How to Price a Guarantee

Football ball on a field
The pricing of a guarantee must take into account not only the financial situation of the borrower but also the value of any collateral.

Temporary Framework
As of 17 April 2020, the European Commission authorised 61 State aid measures from 23 Member States and the UK to combat covid-19.



State guarantees on loans make up the largest category of emergency measures implemented by Member States to combat the economic impact of the corona virus covid-19. The Temporary Framework requires that these guarantees are priced at a minimum premium whose rate varies between 0.25 and 2.00, depending on the duration of the underlying loan and whether the beneficiary is an SME or large enterprise.

According to the 2008 Commission notice on guarantees and the decisional practice of the European Commission, the gross grant equivalent of aid in a state guarantee is calculated as follows:


Typical situation Amount of State aid
Premium at market rate Zero
Premium below market rate (Market rate – lower rate) x guaranteed amount
Market premium rate cannot be identified [(Market rate of interest – interest rate for guaranteed loan) x loan] – any premium paid
Market interest rate cannot be identified [(Reference rate of interest – interest rate for the guaranteed loan) x loan] – any premium paidh
Borrower in financial difficulty; no market operator willing to lend Whole guaranteed amount

According to a well-established principle in the case law, the beneficiary of a guarantee is te borrower not the lender. But, as we will see, the granting of a guarantee can be much more complicated because the ultimate beneficiary may not be the immediate borrower, the financial situation of the immediate borrower can be as important as the financial situation of the ultimate beneficiary and because collaterals and other securities may be attached to the guarantee.

On 12 March 2020, the General Court had among other things to identify the ultimate beneficiary and the significance of the securities it offered in case T‑901/16, Elche Club de Fútbol v European Commission.[1]

Elche had appealed against Commission decision 2017/365 concerning aid granted by Spain to Valencia Club de Fútbol, Hércules Club de Fútbol, and Elche Club de Fútbol.

In February 2011, the Instituto Valenciano de Finanzas [IVF] which is the financial arm of the regional government of Valencia provided a guarantee for two bank loans totalling EUR 14 million to Fundación Elche for the purposes of acquiring shares issued by Elche in the context of a capital increase. As a result of the capital increase, Fundación Elche acquired 63.45% of the Elche’s shares.

The guarantee covered 100% of the principal of the loans, plus interest and the costs of the guarantee transaction. In return, an annual guarantee premium of 1% had to be paid by Fundación Elche to IVF. In addition, the IVF received, as a counter-guarantee, a pledge on the shares acquired by Fundación Elche. The duration of the underlying loan was five years. The interest rate of the underlying loans was Euribor 1-year plus 3.5% margin. In addition, there was a 0.5% commitment fee.

After conducting a formal investigation, the Commission found that Elche was a firm in difficulty, the value of the shares of Elbe was close to zero and that, consequently, the guarantee provided by the IVF was illegal aid incompatible with the internal market and ordered Spain to recover the sum of EUR 3,688,000.

Who was the beneficiary?

Both Elche and the Commission agreed that the measure in question was the guarantee granted by IVF but disagreed on who was the actual beneficiary.

The General Court noted that “(36) Article 107 TFEU prohibits aid […] without drawing a distinction as to whether the aid-related advantages are granted directly or indirectly […] it is possible in particular that the beneficiary is not the person who took up the guaranteed loan […] Ultimately, in order to determine the recipient of State aid, it is necessary to identify the undertakings which have actually benefited from it”.

“(37) The guarantee granted by the IVF was applicable only if the guaranteed loans were used for the purposes referred to in the guarantee contract, that is to say participation in the applicant’s capital increase.”

“(39) It follows that the Commission correctly held that the applicant was the beneficiary of the measure in question.”

Was the guaranteed imputed to the state?

Elche claimed that the IVF guarantee could not be imputed to the state.

The General Court, first, recalled that “(50) the imputability to the State of an aid measure taken by a public undertaking may be inferred from a set of sufficiently precise and consistent indicators, arising from the circumstances of the case and the context in which that measure was taken and justifying the presumption of the existence of the specific involvement of the public authorities in the adoption of that measure”.

Then the General Court referred to the landmark “Stardust Marine” case France v Commission [C‑482/99] in which the Court of Justice defined indicators of imputability “(51) such as the fact that a public undertaking which granted the aid could not take that decision without taking account of the requirements of the public authorities, the fact that the undertaking was linked to the State by factors of an organic nature, that it had to take account of directives issued by an inter-ministerial committee, the nature of the activities of the public undertaking and the exercise of the latter on the market in normal conditions of competition with private operators, the legal status of the undertaking (in the sense of its being subject to public law or ordinary company law), the intensity of the supervision exercised by the authorities over its management or its integration into the structures of the public administration.”

