Commission Decision
of 27 October 2010
on State aid C 14/09 (ex NN 17/09) granted by Hungary to Péti Nitrogénművek Zrt.
(notified under document C(2010) 7274)
(Only the Hungarian text is authentic)
(Text with EEA relevance)
(2011/269/EU)
THE EUROPEAN COMMISSION,
Having regard to the Treaty on the Functioning of the European Union, and in particular the first subparagraph of Article 108(2) thereof,
Having regard to the Agreement on the European Economic Area, and in particular Article 62(1)(a) thereof,
Having called on interested parties in accordance with the aforementioned provisions to submit their comments pursuant to those provisions, and having regard to their comments,
Whereas:
At the end of 2008 the Commission learnt from the media about planned measures by Hungary in favour of Péti Nitrogénművek Zrt. (hereinafter ‘Nitrogénművek’). After several exchanges of information, on 29 April 2009 the Commission opened the formal investigation procedure on measures allegedly constituting State aid.
Hungary submitted its comments to the Commission’s opening decision on 3 and 17 August 2009.
The Commission transmitted the comments to Hungary by letter of 21 September 2009. Hungary replied to the third-party comments by letter of 20 October 2009.
The Commission requested further information from the Hungarian authorities on 3 November 2009, to which Hungary replied by letter of 4 December 2009. A further informal exchange of information took place by e-mail in June 2010 between the Commission services and the Hungarian authorities.
Nitrogénművek is a producer of synthetic fertilisers. Its head office is located in Pétfürdő, Veszprém county, Hungary, which is an assisted area pursuant to Article 107(3)(a) TFEU. The company is Hungary’s main fertiliser producer and the main supplier of the Hungarian market.
Table 1 | ||||
Nitrogénművek’s key financial data | ||||
2007HUF billion | 2007EUR million | 2008HUF billion | 2008EUR million | |
|---|---|---|---|---|
Turnover | 48,211 | 175 | 64,836 | 232 |
Operating result | 2,435 | 8,9 | 16,335 | 59,4 |
Net result profit/loss (-) | -3,303 | -12 | 7,296 | 26,5 |
Source: Data from the company’s 2008 financial statements. | ||||
On 18 October 2008, Nitrogénművek stopped its production activity.
- (a)Loan A: investment loan7 of EUR 52 million with a maturity of 6 years. The interest rate is 6-month EURIBOR + 1,7 %. The 100 % government guarantee has an up-front one-off premium of 2 % of the loan amount. Collaterals for MFB: 100 % state guarantee, second-rank (i.e. ranking immediately after loan B, below) pledge on assets8. No specific collaterals for the State were specified. The principal is to be reimbursed in 12 six-monthly instalments starting from 15 June 2009. Interest payment is due every 6 months.
- (b)Loan B: current facilities loan HUF 10 billion (approx. EUR 36 million) loan granted for 4 years, with an interest rate of 3-month BUBOR9 + 2,5 %. The loan is backed by an 80 % government guarantee, with an upfront one-off premium of 2 % (of the amount covered by the 80 % guarantee). Collaterals for MFB: 80 % state guarantee, first-rank pledge on assets. No specific collaterals for the State were specified. In accordance with the Government Decision, MFB had the right to appoint two members of Nitrogénművek’s executive board. The principal is to be repaid at the end of the maturity. Interest payment is due every 3 months.
Table 2 | ||||||
Summary of the state measures in favour of Nitrogénművek | ||||||
Aim | Loan amount | Interest | Guarantee | 2 % upfront guarantee fee, annualised10 | Main collaterals to the bank | |
|---|---|---|---|---|---|---|
Loan A | Investments | EUR 52 million | EURIBOR + 1,7 % | 100 % | 0,41 % | Second-rank asset pledge |
Loan B | Current facility | HUF 10 billion | BUBOR + 2,5 % | 80 % | 0,46 % | First-rank asset pledge |
Nitrogénművek restarted production on 26 February 2009.
