS Internal Revenue Service
KPI Key Performance Indicator
LTM Last Twelve Months
LTV Loan to Value
MDČR Ministerstvo dopravy České republiky (Ministry of Transport of Czech Republic)
MFČR Ministerstvo financí České republiky (Ministry of Finance of the Czech Republic)
MFSR Ministerstvo financií Slovenskej republiky (Ministry of Finance of the Slovak Republic)
MHMP Magistrát hlavního města Prahy (Prague City Council) MIRRI Ministerstvo investícií, regionálneho rozvoja a informatizácie
Slovenskej republiky (Ministry of Investments, Regional Development and Informatization of the Slovak Republic)
MMR Ministerstvo pro místní rozvoj (Ministry of Regional Development) MPO Ministerstvo průmyslu a obchodu (Ministry of Industry and Trade) MPSR Ministerstvo pôdohospodárstva a rozvoja vidieka Slovenskej republiky
(Ministry of Agriculture and Rural Development of the Slovak Republic)
MPSV Ministerstvo práce a sociálních věcí (Ministry of Labour and Social Affairs)
MSČR Ministerstvo spravedlnosti České republiky (Ministry of Justice of the Czech Republic)
MSSR Ministerstvo spravodlivosti Slovenskej republiky (Ministry of Justice of the Slovak Republic)
MVČR Ministerstvo vnitra České republiky (Ministry Of the Interior of the Czech Republic)
OECD Organisation for Economic Co-operation and Development PPP Paycheck Protection Program
S&P 500 Standard and Poor’s 500 SBA Small Business Administration
TASR Tlačová agentúra Slovenskej republiky (News Agency of the Slovak Republic)
US United States
VAT Value-added tax
WHO World Health Organization
1. Introduction
The year 2020 was life-changing to most people. What looked like to be a grim start into a new decade (with Australian wildfires and a barely averted war between the US and Iran) turned out to impact the lives of nearly every living human being. A new virus appeared and spread all around the world in a few months. By March 11, 2020, the World Health Organization (WHO) declared a worldwide pandemic (WHO, 2020), halting most businesses worldwide. Investors began selling off their assets and pulling back credit in fear of a slash in economic growth (Kostic & Smith, 2020). Conversely, gold prices increased by over 40% (GOLDPRICE, 2021) – a trend similar to the 2008 financial crisis.
The stock markets recovered shortly in spite of the seeming major economic crisis. The Dow Jones Industrial Average (DJIA) index returned to its pre-pandemic level within eight months after its March trough. On the contrary, it took about 28 months for the DJIA index to rebound after the 2008 financial crisis (MarketWatch, 2021). The story is similar to broader market indices such as S&P 500 or Russell 3000.
Even though many businesses saw significant growth on account of the pandemic, many others were less fortunate. Governments worldwide imposed strict regulations for their citizens and businesses to slow the spread of the “C-19 virus”. Some of these regulations meant that businesses were unable to operate to their full capacity, while others had to shut down completely (Bajtler, 2020). Many governments and financial institutions reacted to this problem by providing various aids to help companies and individuals in financial distress. This paper aims to analyze the available support programs and financial support from investors that Czech companies could leverage in 2020 to finance their operations and study the efficacy of these aids.
The inspiration to study and explain this problem originated at the author’s work. As a treasury and financial specialist intern in a global investment company, the author had the chance to observe the pandemic taking its toll on some of the company’s subsidiaries. The author’s job was to calculate some of the subsidiaries’ DSCR and LTV ratios. This experience was also a great opportunity to learn more about internal and external debt financing of financially distressed companies. Seeing some of the company’s subsidiaries struggle to comply with debt covenants, the author decided to investigate further into this topic and conduct research on what opportunities companies had to improve their liquidity position during the pandemic. The author also wanted to gain a better understanding of how these opportunities worked in practice.
Through writing this paper, the author hopes to familiarize the readers with the discussed issues and to come up with creative solutions to the underlying problem. As of writing this paper, many companies struggle to survive for various reasons (MF DNES, 2020). This paper aims to analyze these support programs and their efficiency by looking at the available information and applying it to several case studies. The author also uses the available information to determine which programs were the most effective, and what problems afflicted others. However, this paper is not a comprehensive description of all the financing opportunities that companies and
individuals alike could use. Many sources describe the offered financial aids and loans in more detail. Furthermore, different solutions are likely to be introduced in the future. On the contrary, the contribution of this paper is to educate the reader about the efficiency of said programs.
To stay concise, the author decided to split the Theoretical part of this paper into three core chapters: State financial support programs; Bank-offered loans; and Intercompany funding.
Each chapter will describe the financing opportunities in that area and their practical usage. The first chapter will delve into the programs introduced by the government to help businesses through various governmental institutions. The second chapter will focus on loans offered by commercial banks or governmental institutions as the loan guarantors. The third chapter complements the first two in that it brings forth alternative ways of improving a company’s liquidity position through various actions, in which managers are the key decision-makers.
The author then discusses the practical usage of these programs in the Practical chapter. This chapter contains three case studies: Orea Hotels, s.r.o.; Plzeňský prazdroj, a.s.; and Smartwings, a.s. In each chapter, the author explains the situation of each company during the pandemic.
Additionally, in the Macroeconomic overview chapter, the author looks at the overall efficiency of the discussed programs on a macroeconomic scale.
2. Theoretical
When the C-19 virus first emerged at the beginning of 2020 in Wuhan, people took little notice.
Before WHO declared a worldwide pandemic, it was already too late (Sanger, Lipton, Sullivan,
& Crowley, 2020). Governments all over the world began searching for ways to best protect their citizens’ health. Most of these strategies included suspending operations in various industries to prevent and slow down the spread of C-19. The negative impact of this temporary halt can be best shown on the total market capitalization of the most struck industries. For this task, let us use market capitalization data from Damodaran’s website. See Table 10 and Table 11 in Annex 1 to see how this data was obtained.