In its decision, the Commission relied on the following indicators:

  1. IVF was governed by public law.
  2. IVF acted as the main instrument of public credit policy.
  3. Representatives of the regional government of Valencia participated in IVF’s General Council and Investment Committee.
  4. IVF was attached to the department responsible for economic affairs.
  5. The guarantee at issue was in line with the applicable legislation.

The General Court concluded that “(59) IVF acts as a development bank pursuing public policy objectives and not as a credit institution with purely commercial objectives”, and that “(61) the Commission was justified in finding that the guarantee at issue was imputable to the State.”

Who bears the consequences in case of non-repayment of the loan?

Elche argued that the Commission mispriced the guarantee because it did not take into account the financial situation of Fundacion Elche.

The General Court, first, observed that “(85) Fundación Elche must be accountable to the IVF for the consequences of non-payment of the underlying loans of the guarantee contract and for the invocation of the guarantee by the lending banks.”

“(86) The financial and economic situation of the Fundación Elche therefore constitutes, in principle, a relevant characteristic for the purposes of evaluating the risk taken by the State guarantor and, thereby, the guarantee premium which a private operator would claim in those circumstances.”

“(89) First, … the Fundación Elche’s economic and financial situation constitutes, in principle, a relevant fact for the purposes of assessing the existence of an advantage resulting from the conditions governing the grant of the guarantee at issue.”

“(91) The probability of the borrower’s default, in the present case the Fundación Elche, owing to its financial situation is, in itself, a relevant fact that the Commission was required to examine (see, in that regard, point 3.2(d) of the Guarantee Notice)”.

“(92) Second, once the relevance of the Fundación Elche’s economic and financial situation has been established, it must be examined whether the Commission took into account in its assessment the existence of an advantage.”

The General Court went on to note that “(94) it is apparent from examining the contested decision, that it does not take into account the Fundación Elche’s situation for the purposes of establishing the existence of an advantage, […] By contrast, the contested decision does not in any way determine the relevance of the Fundación Elche’s individual position in assessing the risk associated with the grant of the guarantee at issue.”

“(95) In view of all of the foregoing, it must be held that the Commission failed to take into account the relevant fact which constitutes the Fundación Elche’s economic and financial situation for the purposes of assessing the existence of an advantage and, in doing so, committed a manifest error of assessment”.

The relevance of Elche’s financial condition

Elche argued that although its financial condition was not healthy, it was not assessed properly. The General Court rejected this argument.

“(98) In the present case, […], the Commission submits that the applicant has diminishing turnover […], a negative earnings before tax […] and negative own equity […] It must also be noted that the registered capital of the applicant, which is a limited liability company, has diminished by more than half”.

“(99) In view of the foregoing, the Commission committed no manifest error of assessment in finding that the applicant was, at the time the guarantee at issue was granted, a firm in difficulty”.

“(105) Finally, as regards the Kingdom of Spain’s argument that, in essence, the applicant’s economic situation should have been assessed by the Commission in the light of the particular features of the professional football sector, it is sufficient to note, first, that the economic nature of the practice of football by professional clubs has previously been recognised by the Court […] and, second, that the meaning of ‘a firm in difficulty’, […], is an objective notion that must be assessed solely in the light of the specific indices of the financial and economic situation of the undertaking in question”.

Therefore, a sports club can be in financial difficulty, just like any other undertaking.

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The impact of the recapitalisation and the value of the collateral

The General Court, first, noted that “(107) the Commission has correctly pointed out, that the contested decision states, in recital 86, that ‘the annual guarantee premiu[m] of … 1% charged for the guarante[e] in question cannot be considered as reflecting the risk of default for the guaranteed loans, given the difficulties’ of the applicant.”

Then the Court examined whether the value of the shares that were pledged as counter-guarantees was close to zero, as the Commission had asserted in its decision.

“(111) It must be noted in this respect that, in order to conclude that the applicant’s shares are of a low value, the contested decision relies on the fact that it was a firm in difficulty at the time the measure in question was granted, for which there was no credible viability plan in place to demonstrate that its activity was likely to generate a profit for its shareholders.”

The Court concluded that “(112) the applicant’s classification as a firm in difficulty in the contested decision is free from manifest errors of assessment.”

“(113) It remains to be determined whether the method used by the Commission in this case which consists in deducing a value ‘close to zero’ of the applicant’s shares from the fact that it was in difficulty without a viability plan also being drawn up — that point not being disputed — is vitiated by a manifest error.” However, according to the Commission “the impact of the applicant’s capital increase could not be taken into account in determining the shares’ value at the time the guarantee at issue was granted, in so far as it predated the capital injection.”