- (a)
the 100 % state guarantee on the EUR 52 million investment loan;
- (b)
the EUR 52 million investment loan itself, in case it is an existing loan which was granted prior to the state guarantee (On the basis of the information available at the time of the opening, it was not clear whether the investment loan was an existing or a new loan.);
- (c)
the 80 % state guarantee on the HUF 10 billion current facilities loan;
- (d)
the 20 % non-guaranteed part of the current facilities loan.
The Commission also considered that the 100 % state guarantee backing the investment loan might constitute aid in favour of MFB, insofar as it guarantees an existing loan.
In general, Hungary argues that the measures could not be classified as State aid because they were market-conform and thus provided no advantage to the beneficiary. Hungary does not dispute the other cumulative criteria of State aid, i.e. transfer of state resources, selectivity, distortion of competition and effect on trade.
With regard to the shutdown of the company’s production in autumn 2008, the Hungarian authorities explain that in general the fertiliser industry is characterised by high seasonality. Moreover, due to the evolving financial and economic crisis, demand diminished. The company decided to stop its production in the view of high gas prices (which represent a major cost element in fertiliser production and were expected to fall) and the substantial accumulated inventories. Hungary also notes that such a stoppage was not a rare phenomenon on the European market; several manufacturing sites shut down or limited production in the same period.
With regard to the interest paid and the guarantee fee, Hungary maintains that those are market-conform: (i) in the case of loan B they do not qualify as aid in view of the Reference rate communication; and (ii) in the case of loan A the interest rate is below that which would be deemed market-conform under the Reference rate communication, but given the high-value collaterals, it can nevertheless be considered as market-conform. Hungary also holds that there were several loan and credit line contracts concluded between the company and private banks in the first half of 2008 on similar conditions, which – it argues – would show that the premiums and terms of loans A and B did not provide the company with any advantage compared to market financing.
The beneficiary also commented, contesting that the measures would entail illegal State aid. Its arguments overlapped to a large extent with those submitted by the Hungarian authorities.
In its reply to the comments of interested parties, Hungary dismisses the third parties’ comments and reiterates its arguments that Nitrogénművek did not benefit from State aid.
In order to ascertain whether a measure constitutes State aid, the Commission has to assess whether the contested measure fulfils the conditions of Article 107(1) TFEU. This Article states that: ‘Save as otherwise provided in the Treaties, any aid granted by a Member State or through state resources in any form whatsoever which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods shall, in so far as it affects trade between Member States, be incompatible with the internal market’.
In the light of this provision, the Commission will assess hereunder whether the contested measures in favour of Nitrogénművek constitute State aid.
The rules governing MFB’s functioning have changed since the granting of the measures. The present assessment refers to the legal situation at the time of the conclusion of the loan agreements under scrutiny.
MFB’s share capital, amounting to HUF 60 billion, is 100 % owned by the Hungarian State, its shares are not subject to trading as stipulated by the MFB Act. Some of MFB’s liabilities are covered by the State’s Central Budget; the budgetary law stipulates MFB’s maximum lending and the amounts it is allowed to guarantee. Moreover, any dividends paid out flow into the Central Budget. Consequently, the Commission finds that measures granted by MFB involve state resources.
The State’s ownership rights in MFB are exercised by the competent minister. MFB reports annually to the competent minister about its operations; the auditor is also appointed by the competent minister. The members and the Chairperson of the management and supervisory boards, as well as the Chief Executive Officer, are appointed and revoked by the competent minister.
On the basis of the foregoing, the Commission considers that the MFB’s actions are imputable to the State.
As the loans themselves are directly imputable to the State, the additional state guarantees do not increase the financial burden borne by the State or the advantage to Nitrogénművek. It therefore appears appropriate to subsume the loans and the guarantees at issue under two measures to be assessed as straightforward loans from the State (for which the cost to Nitrogénművek will be the interest on the loan plus the premium for the guarantee).
Consequently, the State aid assessment will be made in the light of the Reference rate communication which applies to loans.