Table 1 – Market cap data for different industries
Industry Name 14/02/2020 20/03/2020 % change 14/02/2020-
20/03/2020 01/09/2020 % change 20/03/2020-
01/09/2020 Best five industries (millions USD)
Coal & Related Energy $5,476 $5,723 4.51% $8,016 40.07%
Retail (Grocery and
Food) $36,005 $37,467 4.06% $50,214 34.02%
Retail (General) $625,147 $569,162 -8.96% $745,389 30.96%
Precious Metals $46,925 $40,075 -14.60% $71,022 77.22%
Retail (Online) $1,242,197 $1,029,299 -17.14% $1,990,765 93.41%
Worst ten industries (millions USD)
Reinsurance $21,533 $10,506 -51.21% $14,226 35.42%
Oil/Gas Distribution $360,147 $171,313 -52.43% $237,171 38.44%
Insurance (Life) $193,521 $89,490 -53.76% $139,446 55.82%
Homebuilding $115,494 $53,280 -53.87% $124,048 132.82%
Food Wholesalers $58,645 $25,260 -56.93% $44,083 74.52%
Hotel/Gaming $292,656 $125,639 -57.07% $225,897 79.80%
Oil/Gas (Production and
Exploration) $290,092 $124,373 -57.13% $192,105 54.46%
Oilfield Svcs/Equip. $250,897 $105,554 -57.93% $159,392 51.00%
Real Estate
(Development) $6,965 $2,745 -60.59% $4,738 72.59%
Air Transport $128,711 $50,084 -61.09% $75,477 50.70%
Source: (Damodaran, 2021)
As can be seen in Table 1 above, only the Coal & Related Energy and Retail (Grocery and Food) industries have experienced a positive growth in the first period. The logical assumption is that the demands for both energy and groceries do not change significantly during economic downturns as those help satisfy basic human needs and rights (Kuo, 2011). On the other hand, all of the other industries faced a decline in the overall market cap. It can be reasoned that this phenomenon happened due to a halt in production and services. In contrast, the following six
months saw positive growth in market cap across all industries, as demonstrated in the last column in the table above.
To help companies survive, governments worldwide introduced government-backed support programs. These programs targeted businesses and individuals who suffered financial losses based on the various restrictions imposed to slow down the spread of the C-19 virus. For example, the US government spent a total of two trillion dollars as part of the CARES Act and offered small businesses and non-profit organizations low-interest disaster loans (Hotstats, 2020).
In mid-April 2020, the European Central Bank announced guidelines and regulations on financial supports to avoid a full-blown economic crisis. These measures were adopted to ease financing conditions of firms and households in effort to maintain a large-scale viable liquidity condition (ECB, 2020b). EU states generally had control over the interpretation of support programs as long as they complied with these regulations (ECB, 2020a).
On March 12, 2020, the Czech Republic declared a state emergency. As part of this state emergency, the government introduced extensive measures unprecedented in the history of the Czech Republic aimed at preventing this disease. These measures mainly included the closure of sports venues, theaters and cinemas, most shops, and all restaurants. It also gave a ban on traveling and entering the Czech Republic.
However, according to the Czech law § 36 Act N. 240/2000 Coll.1, the government is responsible for the damage inflicted upon legal and natural entities in connection with crisis measures and practices unless it is proven that the damage was inflicted by the damaged person themself. The state is obliged to compensate inflicted entities for material damages arising from said crisis measures or for ordered provision of material assets like personal protective equipment (ECB, n.d.).
To address the issue of many companies’ deteriorating economic situation, the Czech government introduced programs such as the Antivirus employee retention program, COVID loan, and certain subsidies and tax relief plans. A timeline showing the introduction of these programs can be seen in Figure 1. The governments also stipulated the requirements to be eligible for receiving said programs. Generally speaking, the programs were for healthy companies that were unable to generate sufficient income to stay afloat due to the restrictions (Government of the Czech Republic, 2020). The COVID loans also required applicants not having obtained benefits from any of the other support programs (ČMZRB, n.d.). These conditions will be reviewed in more detail in the following chapters.
1 See full text on Article 36 of Act N. 240/2000 Coll. on Figure 8Figure 8
Figure 1 – Timeline of important events and the introduction of related support programs
Source: Author
2020
2021
March 16, COVID I (loan) + Tax Liberation Package Covid first reported, December 31
WHO declared a pandemic, March 11
August 11, COVID – Culture I
October 15, COVID – Culture II June 1, COVID – Sport I + Antivirus C
COVID – Sport II + Antivirus Plus, October 14
September 7, COVID – Accommodation I COVID – Rent I, June 26
COVID – Rent II, October 21
December 1, AgriCOVID – Food Production Antivirus A + B, March 19
April 2, COVID II (loan)
VAT decrease, May 1
Void of EET obligation, June 3
October 26, COVID – Bus
March 1, Subsidy ZOO + COVID – Culture / Audio-vision + COVID Travel Agency Guarantee
COVID – Tourism, November 11
COVID – Sport III (Ski Resorts), February 15 COVID – Gastro – Closed Establishments, January 18 COVID – Outdoor Schools, December 10
January 25, COVID – Accommodation II
April 6, COVID – Trade Fairs / Congresses Tax exemption for ‘beer poured down the drain’, January 1
COVID 2021, April 12
April 19, COVID – Uncovered Costs COVID Praha (loan), April 21
May 5, COVID Plus (loan)
2.1 Methodology
At the time of writing this thesis, the topic of available support programs is still relatively fresh.
Due to a lack of relevant data and information on the available support programs, the author primarily conducts research from the websites of governmental institutions and news organizations. This information is presented in the Theoretical section of this paper. The lack of research also means that the information from various news sources may be biased or inaccurate. Instead of relying on one source, the author backs up much of the information in this paper with a second source (e.g., data from one governmental institution in conjunction with information from a news source).
Furthermore, foreign governmental institutions likely introduced their support programs hurriedly and aimed at the local demographic, meaning English versions were not available.
For this reason, the author focuses primarily on the programs available to Czech companies.
Though the author does compare the Czech programs to programs in other countries, this paper is by no means a comprehensive comparison of those programs. The comparison countries were chosen to be easily researchable (considering authors’ language proficiency limitations) or similar in size or demographic to the Czech Republic. These countries are namely Hungary, Slovakia, and the United States of America. Programs from other countries such as Austria or Luxembourg also appear throughout this paper.