The Court disagreed. “(115) Since the applicant’s recapitalisation is the purpose and the intended effect of the guarantee at issue, it is a predictable factor at the time the guarantee at issue was granted and which a private operator in the IVF’s situation would have taken into account for the purposes of assessing the value of the pledged shares. It follows that, by failing to take this into account, the Commission committed a manifest error of assessment.”

“(116) In addition, the applicant criticises the Commission for not having examined the existence of a mortgage on a six-hectare land plot also given to the IVF as a counter-guarantee by the Fundación Elche.” The General Court ruled that the Commission should have been aware of that mortgage because it was included in the information that had been submitted to it.

Next, the General Court explained that it was necessary to examine “(118) whether the mortgage in question constitutes a relevant factor for the purposes of assessing the existence of an advantage and whether, as the case may be, the Commission took account of it.”

“(119) In the present case, the mortgage given by the Fundación Elche, a security granted by the guaranteed borrower, constitutes as such a characteristic of the guarantee at issue which the Commission is required to examine (see, in this respect, point 3.2(d) of the Guarantee Notice). Moreover, it is not disputed by the Commission that the contested decision contains no mention of that mortgage.”

“(120) It follows that the Commission did not take into account the relevant fact of the mortgage granted by the Fundación Elche to the IVF for the purposes of assessing the existence of an advantage, and, in doing so, committed a manifest error of assessment.”

Undertaking in difficulty v undertaking in severe difficulty

Elche argued that the Commission mispriced the guarantee because it considered that it was in severe difficulty.

“(124) In that regard, the Court has previously held that a borrower who subscribes to a loan guaranteed by the public authorities of a Member State normally obtains an advantage inasmuch as the financial cost that it bears is less than that which it would have borne if it had had to obtain that same financing and that same guarantee at market prices”. [At this point the judgment cites the seminal cases of Residex Capital IV, C‑275/10, paragraph 39, and France v Commission, C‑559/12 P, paragraph 96.]

“(125) As is stated in point 3.2(d) of the Guarantee Notice, in order to determine the corresponding market price, the characteristics of the guarantee and of the underlying loan should be taken into consideration, which include, inter alia, the amount and duration of the transaction, the security given by the borrower and the other factors affecting the recovery rate evaluation and the probability of default of the borrower due to its financial position, its sector of activity and prospects.”

“(126) 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 (see the second subparagraph of point 3.2(d) of the Guarantee Notice). 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 (see the third subparagraph of point 3.2(d) of the Guarantee Notice). Finally, where there is no market price of a similar non-guaranteed loan, it is appropriate to use as a proxy the reference rate, defined in accordance with the Reference Rates Communication (see the second paragraph of point 4.2 of the Guarantee Notice).”

“(127) In the present case, it must be observed that the contested decision excludes the possibility that the requested guarantee premium reflects the applicant’s financial difficulties and the associated risk of default for the guaranteed loans … the Commission states that a firm in difficulty is unlikely to find a financial institution prepared to lend on any terms, without a State guarantee. The Commission does not state anywhere in those recitals, or elsewhere in the arguments relating to the characteristics of an advantage … what the market price is at which it assesses the premium in question. Nor at that stage does the Commission examine the pledge made to the IVF as a counter-guarantee … Overall, the Commission merely carries out an evaluation of the applicant’s financial situation to conclude that, in view of the amount of the guarantee premium paid to the IVF, that premium is not in line with market conditions.”

“(128) Before the Court, the Commission states, in essence, that the contested decision dispenses with the need for a comparison between the guarantee premium due and the market price, taking into account the applicant’s situation, which is a firm in difficulty. In other words, there is a presumption that the premium guarantee does not comply with market conditions where the borrower being granted the guarantee, or in this case the beneficiary of the advantage within the meaning of Article 107(1) TFEU, is a firm in difficulty.”

“(129) As was recalled in paragraph 126 above, point 3.2(d) and point 4.2 of the Guarantee Notice require a prior search for a possible market price against which to compare the terms of the contested transaction. Specifically as regards firms in difficulty, the Commission distinguishes, in point 4.1(a) of the Guarantee Notice, the situation of firms in difficulty according to their risk of default, which is not uniform. That notice thus distinguishes the situation where there is a guarantor on the market for a firm in difficulty from one in which it is likely that no such guarantor exists. It is therefore accepted that there may be a market price including where the guarantee is granted to a firm in difficulty.”

It is helpful to quote here the full text of point 4.1(a) of the Commission notice on guarantees:

“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”.

In all fairness to the Commission point 4.1(a) seems to warn that no market operator would be willing to lend to a company in difficulty. Yet, the General Court distinguished between two situations: companies in difficulty having to pay a high premium and companies in difficulty for which a guarantee would be unavailable or equal to the guaranteed amount.