Hungary maintains that Nitrogénművek did not qualify as a company in difficulty within the meaning of the Rescue and restructuring guidelines at the time of the granting of the measures. As regards the stoppage of the company’s production in October 2008, the Hungarian authorities claimed that this was a strategic and seasonal decision and that several other market players stopped production in autumn 2008. Hungary claims that the company should rightly be considered as BB-rated at the time.
The Commission notes that despite the company’s apparent liquidity problems, and as the evidence submitted by Hungary suggests, the company’s total equity exceeded its registered capital, it did not fulfil the criteria under domestic law for being the subject of collective insolvency proceedings, and it had positive operating as well as net results for the entire year 2008. Therefore, points 9-11 of the Rescue and restructuring guidelines do not seem to be fulfilled.
The Commission considers that a company which, having stopped its production, is unable to resume operations without public help – regardless of the reasons which led to its stoppage – cannot be regarded as a healthy and viable company. It is clear from the financial accounts that the company had a serious liquidity shortage and that the State’s intervention was essential in raising funds.
As regards the creditworthiness of the company, the Commission doubts that the alleged BB rating reflects the real financial situation of Nitrogénművek at the time of the granting of the measures. Firstly, the Commission notes that Hungary did not provide a credit assessment by an independent rating agency or financial institution. The alleged BB rating is attributed to MFB which, for the purposes of the measures at issue, acted as an instrument of the State (indeed in line with the express decision of the Government) and not as an independent financial institution seeking to make sound commercial assessment. This is in itself liable to call into question the value of the ‘rating’. Secondly, Hungary provides no information whatsoever on the methodology and underlying information used by MFB to establish the financial health of the company. Thirdly, in the light of the fact that Nitrogénművek was, at the time of the granting of the measure, a company with no production activity and apparently in urgent need of financing in the absence of which it would be unable to resume production (see in detail recitals 34 and 35 above), it is not credible that its financial situation could be considered as ‘satisfactory’. Against this specific background, and regardless of the past performance of the company, the Commission is of the view that in the present case the alleged BB rating cannot be applied for the State aid assessment of the measures under the Reference rate communication.
In conclusion, the Commission is of the opinion that the company cannot be regarded as a company with sound financial strength. It is clear from the submissions that it suffered severe liquidity problems and was unable to resume operations (see recitals 34 and 35 above). Thus it can be considered to be in bad financial shape, which corresponds to the lowest category of the Reference rate communication (CCC category).
Given that the total combined value of the two loans under scrutiny is EUR 88 million (i.e. collaterals have a value of [over 70] % of the loans according to the most prudent estimate), the Commission considers that the transactions are highly collateralised. Even if the pledges for loan A are in second rank, any claims resulting from this transaction can be satisfied after those from loan B.
Moreover, with regard to loan B, the State had the right to appoint two members to the company’s executive board, having a veto right on any decision to pay out dividends, to grant further pledges to third parties or to take out further loans exceeding HUF 100 million.
In the light of these elements, the Commission considers that both transactions, loan A and loan B, were highly collateralised for the purposes of the Reference rate communication.
In its submission Hungary presented several allegedly ‘comparable’ loans concluded between private banks and Nitrogénművek, with the aim of demonstrating that the financial charges under the public measures were market-conform.
In order to determine whether a loan entails State aid and, if so, how much, the Commission applies a proxy for market interest rates in its Reference rate communication. According to the Reference rate communication, differentiated margins are to be applied on the base rate, depending on the creditor’s rating and the available collaterals.
With regard to the relevant date of assessment, given that the final binding ‘granting’ acts (i.e. the loan agreements) were concluded on 26 January 2009, the reference rate (base rate plus the relevant margin) of that day has to be compared with the corresponding effective remuneration of the financing package.
Concerning the margin to be applied, as set out in detail above, the Commission considers that Nitrogénművek fell into the lowest category of the reference rate ‘grid’ and that the transactions were highly collateralised. Consequently, a margin of 400 basis points added on the top of the relevant base rate can be considered as a market benchmark rate.
As shown above, the measures are financed by state resources and imputable to the State.
Nitrogénművek obtained financing on better terms than on which it would have raised funds on the markets. The measures thus confer an advantage on the company.
