EU authorities should work with the private sector to develop a common EU-level hybrid instrument to help companies overcome the remaining challenges of the coronavirus crisis, according to pan-European trade association AFME.

In a report produced with PwC, the association said the current low number of insolvencies in the EU belied the fragile health of EU corporates, and that equity recapitalisation was needed to support long-term economic recovery.

It recommended the development of a new hybrid instrument, such as a preferred shared instrument, to cater for mid-caps and SMEs that do not have access to capital markets.

The envisaged instrument should be exempt from state-aid restrictions and feature standardised legal, accounting, tax bases and economic conditions for use across EU member states, it said.

According to AFME, interviews carried out for the report suggested that such an instrument could have broad appeal among institutional investors, such as pension funds and insurers, who were seeking debt-type risk profiles but with better returns.

However, they would need to be able to properly assess the risk that they are taking on board.

“This can be a particular challenge for unrated issues, as is likely to be the case for a scheme that is targeted at corporates with limited capital markets exposure,” the association continued.

“This is where intermediaries have a role to play in providing those assessments and to perform these at scale, reinforced by public support to boost the sector’s capacity.” 

Adam Farkas AFME

Adam Farkas, CEO of AFME

Other recommendations put forward by AFME include scaling up existing EU-wide recovery support schemes such as the EIF European Guarantee Fund tailored to the needs of SMEs, replicating existing member state best practices on hybrid instruments, and accelerating equity investment measures under the Capital Markets Union project.

“As European businesses strive to recover from the economic crisis, alternative types and sources of funding will be required to help mitigate their mounting debt burden while also allowing them to invest in their future,” said Adam Farkas, AFME’s chief executive officer. “This is where hybrid and equity markets can play a key role in supporting Europe’s recovery.

“The size of the challenge calls for urgent action. With a shortfall of up to €600bn threatening Europe’s recovery, we are calling on policymakers to work with the private sector at the national and EU levels to implement solutions to ensure mid-caps and SMEs in particular have the resources they need to recover post-COVID-19.”

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