The Practical section is an analysis that consists of case studies of companies from some of the most disadvantaged industries. The information on these case studies is, for the most part, derived from various news articles and supported by empirical data if applicable. For one of the case studies, the author was able to schedule an interview with the CEO of Orea hotel chain company (full interview transcript in Czech can be found in Annex 8). This interview proved useful in collecting relevant information regarding the situation of Orea Hotels during the pandemic. The interviewer and the author of this paper prepared various questions regarding the company’s financial situation during the pandemic, the support programs it utilized, or the company’s restructuring process. The author was also interested in the interviewer’s opinions and suggestions on the impact the pandemic had on their company and inherently its industry, as well as the programs that were made available to them. The reason for choosing a hotel as a case study is that the accommodation industry was one of the most disadvantaged industries during the pandemic as proven on page 6. The author chose Orea Hotels specifically for the reason of having mutual connections with its CEO.
Similarly, the pandemic also had its toll on food wholesalers and air transport. Again, this proof can be seen on page 6. For this reason, the author also chose to analyze two companies in these industries. For the food wholesale industry, the author chose to discuss Plzeňský prazdroj group of breweries. This is because due to the company’s size and overall public interest, relevant information exists regarding the situation of Plzeňský prazdroj during the pandemic. For the air transport industry, the author chose to discuss Smartwings and its subsidiary, ČSA. The reason for this decision is simple. Smartwings along with its subsidiary, ČSA, are the two largest Czech airliners, which received much media attention during the pandemic. The author uses the
available information on these companies to explain how they used the support programs in practice. Where necessary, the author makes assumptions based on the knowledge from the theoretical portion of this paper as well as the information provided by Orea Hotels’ CEO if similar conditions applied to the usage of these programs.
Using the knowledge from the case studies, the author makes a conclusion regarding the efficiency of these programs. Additionally, the author discusses the latest available data on the total volumes of provided support. In that chapter, the author argues that this data is inflated to give the impression of the programs’ overall success. This argument is again based on the knowledge from the theoretical portion of this thesis.
By combining the knowledge introduced in the theoretical and the practical parts of this paper, the author presents his findings in the Conclusion section. The author summarizes the most important information as well as gives an opinion on the possible future state of these programs.
Author’s opinions on the future development and the introduction of new programs are based on his judgement. However, the dynamic nature of the pandemic means that the future situation is highly unpredictable.
2.2 State financial support programs
Although the Czech Republic was one of the least affected countries during the first wave of the pandemic, it was unable to retain that position during the second wave in the fall of 2020.
The government soon declared a state of emergency, reintroduced a lockdown, and set restrictions on social events, education, and the retail and hospitality sectors. These measures limited mobility of citizens and tourists and caused a decline in private consumption.
Employees in many affected industries were laid off to reduce costs increasing the overall unemployment rate, and the growth of wages and real GDP subsided (OECD, 2020). This can be seen in Figure 2 below.
Figure 2 – Czech Republic GDP growth and unemployment rate
Source: (OECD, 2021a)
To battle the downward shift in the economy, the Czech government approved several financial aid programs for businesses and individuals (BDO, 2020). The author only analyzes the programs that managers could exploit to limit/compensate their corporation’s financial losses.
These programs can be categorized into three main groups: programs aimed at employee retention2; grants; and tax reliefs (Government of the Czech Republic, 2020).
2.2.1 Employee retention programs
Companies, whose economic activity was hindered due to the government’s restrictions, could take advantage of the Antivirus employee retention programs. According to the Czech labor code (Act No. 262/2006 Coll.), in certain cases employers must provide their employees financial compensation even with obstacles hindering economic activities, if these obstacles were caused by government interventions (MPSV, 2021b). To prevent economic losses, the government offered partial or full reimbursement as a compensation of employees’ total wages, to which they are entitled to. The program was available to all employers with at least one
2 In German-speaking countries also known as Kurzarbeit (Podnikatel.cz) -12.00%
-10.00%
-8.00%
-6.00%
-4.00%
-2.00%
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
% GDP change % Unemployment rate
employee that falls within the terms and conditions of the Antivirus program regimes3 (MPSV, 2021b). In 2020, there was a set of total four Antivirus programs that companies’ managers could apply for. Brief description of the individual Antivirus programs can be found in Table 2 below.
Table 2 – Antivirus employee retention programs description
Antivirus A Antivirus Plus Antivirus B Antivirus C Valid from 19th of
March, 2020
Introduced on 14th of October, 2020 as a version of Antivirus A
Valid from 19th of March, 2020
In effect through June - August, 2020
For employers whose employees were in quarantine or isolation due to forced closure or limitation of business activities
For employers whose employees were in quarantine, isolation, or hindered at work due to forced closure of business
For employers who encountered obstacles as a result of the challenges connected to the pandemic
For employers with fewer than 50
employees that did not lay of more than 10%
of its employees and did not lose more than 10% of its revenues Reimbursement of
80% of paid
employees’ salaries up to CZK 39,000
Reimbursement of 100% of paid
employees’ salaries up to CZK 50,000
Reimbursement of 60- 100% of paid
employees’ wages depending on the severity of encountered obstacles
Remission of social insurance
responsibility
accounting to 24.8% of employees‘ gross wages
Source: Compiled by author from (MPSV, 2021a)
According to the Czech Ministry of Labor and Social Affairs, in 2020, the Antivirus program proved successful in retaining low unemployment (MPSV, 2020c). In December 2020, the unemployment in the Czech Republic was the lowest of all EU countries4 at 3.1% compared to the previous year’s 2% (OECD, 2021b). If an employee retention program such as Antivirus had not existed and supported employers would lay off just 50% of their employees, the unemployment rate in the Czech Republic would be as high as 9.9% - the highest in the history of the Czech Republic (MPSV, 2020c). Synonymous with the positive change, as shown in Table 1, the number of employees in the energy sector has increased compared to the previous year (MPO, 2020a). Nonetheless, Antivirus programs only managed to absorb the consequences of imposed restrictions partially. Despite expected growth of 4.4%, the economy declined by 2.2% in the first quarter, 10.7% in the second, and 6.2% in the third, as portrayed in Figure 2 (MPSV, 2020c).