Furthermore, the advantage is selective as the measures are limited to Nitrogénművek.
These selective measures are likely to distort competition, by providing the company with an advantage in relation to competitors, and there is extensive trade between Member States in fertilisers.
Consequently, loans A and B constitute State aid within the meaning of Article 107(1) TFEU.
In the opening decision the Commission raised the possibility that the 100 % guarantee on loan A could be State aid to the benefit of MFB in view of the fact that contradictory information had suggested that the investment loan was an existing one (in which case the later guarantee could be considered aid to the bank inasmuch as it improved its likelihood of repayment). However, the investigation has shown that loan A is a new loan which was signed on 26 January 2009, thus the 100 % guarantee on loan A did not contain State aid to MFB.
Article 107(2) and 107(3) TFEU provide for exemptions to the general rule that State aid is incompatible with the internal market as stated in Article 107(1).
In the following the Commission will assess the compatibility of the measures under those exceptions. However, it should be noted at the outset that Hungary did not put forward any arguments as regards their compatibility with the internal market.
The exemptions in Article 107(2) TFEU do not apply in the present case because this measure does not have a social character, has not been awarded to individual consumers, is not designed to make good damage caused by natural disasters or exceptional occurrences and has not been awarded to the economy of certain areas of the Federal Republic of Germany affected by the division of that country.
Further exemptions are laid down in Article 107(3) TFEU. In the following, the Commission will first assess the measures’ potential compatibility pursuant to Article 107(3)(a), (c) and (d) and in the end pursuant to Article 107(3)(b).
In view of the above, the Commission concludes that the aid is not eligible for the derogation provided for in Article 107(3)(a) TFEU.
Article 107(3)(c) provides for the authorisation of State aid to facilitate the development of certain economic activities or of certain economic areas, where such aid does not adversely affect trading conditions to an extent contrary to the common interest. The Commission has developed several guidelines and communications that explain how it will apply the derogation contained in the aforementioned provision.
With regard to the Rescue and restructuring guidelines, the Commission notes that (irrespective of whether the company was eligible to receive aid under the guidelines) the criteria for compatible aid do not appear to be fulfilled. With regard to rescue aid, the measures are not restricted to the minimum necessary as they are longer than 6 months; it has not been demonstrated that they would be warranted on the grounds of serious social difficulties or would not have any unduly adverse spill-over effects on other Members. With regard to restructuring aid, in the absence of a restructuring plan, the Commission cannot evaluate whether the aid would restore long-term viability, whether it would be kept to a minimum, and that undue distortions of competition would be avoided.
The Commission thus concludes that the measures are not compatible as rescue or restructuring aid.
The Commission considers that because of the nature and characteristics of the aid, none of the exemptions enshrined in other guidelines and communications issued pursuant to Article 107(3)(c) is applicable to the present case.
Article 107(3)(d) TFEU states that aid to promote culture and heritage conservation may be declared compatible with the TFEU where such aid does not affect trading conditions and competition in the EU to an extent that is contrary to the common interest. This obviously does not apply to the current case.
Article 107(3)(b) TFEU states that ‘aid to promote the execution of an important project of common European interest or to remedy a serious disturbance in the economy of a Member State’ may be declared compatible with the internal market.
The Commission notes that the aid in question is not designed to promote the execution of an important project of common European interest.
The Commission notes, however, that the effective remuneration of the transactions is below the minimum interest rate deemed compatible under the Temporary Framework.
According to the relevant provision, ‘the Commission will accept that public or private loans are granted at an interest rate which is at least equal to the central bank overnight rate plus a premium equal to the difference between the average 1-year interbank rate and the average of the central bank overnight rate over the period from 1 January 2007 to 30 June 2008, plus the credit risk premium corresponding to the risk profile of the recipient, as stipulated by the Commission Communication on the revision of the method for setting the reference and discount rates.’
In view of the above, the Commission concludes that loan A and loan B are partly compatible as subsidised loan measures under the Temporary Framework.