Then the Court went on to note that “(130) the Commission indicates … that the applicant was ‘not in an extreme difficult situation, in the sense of point 2.2 and point 4.1 letter (a) of the 2008 Guarantee Notice’, after stating … that it ‘was in financial difficulty … In doing so, the Commission also concurs with the interpretation made in paragraph 129 above of point 4.1(a) of the Guarantee Notice as tending to distinguish, among those firms in difficulty within the meaning of the Rescue and Restructuring Guidelines, two sub-categories of firms according to their risk of default.”

“(132) Consequently, the Commission, in presuming that no financial establishment would act as a guarantor for a firm in difficulty and, therefore, that no corresponding guarantee premium benchmark could be found on the market, failed to have regard to the Guarantee Notice by which it is bound … For the same reasons, it also failed to fulfil its obligation to carry out an overall assessment, taking into account all relevant evidence in the case, enabling it to determine whether the applicant would manifestly not have obtained comparable facilities from such a private creditor”.

Use of the reference rate for loans

Once the Commission found that the guarantee was not on market terms, it had to calculate its gross grant equivalent. For this purpose, it used the applicable reference rates for loans as a proxy for the market rate, given that it had considered a similar non-guaranteed loan did not exist.

Unfortunately for the Commission, the Court noted a logical inconsistency in the Commission’s approach.

“(135) The Commission applied the reference rate applicable in this case, established in accordance with the Reference Rates Communication. As has been recalled in paragraph 126 above, recourse to the reference rate constitutes a default method where there is no market price identified on the basis of similar transactions. Therefore, the Commission cannot rely on the application of that method in connection with calculating the amount of aid to argue that it did in fact proceed to compare the contested transaction with transactions carried out in market conditions.”

Indeed, it appears that there is a contradiction in the reasoning of the Commission. The reference rate is used when an actual market rate cannot be established, but it implies that a market rate in principle exists. Logically, if a market rate cannot exist at all because no one is willing to lend to the undertaking in question, then the reference rate is irrelevant. In this case, the amount of State aid would have been much larger than what the Commission had estimated because, as point 4.1(a) of the guarantee notice indicates, it could have been equal to the whole amount of the loan [minus the premium of 1% that was paid].

In replying to a question put to it by the Court, “(136) the Commission merely stated that no information concerning interest rates on loans granted in similar situations had been supplied in the course of the investigation, without providing any indication as to the investigative measures taken, if any at all.”

In response the General Court recalled the well-established principle that “(137) the burden of proving that the criteria pertaining to the application of the private operator test have been fulfilled – which is applicable in the present case – lies with the Commission, which must ask for all relevant information during the administrative procedure … In that regard, the Commission cannot rely on the fragmentary nature of the information it received during the administrative procedure to justify its decision, since it has not exercised all the powers at its disposal to obtain the necessary information … That applies all the more strongly where the contested decision is based not on a failure to produce evidence which had been requested by the Commission from the Member State concerned, but on the finding that a private creditor would not have behaved in the same way as the authorities of that Member State, a finding which presupposes that the Commission had all the relevant information necessary to draw up its decision”.

“(138) In the present case, the Court inferred from the answers given by the Commission in its defence, …, that, during the administrative procedure, it did not ask the Kingdom of Spain or other sources of information about the existence of similar loans to the loans underlying the contested transaction. The Commission could therefore not rely on a failure to produce evidence requested by it to draw the conclusion, …, that there are a ‘limited number of observations of similar transactions on the market’ which did not ‘provide a meaningful comparison’.”

As a consequence, the General Court annulled the Commission decision.


The General Court is right that the Commission made a mistake in ignoring the impact of the mortgage and the recapitalisation.

However, the interpretation of the General Court of point 4.1(a) of the notice on guarantees is new and must have surprised the Commission. The Commission should consider revising the text of point 4.1(a) to clarify whether indeed it envisages two distinct situations. I think in practice it would be impossible to make a meaningful distinction between two situations. Therefore, the revision should focus on how the right rate can be established. If that is too difficult then it should simply say that for a firm in difficulty the GGE is the guaranteed amount unless the Member State concerned can provide credible evidence that a market rate exists.


[1] The full text of the judgment can be accessed at:



Phedon Nicolaides

Dr. Nicolaides was educated in the United States, the Netherlands and the United Kingdom. He has a PhD in Economics and a PhD in Law. He is professor at the University of Maastricht and the University of Nicosia. He has published extensively on European integration, competition policy and State aid. He is also on the editorial boards of several journals. Dr. Nicolaides has organised seminars and workshops in many different Member States, and has acted as consultant to several public authorities.

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