3 Only for employees under employment contract who participate in the sickness and pension insurance scheme under the Czech laws and regulations (MPSV, 2021b). For more information refer to
https://www.mpsv.cz/web/cz/antivirus
4 For more information on the CZ unemployment rate compared to the rest of EU, refer to Figure 6 in this paper
In December 2020, the Antivirus A+B programs collectively helped a total of 65,235 Czech businesses and 894,340 employees. That’s approximately every fourth business and employee in the Czech Republic. The average company received a contribution of CZK 334,178 over the course of 3.11 months (MPSV, 2020c). As can be seen in Table 3 below, most of the said businesses exploited these programs during months of strictest restrictions on economic activities. This information suggests that companies indeed used the employee retention programs when they needed them the most.
Table 3 – Number of provided Antivirus supports in March through October 2020
Severity of restrictions
Number of supported employers
Number of supported employees
March Partial restrictions 42,666 400,280
April Full restrictions 45,148 589,504
May Partial restrictions 30,559 487,151
June No major restrictions 10,438 285,133
July No major restrictions 7,911 187,877
August No major restrictions 7,444 141,431
September No major restrictions 8,454 102,996
October Partial restrictions 31,329 281,510
Source: (MPSV, 2020c)
While these results may look promising, many people debated their sustainability. Several economists argued that the government-supported jobs and companies, which, even without the restrictions, would not have survived. Subsequently, many jobs were kept artificially afloat, and many employees were paid in spite of not working. (ČTK, 2020c). Conversely, the Czech Chamber of Commerce criticized Antivirus for discriminating against employers with branches abroad5 as they were not eligible for this financial aid (Czech Chamber of Commerce, 2020b).
The Czech Chamber of Commerce also criticized Antivirus for creating an environment in which many employers decided to retain unneeded employees. This is because the Antivirus program did not cover the salaries of employees who were on notice period. Consequently, many employers instead kept those employees than pay for their wages before their notice period expired. This also caused a shortage of qualified employees in companies that needed them the most (Czech Chamber of Commerce, 2020b).
Additionally, the Antivirus programs only reimbursed already paid wages (MPSV, 2021a). This condition creates a pitfall if the company at question does not have the liquidity to pay salaries but requires financial support to survive. To be eligible for this financial support, the company at question would need to find additional ways to raise liquidity. A company with liquidity issues, however, may not be able to obtain a loan to cover these costs due to a high risk of default.
5 In Czech also known as ‘Odštěpný závod’
Moreover, in the program’s inception, 80% of all applications were rejected for being filled out incorrectly. This number dropped to 63% in the second week after the program’s launch, 38%
in the third week, and 28% in the fourth (MPSV, 2020b). The Czech Ministry of Labor and Social Affairs claimed the applicants’ carelessness caused this problem and that instructions on applying were available. However, according to a Seznam zprávy article, an unnamed reader complained about the instructions’ misleading information that led to the application being rejected (Frolík, 2020).
Furthermore, in 2020 the Czech Labor Office initiated inspections in approximately 884 of the supported employers and detected 357 cases of misconduct in relation to the program (ČTK, 2021a). While this number may not seem exceptionally high, it indicates that abusing the system is possible and may only be discovered upon closer scrutiny.
2.2.2 Grants
Many of the government’s restrictions meant that certain businesses had no way of generating revenue. Some of these businesses could take advantage of the Antivirus program mentioned in the previous chapter. Nonetheless, the Antivirus program only covered personnel expenses. For this reason, the Czech government offered additional financial support in the form of grants to the most affected businesses (Government of the Czech Republic, 2020; BDO, 2020). Most of these programs are meant to cover losses incurred due to the government's restrictions to reduce the spread of the C-19 virus, mainly in the cultural, sport, tourism, travel, production, and gastronomic fields6. COVID - Rent provided rent allowances to businesses whose economic activities have been significantly hampered due to government initiatives (BDO, 2020). See Table 4 and Table 5 for a brief description of some of the more notable programs.
6 Information on financial support for individuals can be found at https://www.mpo.cz/en/guidepost/for-the- media/press-releases/government-approved-_nursing-benefits_-for-the-self-employed-ii--257417/
Table 4 – Czech government grants and subsidies in 2020 (1/2)
COVID - Rent AgriCOVID – Food production
Rent I valid through June 26 to September 30, 2020 Rent II valid through October 21, 2020
Valid from December 1, 2020 Aimed at businesses who had to close temporarily
close their business premises due to the restrictions
Entities with revenues at least 25% lower than period
Reduction of 50% of rent to private businesses that paid at least 50% of their fixed rent prior to
submitting an application up to CZK 10 million per enterprise/business
Compensation of up to CZK 200,000 per applicant and up to CZK 20,000 per employee
Source: Compiled by author
However, some programs were only obtainable by businesses operating in specific industries.
Whereas COVID – Rent was created to help enterprises to cover rent expenses regardless of their line of work, programs such as AgriCOVID, COVID – Culture, Sport, and Accommodation were only obtainable by enterprises with business activities in those fields (MMR, 2020a;
eAGRI, 2020; NSA, 2020; MPO, 2020b). However, not all industries received respective grants. Ironically, air travel was one of the most affected industries, yet companies like Smartwings or ČSA did not have an opportunity to receive a grant (ČTK, 2021c). Instead, they had to rely on guaranteed loans, which will be revised in chapter 2.3.2 COVID Plus.
Table 5 – Czech government grants and subsidies in 2020 (2/2)
Source: Compiled by author
It is important to note that the tables above are not exhaustive. They do not include some of the grants aimed at smaller-scale businesses. Grants such as COVID – Bus compensated losses for coach lines depending on the bus's size and type9 (MD, 2020). COVID – Outdoor schools was a grant intended to cover non-refundable expenses from contracted outdoor schools between May 25 to June 29, 2020 (MMR, 2020b). COVID – Spa was in effect from August 24 to September 30, 2020, and was aimed at businesses in the spa tourism industry (MMR, 2021).
COVID – Tourism Support was created to aid tour operators, travel agencies, and travel guides during times of strict restrictions and receded tourism (MMR, 2020c).