Specifically, the Commission considers that the difference between the effective remuneration of the transactions and the subsidised rate is incompatible; whereas the difference between the subsidised rate and the benchmark market rate is compatible on the basis of the Temporary Framework.
Thus, given that the measures at hand are to be considered as unlawful and partly incompatible aid, the incompatible part must be recovered in order to restore the situation that existed on the market prior to the granting of the aid. Recovery is, therefore, to be effected from the date when the advantage accrued to the beneficiary, i.e. when the aid was made available to the beneficiary, and is to bear recovery interest until effective recovery.
In light of section X.5 above, the incompatible aid element of the measures is calculated as the difference between the compatible Temporary Framework subsidised rate and the total effective financing costs (i.e. interest rate plus guarantee premium) at which the financing was provided.
The exact recovery amount is to be computed by the Hungarian authorities.
On the basis of the foregoing, the Commission concludes that loan measures A and B in favour of Nitrogénművek constitute State aid within the meaning of Article 107(1) TFEU.
In addition, the Commission concludes that loan A and loan B are partly compatible with the internal market as subsidised loan measures under the Temporary Framework. In particular, the difference between the subsidised Temporary Framework rate and the benchmark market rate is compatible. On the other hand, the difference between the effective remuneration of the transactions and the subsidised rate is incompatible with the internal market.
Given that loan A and loan B are to be considered as unlawful and partly incompatible aid, the incompatible part must be recovered from Nitrogénművek in order to restore the situation that existed on the market prior to the granting of the aid.
The exact recovery amount is to be computed by the Hungarian authorities. It is calculated as the difference between the compatible Temporary Framework subsidised rate and the total effective financing costs (i.e. interest rate plus guarantee premium) at which the financing was provided.
The Commission also concludes that the 100 % guarantee on loan A did not constitute State aid within the meaning of Article 107(1) TFEU in favour of MFB,
HAS ADOPTED THIS DECISION:
Article 1
The EUR 52 million investment loan and the HUF 10 billion current facilities loan granted by Hungary to Péti Nitrogénművek Zrt. constitute State aid within the meaning of Article 107(1) TFEU.
Article 2
1.
The State aid unlawfully granted by Hungary to Péti Nitrogénművek Zrt. in breach of Article 108(3) TFEU is partly compatible, partly incompatible with the internal market.
2.
The unlawful State aid consisting in the difference between the subsidised interest rate under the Temporary Framework and the relevant reference rate is compatible with the internal market.
3.
The unlawful State aid consisting in the difference between the effective remuneration of the measures and the subsidised interest rate under the Temporary Framework is incompatible with the internal market.
4.
Hungary shall refrain from granting the State aid referred to in paragraph 3 with effect from the date of notification of this decision.
Article 3
1.
Hungary shall recover the aid referred to in Article 2(3) from the beneficiary.
2.
The sums to be recovered shall bear interest from the date on which they were put at the disposal of the beneficiary until the date on which they are actually recovered.
3.
The interest shall be calculated on a compound basis in accordance with Chapter V of Regulation (EC) No 794/2004.
Article 4
1.
Recovery of the aid referred to in Article 2(3) shall be immediate and effective.
2.
Hungary shall ensure that this Decision is implemented within 4 months of its notification.
Article 5
1.
Within 2 months following notification of this Decision, Hungary shall submit the following information to the Commission:
(a)
the total amount (principal and recovery interest) to be recovered from the beneficiary;
(b)
a detailed description of the measures already taken and planned to comply with this Decision;
(c)
supporting documents demonstrating that the beneficiary has been ordered to repay the aid.
2.
Hungary shall keep the Commission informed of the progress of the national measures taken to implement this Decision until recovery of the aid referred to in Article 2(3) with interest has been completed. It shall immediately submit, on simple request by the Commission, information on the measures already taken and planned to comply with this Decision. It shall also provide detailed information concerning the amounts of aid and recovery interest already recovered from the beneficiary.
Article 6
This Decision is addressed to the Republic of Hungary.
Done at Brussels, 27 October 2010.
For the Commission
Joaquín Almunia
Vice-President