Federal Government’s fight against COVID-19 ramps up – the implications of the second stimulus package for distressed SMEs and small lenders

Today, the Federal Government has seen its second stimulus package, to combat the economic challenges Australia faces in the wake of the coronavirus pandemic, enter into law. The stimulus package, valued at about $189 billion, and representative of about 9.7% of Australia's annual GDP, contains support in the form for individuals and households, business and for the flow of credit (Second Stimulus Package).

 

We outline some important aspects of the Second Stimulus Package designed to benefit business, households and individuals, with a particular focus on the small to medium-sized enterprise market (SME) in this article.

We previously reported various changes, including:

  1. temporary changes to the insolvency laws in our articles titled Relaxed insolvency laws now in force to offset economic impact of COVID-19 and Get out of gaol free – Australian Government announces temporary changes to insolvency laws in response to novel coronavirus outbreak; and
  2. financial assistance provided to SMEs in our article titled Key points on the new Federal Government economic stimulus package for SMEs.

1. Guaranteeing loans through the SME Guarantee Scheme

A significant part of the Second Stimulus Package is the Coronavirus Small and Medium Enterprises Guarantee Scheme, involves the Federal Government's commitment of up to $20 billion of lending to SMEs (SME Guarantee Scheme), as set out in the Guarantee of Lending to Small and Medium Enterprises (Coronavirus Economic Response Package) Bill 2010 (SME Lending Guarantee Bill).

In the bill's Explanatory Memorandum, the Government expressed that "the SME Lending Guarantee Bill gives effect to Government's commitment to enter into risk-sharing agreements with financial institutions to ensure that credit continues to flow to SMEs so that SMEs can continue to meet their immediate financing needs during the uncertain economic conditions caused by the Coronavirus" (paragraph [17.1]).

Essentially, eligible corporate lenders under the SME Guarantee Scheme will be provided with guarantees by the Government for loans with terms, that may include that:

  1. the borrower is an SME (including sole traders), with an annual turnover of up to $50 million;
  2. the principal does not exceed $250,000 per borrower;
  3. the principal must be repaid within three years, with an initial six-month repayment holiday; and
  4. there is no security, meaning that you, as a borrower, will not be required to provide any asset as a security for the loan.
The lender is able to extend the term of the loan, however, the Government expects that the lender acts reasonably and makes good business judgment by considering the variable economic circumstances.

The SME Guarantee Scheme will commence the day after the relevant bill, being the SME Lending Guarantee Bill receives Royal Assent. Applications for new loans made under the scheme will be made available until 30 September 2020.

The SME Lending Guarantee Bill is law as of today, after receiving Royal Assent yesterday.

2. Supporting SMEs through the Business Growth Fund Bill

The Australian Business Growth Fund (Coronavirus Economic Response Package) Bill 2020 (Business Growth Fund Bill) will authorise investment into the Australian Business Growth of up to $100 million in Commonwealth funding.

This measure is in response to the challenge that SMEs face in having access to capital. To illustrate the challenge faced, the Government pointed to the Reserve Bank of Australia observation of the reluctance of banks to finance start-ups, the difficulty of entrepreneurs to enter into an unsecured loan of more than $100,000 to support trading, and how medium-sized businesses struggle to provide security when all their real estate has already been provided as collateral (Explanatory Memorandum [18.3]).

Consequently, SMEs' retained profits are being used to fund expansion, which is and will continue to be impacted by COVID-19.

To facilitate this, the Business Growth Fund Bill will enable investment by the Commonwealth in a "company" (as defined in the Corporations Act) through forming or participating in forming a company, acquire shares in a company or become a member of a company, and acquire debentures of a company. And, it is that company which operates a "Fund" for the Government to provide support in the SME market.

The Business Growth Fund Bill is law as of today, after receiving Royal Assent yesterday.

3.  Boosting the securities market through the Structured Finance Support Fund

The Structured Finance Support (Coronavirus Economic Response Package) Bill 2020 (Structured Finance Support Bill) established a Structured Finance Support (Coronavirus Economic Response) Fund (SFS Fund) and the Structured Finance Support (Coronavirus Economic Response) Fund Special Account (collectively, the Funds). The Funds are aimed at improving and ensuring continued access to lending markets. The SFS Fund will invest "in securitised loans, including residential mortgages, written by smaller lenders, through either warehouses or the term market. This will support the ability of smaller lenders to:

  • continue to issue new loans in the current economic conditions resulting from the impact of the Coronavirus; and
  • obtain funding from markets at a competitive price" (Explanatory Memorandum [20.6]).
Securitisation is a form of funding which involves packaging loans into tradeable debt securities. Securities are typically split into tranches, with varied risk allocated to each tranche. Cash that is generated from the loans are used to service the interest and principal payments to investors in the securities. The securities market is a vital source of financing for small lenders and healthy market competition is crucial to its accessibility. The SFS Fund and SFS Special Fund will promote liquidity in that market.

The Structured Growth Fund Bill is law as of today, after receiving Royal Assent yesterday.

The new law will empower the Minister with the power to invest monies in the account, with an initial $15 billion credit the day after the bill receives Royal Assent, which we expect to be shortly.

This liquidity push will no doubt spark an increase in demand for securities in the securities market.

4. Temporary exemptions from obligations under the Corporations Act

The new Coronavirus Economic Response Package Omnibus Bill 2020 (Omnibus Bill) has also become law, which will also enable the Minister with the power to determine that a specified class of persons (as defined under the Corporations Act) are exempt from specified obligations in the Corporations Act or its regulations. The Treasurer may modify any specified obligations under the Corporations Act or its regulations to enable that specified class of person can comply.

This is a significant new measure, and companies under the Corporations Act should monitor closely whether they fall within the specified class of persons and how their obligations have been reduced.

The exemption will commence from either the date of the legislative instrument or at an earlier time as specified by the legislative instrument.

The abovementioned temporary changes to the Corporations Act, as reflected in the Omnibus Bill, is law as of today, after receiving Royal Assent yesterday.

5. Providing administrative relief for certain tax obligations

The Australian Tax Office will provide, on a case-by-case basis, administrative relief for certain tax obligations of taxpayers affected by COVID-19.

This includes:


  • providing businesses with the ability to deter payment of certain taxes up to six months;
  • permitting businesses to vary its pay-as-you-go instalment amounts to zero for the March 2020 quarter, and accordingly claim a refund for any instalments made for the September and December 2019 quarters.

Key takeaways

  1. As of today, there is a raft of new laws from the Second Stimulus Package, so SMEs will be particularly interested in how to access the benefits.
  2. The SME Guarantee Scheme will facilitate up to $20 billion lending to SMEs.
  3. SMEs will have access to a robust funding regime through the Business Growth Fund.
  4. Expect an increased access by SMEs in the securities market to finance expansion and/or trading.
  5. Be alive to any legislative instrument passed by the Treasurer, as you may fall within the specified class of persons and may be required to perform different, possibly reduced, obligations under the Corporations Act.
  6. For further information concerning other aspects of the Second Stimulus Package, take a look at our other articles on the subject: Relaxed insolvency laws now in force to offset economic impact of COVID-19Get out of gaol free – Australian Government announces temporary changes to insolvency laws in response to novel coronavirus outbreak and Key points on the new Federal Government economic stimulus package for SMEs.

Contributors

Benjamin Brady Senior Associate
Gidon Kangisser Lawyer