7 Refer to Table 12 for more information on allocation of COVID – Sport grant in group A
8 Refer to Table 13 for information on calculation of Accommodation grants
9 Refer to Table 14 for more information on allocation of COVID – Bus grant
COVID - Culture COVID - Sport COVID - Accommodation
Culture I valid from August 11, 2020
Culture II valid from October 15, 2020
Sport I valid from June 1, 2020 Sport II valid from October 14, 2020
Accommodation I from September 7 to November 3, 2020
Intended for businesses
(theaters, concerts, night clubs, etc.), individual artists and performers, event organizers, and agents
For businesses that participate in professional championships (allocation group A) and organizers of sports events (allocation group B)
Intended for collective
accommodation facilities, such as hotels, pensions with at least five rooms
Compensation of 50% of expenses of postponed or canceled events
Compensation of 80% of expenses of postponed or canceled events due to
continuous restrictions (Culture II)
Compensation of 50% of incurred expenses up to a limit of 12,500,000 (allocation group A)7 or 10,000,000 (allocation group B)
Compensation of CZK 100-330 per day per room, depending on the type of accommodation8
As of writing this paper, new grants such as COVID – Gastro or COVID – Sport III Ski Resorts came into effect (MPO, 2021b). These grants offered compensation to businesses closed in 2020 but were only redeemable at the beginning of 2021 and are not within this paper’s timeline.
Furthermore, some of the grants mentioned above can no longer be exploited as their deadline for application has expired, in which case new ones have likely replaced them.
Additionally, the Czech government gave donations to businesses and projects that directly combat the C-19 virus's further spread through new technological devices and innovations (Government of the Czech Republic, 2020). On April 2, 2020, the Czech government allocated a total of CZK 200 million as part of the Czech Rise Up program. This program was supposed to help speed up the deployment of medical and non-medical technologies and solutions and increase the output of medical protection production plants (MPO, 2020f).
As a result of the program’s success, the Czech government introduced Czech Rise Up 2.0, valid from November 18 through December 17, 2020 (Government of the Czech Republic, 2020). Its primary purpose was to fund projects to create various medical solutions to battle the C-19 virus, such as vaccine research and testing, production of medical equipment, and building medical facilities (MPO, 2020g). A total of CZK 100 million was allocated for this cause (MPO, 2020g).
However, just as with the Antivirus programs, some of these grants were met with criticism.
The president of sportswear retailer Alpine Pro criticized COVID – Rent for being introduced too late. Meanwhile, a partner at Clifford Chance Prague, an international law firm, argued that the maximum support of CZK 10 million might seem enough to small businesses but problematic for large chain stores (MONIOVÁ, 2020).
Another issue of COVID - Rent was that businesses were required to pay 50% of the rent to the lessor prior to applying for the support. This condition posed a significant challenge for businesses with liquidity issues as they had to take on a loan or obtain the money through different means. Moreover, the government set the deadline for paying out the COVID – Rent support until the end of 2020, meaning most tenants could not expect to receive the support earlier (MONIOVÁ, 2020; MPO, 2021c).
COVID – Rent also disfavored businesses that remained open but had lower revenues because of the restrictions – such as shops selling flowers or tea. These businesses are put at a disadvantage compared to those that had to close down completely. The program also neglected the fact that most rent prices are indexed when the program was introduced. However, tenants had to substantiate their rent with the lower prices of January and February 2020 (MONIOVÁ, 2020).
Similarly, COVID – Culture also came with many caveats. Although the Czech government set aside a budget of CZK 900 million to provide financial aid for artists and performers, only about 6 % of that was budget was actually allocated. Most artists and performers could not meet the requirements set by the Czech Ministry of Industry and Trade. The underlying problem was
that COVID – Culture only covered expenses of postponed or canceled events. Revenues lost due to the government’s restrictions were not covered by this program (MPO, 2020b; ČT24, 2020).
The problematic usage of these grants does not end there. The vaguely specified conditions for obtaining COVID – Accommodation caused uncertainty for many guesthouse owners, who were unsure if they were eligible to receive any financial support (Horáček, 2021). COVID – Rent and COVID – Gastro internet portals were overloaded when they were introduced due to high internet traffic (Krýžová, 2021).
2.2.3 Tax reliefs
In addition to the employee retention programs and grants, the government decided to ease companies' tax burden affected by the government’s restrictions. On March 15, mere four days after a global pandemic was declared, the Czech government approved a large liberation tax package, which came into effect the following day (MFČR, 2020b; Finanční správa, 2020c).
Taxpayers could defer various tax payments and were relieved of interests and penalties on arrears and administration fees to the tax office (Finanční správa, 2020c). Companies could also defer mandatory prepayments on payroll or corporate income taxes.
On 1st of May 2020, the value-added tax for accommodation services, entrance fees to sports fields and fare for ski lifts, admission fees for cultural and sports events, and entrance fees to sauna and other similar facilities has been reduced from 15% to 10% (Finanční správa, 2020c).
Further, from June 3, businesses no longer had to record and send sales data to Financial Authority through the Electronic Sales Control System (EET). This exemption was first valid until the end of 2020 but was later postponed until the end of 2022 (Finanční správa, 2020c).
The liberation package mentioned above also reduces the tax rate for road tax by 25% for all vehicles, except passenger cars, starting in 2020. Taxpayers that already paid road tax before this amendment was created have created an overpayment, which decreases the advance on road tax for the next period (MFČR, 2020a).
For the first time in Czech history, taxpayers also had the option to deduct their tax loss retrospectively in two preceding years. This enabled businesses and individuals to deduct the losses on corporate or personal income tax for periods beginning 2020 from the tax base of periods 2019 and 2018 (Finanční správa, 2020c; Děrgel, 2020). This amendment of tax deductions will be explained in more detail in section 2.4.3 Loss carryback.
2.2.4 Comparison
As discussed earlier, the Czech government introduced several support programs aimed at helping businesses and individuals survive the pandemic. These programs can be categorized as employee retention programs, grants, and tax reliefs. To help the reader understand the efficiency of these programs, it can be helpful to compare them with the programs available in some other countries.
Similar employee retention programs were introduced in other countries such as Slovakia (Finančná správa, n.d.) or Hungary (Fülöp, 2020). The government of the Slovak Republic offered employers support of 80% of employees’ average wages (Finančná správa, n.d.). In spite of these efforts, the Slovak and Hungarian unemployment rates increased by 1.2%
compared to the previous year10. For recollection, the Czech unemployment rate increased by 1.1% in the same period. On the other hand, the USA's unemployment rate briefly spiked to an all-time high since the OECD started recording unemployment rate data in 1953, at 14.8%
(OECD, 2021b). The US government offered employers employee retention credits to cover certain employment taxes (IRS, 2021). By the end of 2020, the unemployment rate dropped to 6.8% (OECD, 2021b); however, it is debatable whether this program substantially impacted its decrease.
In contrast, government grants and subsidies vary significantly depending on the region.
Whereas higher unemployment rates were a global problem (OECD, 2021b), the grants mainly reflect the region’s most economically disadvantaged industries. Similar to the subsidies offered by the Czech government, the Slovak government offered rent subsidies (MIRRI, n.d.) and subsidies for businesses in the food production industries (MPSR, 2020). Companies in other industries could take advantage of the more flexible temporary grants to entrepreneurs (MSSR, n.d.; MIRRI, n.d.). The Hungarian government offered subsidies, namely to businesses in the tourism and accommodation sectors. These subsidies were similar to that of COVID – Accommodation and reimbursed accommodation providers 80% of net income for accommodations booked until November 8, 2020 (Wolters Kluwer, n.d.). The Hungarian government also offered financial support to small businesses as well as rent exemptions (KPMG, 2021).
Similarly, Austrian restaurants and hotels had the opportunity to draw on the Überbrückungshilfe funding programs (Ziebolz, 2020). On the other hand, the US government lists all of the available federal support programs and financial aids, including those introduced before the pandemic, on a government-owned website. Businesses and individuals can choose from hundreds11 of different financial aids explicitly created for them (grants.gov, n.d.).
Measuring the efficiency of grants and subsidies is complicated due to the lack of metrics and KPIs. Comparing the grants available to Czech businesses with grants offered by governments of different nations is also tricky because each state offers its businesses and individuals a different set of subsidy programs. However, many of the problems that plagued the Czech system for obtaining grants and subsidies, such as the excessive bureaucracy, were also present in Slovakia and Hungary (TASR, 2020; Index, 2020). The Austrian system for applying for the Überbrückungshilfe subsidy program had similar technical difficulties as the Czech COVID – Rent and COVID – Gastro programs (Lutz, 2020). That said, the vastly different system for obtaining grants in the US is also jammed with an array of different challenges. One of the main
10 Refer to Figure 6 for a graph of the development of the EU unemployment rate
11 On 3rd of April 2021, a total of 2534 grants were available (grants.gov, n.d.)
issues is that the process for obtaining federal grants may be biased and is not transparent enough (Enago Academy, 2018).
It can be assumed that most of these subsidies were targeted at the industries that have suffered the most due to the various restrictions imposed by the governments worldwide. For example, as we have established in Table 1, the Hotel/Gaming industry was among the most impacted.
As a result of that, temporary accommodation providers were eligible for financial aid in most discussed regions.
Lastly, governments of all of the discussed countries introduced some forms of tax reliefs to ease the individuals’ and companies’ tax burden. The US government approved several tax reforms, such as postponing the deadline for filling out taxes or making adjustments for underperforming companies and individuals in 2020 (Watson & York, 2020). Slovak taxpayers were given a new deadline for filing tax returns, reports, annual employee accounts, notifications, and payment of non-cash income tax to healthcare providers and motor vehicle tax. During the pandemic only, Slovak taxpayers were also eligible for tax overpayments from the previous tax year and would receive these overpayments within 40 days after applying for tax returns12 (MFSR, n.d.). Unlike their Czech counterparts, however, Slovak or American taxpayers could not deduct their tax loss from two preceding years.
It is essential to clarify that this comparison of support programs is not exhaustive. It serves as an indicator that governments worldwide faced similar challenges and introduced similar measures to tackle those challenges. Furthermore, making a comprehensive conclusion would require additional information, which might not be available at the time of writing. For these reasons, this paper should only be viewed as an initial analysis of the programs available in 2020.
12 Information on Slovak tax reliefs can be found at https://www.mfsr.sk/sk/koronavirus-informacie/
2.3 Bank-offered loans
In the previous chapter, we have looked at the various programs and tax reliefs introduced by the Czech government to help businesses and individuals survive the pandemic. Some of the discussed programs proved out of reach for many enterprises that needed them or did not offer adequate compensation. Additionally, some of the subsidies would only pay out at the end of 2020. Because of their lower-than-usual sales, these businesses were also unlikely to obtain conventional loans to increase their liquidity temporarily.
Before applying for a loan, most loan providers look at a company’s ability to service its debt.
Businesses with high expenses but low income will have a more difficult time convincing the loan provider of their capacity to repay in due time (Ward, 2020). This statement holds especially true for businesses whose economic activities were significantly hampered due to the government's restrictions. The Czech government anticipated this complication and, on March 16, 2020, readily introduced the national COVID loan program, later known as COVID I (CzechInvest, n.d.).
2.3.1 COVID loans
On March 9, 2020, at a council meeting, the government of the Czech Republic approved an interest-free loan COVID I, which came into effect on March 16. The government allocated a total of CZK 600 million to help small and medium enterprises13 that lost revenues or were limited in their business activities. Each enterprise could obtain a loan from CZK 500,000 up to CZK 15 million (ČMZRB, 2020b) to finance up to 90% of business-related project expenses, such as essential physical materials or financing reserves. The maturity of the loan was two years, with the option of starting repayment 12 months after receiving the loan (CzechInvest, n.d.).
The loan was provided by Českomoravská záruční a rozvojová banka, a bank entrusted with the disbursement of funds within governmental programs of assistance (ČMZRB, n.d.). To be eligible for this loan, an applicant had to prove their worsened economic situation. They could do so, for example, by submitting the confirmation of the cancelation of tours for travel agencies, confirmation of the cancelation of orders or delay in delivery of materials for manufacturers, or regulations from municipalities or hygienic stations on the cancelation of cultural, sports and other events (ČMZRB, 2020c).
The underlying problem with this approach was that ČMZRB was soon overwhelmed and could only satisfy a minimum number of applicants (Ťopek & Prokeš, 2020). By April 29, 2,928 out of 3,402 applications were rejected, and 307 were still being processed (MPO, 2020d).
According to a Hospodářské Noviny article, a scrap metal supplier to Škoda Auto found itself in financial distress when its customer halted production. Nonetheless, after a month of waiting, ČMZRB rejected their application without specifying the reason (Ťopek & Prokeš, 2020).
13 i.e., companies with up to 250 employees and annual turnover below EUR 50 million (CzechInvest, n.d.)
To address these problems, the government quickly introduced COVID II on April 1, 2020.
This program aimed to increase the scope to even the smallest business owners. Similar to its predecessor, this loan could be used to cover operational expenses of up to CZK 15 million.
However, unlike its predecessor, ČMZRB only served as the guarantor, whereas commercial banks acted as the loan providers. The advantage of this was that commercial banks know their customers and have more experience with providing loans to small business owners. This also means that the loan was available quicker than COVID I (CzechInvest, n.d.).
ČMZRB guaranteed for up to 80% of the loans with a warranty period of up to 3 years. Aside from providing guarantees, ČMZRB also assisted with paying part of the interest fee. However, COVID II only offered loans to projects undertaken outside of Prague (CzechInvest, n.d.).
Businesses located in the capital could take on a loan from the COVID Praha program, which was available beginning April 21, 2020. This program was essentially Prague’s version of COVID II and aimed at creating equal opportunities for businesses inside the city limits (ČMZRB, 2020a; MHMP, 2020).
A critical difference between these two loans is that COVID II was funded by the government.
Businesses outside of Prague were likely to obtain a loan if they met the criteria. However, according to the mayor of Prague, the government neglected businesses with activities in the capital (MHMP, 2020). Ironically, companies in Prague were often the most desperate for a loan. Many of these businesses’ primary income comes from tourism, which was almost non- existent during the pandemic. Higher rent prices compared to other regions would also negatively impact the businesses’ financial situation (Ťopek & Prokeš, 2020).
In addition, Prague could only allocate a maximum of CZK 600 million for the COVID Praha program. These resources were initially reserved for innovations as part of the Praha – Pól růstu program introduced in 2014 (MHMP, 2014). This amount was quickly distributed to companies on a first-come, first-served basis. However, the Prague City Council mentioned that only a handful of Prague entrepreneurs received this loan (MHMP, 2020; Ťopek & Prokeš, 2020). By May 25, ČMZRB managed to evaluate 179 applications out of only 412 successfully submitted. According to the mayor of Prague, this was only a fraction of businesses in dire need of an increase in liquidity (MHMP, 2020).
Further, ČMZRB only guaranteed 80% of the interest-free loans. In the end, commercial banks were still the key decision-makers when deciding who receives the loan. If the commercial bank deemed the borrower high-risk (and unlikely to repay the loan's face value), that borrower would not be eligible for the loan, even with ČMZRB as the guarantor. But it was precisely these businesses that required the risk-free loan the most (Ťopek & Prokeš, 2020).
After the failure of COVID II and COVID Praha programs, the government introduced COVID III. According to the Czech Chamber of Commerce, this new loan guarantee was arguably a step up in the right direction (Beneš, 2020). COVID III was available to businesses inside and outside of Prague. It provided a 90% guarantee for enterprises with a maximum of 250 employees, and an 80% loan guarantee for enterprises with up to 500 employees to a maximum
amount of CZK 50 million. Just like with COVID II and COVID Praha, the loan providers were commercial banks (ČMZRB, n.d.; CzechInvest, n.d.).
Businesses could obtain this loan to cover operational expenses, such as salaries, rent, energy expenses, customer or supplier invoices, inventory acquisition, etc. When it was introduced, this loan could not be used for the financing of investment activities or for the refinancing of other loans (Czech Chamber of Commerce, 2020c). But in October 2020, the government approved an amendment that allowed the extension of the COVID III program and use the borrowed amount for investment purposes (Czech Chamber of Commerce, 2020a).
2.3.2 COVID Plus
Businesses with over 500 employees were not left out from receiving a guaranteed loan. Larger corporations could draw on the COVID Plus (also known as COVID EGAP) program, which was provided by commercial banks and guaranteed by EGAP, a state-owned Export Guarantee and Insurance Corporation (Osinová & Kadeřábková, 2020). This program was available from May 5, 2020, and guaranteed for 80% of the loan with a face value of up to 25% of the applicants’ previous year’s revenues; e.g., a company that made CZK 1 billion in sales in 2019 was eligible for a loan of up to 250 million, 200 million of which was guaranteed by EGAP (EGAP, 2020a).
COVID Plus was available to corporations whose sales constitute at least 20% of exports and at least 250 employees. Furthermore, it was initially not intended for corporations with economic activities, mainly in transport, accommodation, tourism, and gambling (EGAP, 2020a). However, by the summer of 2020, the Czech government lifted this condition, making it available to companies with activities in the transportation or tourism industries, and in January 2021, the accommodation industry. Gambling companies were still not eligible for the loan (ČTK, 2021b). By the end of 2020, EGAP approved about 70 applications for COVID Plus. A list of some of these applicants can be seen in Table 6 below.
Table 6 – COVID Plus prominent applicants
Company Industry ~ FTE Loan amount
(CZK million)
Liberty Ostrava Steel 6000 2,000
Smartwings Air Transport 2400 2,000
Kiwi Air Transport 2000 932
RegioJet Transportation (Railroads) 1500 375
Umbrella (FlixBus) Transportation 400 96
Leo Express Transportation (Railroads) 250+ 44
Source: Compiled by author
Out of these examples, Smartwings and Liberty Ostrava were perhaps the most controversial.
Because the maximum loan amount was set at “only” CZK 2 billion, Liberty Ostrava objected that the amount was insufficient and asked the government for an amendment to increase the maximum loan amount, which the government rejected (ČTK, 2020b). Smartwings, along with
its subsidiary, ČSA, initially could not attain a loan and faced insolvency as they failed to meet the necessary criteria (ČTK, 2020d). For these reasons, both companies filed for a moratorium, temporarily delaying the repayment of debts and obligations (ČSA, 2020; Smartwings, 2020a).
Smartwings later secured a loan in the maximum amount of CZK 2 billion, which, together with restructuring14 and support from leasing companies, brought enough liquidity to financially recover (ČTK, 2021c; Smartwings, 2021). Nevertheless, the lower revenues and demand for traveling forced Smartwings to lay off 481 employees. ČSA, on the other hand, did not receive a loan and consequently filed for insolvency (ČTK, 2021c). The case of Smartwings and ČSA will be revised again in section 3.3 Smartwings, a.s.
2.3.3 Comparison
Only a handful of countries offered an interest-free guaranteed loan to disadvantaged businesses. Like the Czech Republic, Hungary offered a loan for companies to promptly receive an amount of money, which could be used to cover personnel expenses free of interest as part of the NHP Hajrá program (IMF, 2021; Hello Vidék, 2020). Though many governments worldwide introduced some forms of loan programs to help businesses with liquidity issues quickly, most of those loans came with mandatory interest payments (IMF, 2021).
The US offered low-interest loans, along with bailout grants, amounting to $25 billion for passenger airlines (Rappeport & Chokshi, 2020). At the time of writing this paper, the US Small Business Administration (SBA) also offered Paycheck Protection Programs (PPP) for businesses to help cover employee expenses and low-interest Economic Injury Disaster Loans (EIDL) to provide economic relief (SBA, n.d.). The latter EIDL program is comparable to the Czech COVID I loan program in that both loans were available to regular economically disadvantaged businesses. However, unlike its Czech counterpart, EIDL was offered at a 3.75%
p.a. fixed interest rate for ordinary businesses and 2.75% p.a. fixed interest rate for non-profit organizations, both with a maturity of 30 years. Additionally, for loans over $25,000, EIDL applicants had to pledge business assets as collateral since the loan was not guaranteed by a third party (SBA, n.d.).
Slovak businesses could rely on a state-guaranteed loan with an interest rate from 1.9% p.a., with the option of starting repayment one year after obtaining the loan and maturity of 2-6 years.
This loan was provided by Tatra bank and guaranteed by Slovak Investment Holding or Eximbank SR (Tatra Banka, n.d.). A similar loan program was set up by the Luxembourg Ministry of Finance, which guaranteed a large portion of existing loans (BIL, 2020).
It may seem like the lenient conditions for obtaining the COVID loans would attract many borrowers with liquidity issues. For this purpose, the Czech government allocated a total of CZK 851.5 billion to be loaned to distressed entrepreneurs. By the end of 2020, only about CZK 39.4 billion was loaned as part of the COVID loan programs (Czech Chamber of Commerce, 2021). This jarring difference can be seen in Figure 3 below.
14 Refer to section 2.4.2 to read more about recapitalization
Figure 3 – Expected vs. Actual loans to entrepreneurs
Source: (Czech Chamber of Commerce, 2021)
The causes for this significant disparity are unclear, and any reasoning is pure speculation.
However, it is possible that because ČMZRB and EGAP did not guarantee the whole loan, and commercial banks were the ultimate decision-makers, many applicants were rejected on the basis of having high credit risk. Additionally, as mentioned in section 2 Theoretical, one of the requirements for obtaining the COVID loans was that the applicant could not have drawn any other financial support. This means applicants could either choose from getting an interest-free guaranteed loan or apply for the financial support programs. The conditions of COVID loans would also prevent applicants from borrowing more than the maximum amount, like in the cases of Liberty Ostrava or Smartwings.
39.4
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A c t u a l t o t a l f i n a n c i a l s u p p o r t a s p a r t o f C O V I D I I , C O V I D P r a h a , C O V I D
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2 0 2 0 i n t h e f o r m o f l o a n s
2.4 Intercompany funding
Both state financial support programs and bank-offered loans were financing opportunities provided by external entities, be it a governmental institution or a commercial bank. When companies were unable to obtain or decided not to draw on these opportunities, they had a few options left to improve their liquidity position. Subsidiaries of holding companies may be eligible for an intercompany loan. Others had to rely on other restructuring methods. This chapter aims to discuss those remaining options and the previously mentioned option to deduct the company’s tax loss to improve their liquidity immediately.
2.4.1 Intercompany loans
An intercompany loan (hereinafter referred to as an IC loan) is an agreement to exchange funds between two members belonging to the same group of companies. In most cases, the borrower is a subsidiary of a parent company, which is the lender (AccountingTools, 2021).
Although IC loans are nothing new, they have received increased traction during the pandemic as many companies find themselves in a worsened financial situation. These loans bring forth many benefits compared to conventional bank loans but are met with many caveats. One of the main incentives to provide IC loans is that companies in a cash crunch can ask for a loan they would otherwise not obtain through a bank or another financial institution (Kumar, 2020). On account of the various restrictions, many commercial banks anticipated higher default rates.
They hence rigidified the conditions for obtaining a loan or made them less desirable by increasing the interest rates (ČTK, 2020a). In these cases, it often made sense to look for additional financing opportunities.
Another advantage of IC loans is that the lender may offer less stringent conditions than those provided by commercial banks. A direct shareholder may provide its subsidiaries an interest- free or a low-interest loan. The holding company can also stipulate other conditions such as indefinite maturity15. Furthermore, securing an IC loan is often faster than obtaining a loan from commercial banks (AccountingTools, 2021).
Despite the mentioned benefits, obtaining a loan from shareholders or holding companies may be complicated for several reasons. Firstly, companies with existing loan agreements may have previously entered into contracts, which forbid them from entering into new ones. These contracts may include conditions specifying that obtaining new loans is strictly prohibited even from related entities.
Secondly, shareholders and managers may run into the principal-agent problem. Like banks, shareholders may be reluctant to offer a loan to a dying company or a company with long- lasting liquidity issues. In addition, these loans are often subordinate to other loans, and in the event of bankruptcy, are only paid out after all senior loans have been repaid in full value. This is because, unlike conventional bank loans, IC loans are usually not backed up by collateral (Brealey, Myers, & Allen, Security and Seniority, 2012). In such cases, shareholders must
15 These are called perpetual subordinated loans
