COMPLEX INFORMATION SERVICE – COVID-19

Do you know what the real options for receiving funding from programmes related to the measures taken against COVID-19 are?

The Ministry of Industry and Trade of the Czech Republic announced two follow-up subsidy programmes in mid-December 2021, namely COVID-2021 and COVID Uncovered Costs 3. Both the subsidy programmes respond to the ongoing COVID-19 coronavirus pandemic and serve as additional financial support for entrepreneurs whose sales have dropped remarkably as a result of the pandemic. The period from 1 November 2021 to 31 December 2021 for both the calls shall be considered the relevant period. It is important to note that if an entrepreneur opts for the COVID-2021 programme, he/she can no longer apply for the COVID Uncovered Costs 3 programme and vice versa. Entrepreneurs will be able to apply in 2022, after the official launch of the Calls.

The popular ANTIVIRUS programme, Option A – Enforced Restriction of Operations and Quarantine, which covers cases in which employees are ordered to be quarantined or isolated because of COVID-19, also continues.

Updated overview of funding programmes available for entrepreneurs, including their current status:

ANTIVIRUS – Option A

The Ministry of Labour and Social Affairs provides compensation within the ongoing ANTIVIRUS programme, which is primarily used to protect employment. Option A is the only one available at the present. It focuses on supporting businesses when their employees are forced to stay at home because of quarantine or isolation as a result of COVID-19.

Qualification criteria for support under the programme:

• The employer strictly complies with the Labour Code
• The employee must not be in a termination notice period and must not be given a termination notice
• It applies to enterprises; the employees must be regularly employed and participate in the sickness and pension insurance system
• The employer must pay wage compensation and pay the levies

How to submit an application:

• Companies that have already signed an agreement with the Labour Office of the Czech Republic (hereinafter abbreviated to “LO CR”) take the same steps as they used to before. That means they should submit a Statement of Accounts and will proceed to draw the support. The Statement of Accounts should be submitted after the end of the calendar month for which the company is applying. At the same time, wage compensation and compulsory levies must first be paid.
• Companies that do not have a signed agreement with LO CR should fill in the application (click the banner below) and send it to LO CR. LO CR will check it and, if necessary, call for correction or modification. In such a case, the applicant shall complete a new application in the required format. The Labour Office will then decide whether the application can be concluded or rejected for specific reasons. Once the agreement has been concluded and the wage compensation and mandatory levies have been paid, a monthly Statement of Account should be completed for each scheme for which the employer is claiming a contribution (A, B) and this Statement should be sent back by the company to the Labour Office via a data box or email with an electronic signature.

Amount of support provided:

• The amount of the contribution is set at 80% of the eligible costs (wage compensation paid to the employee + the corresponding amount of statutory levies)
• The amount of the contribution is capped at CZK 39,000 per employee per month
• An employee who receives benefits from this scheme will thus receive 60% of his/her average earnings

COVID-2021

The proposed COVID-2021 programme will seek to provide liquidity to entrepreneurs so that they are not forced to terminate their business as a result of the global pandemic.

An eligible applicant is an entrepreneur who:

• Is an entrepreneur (individual or legal entity) and carries out business activities in accordance with Act No. 455/1991 Coll., on Trade Licensing (Trade Licence Act) as amended, or in a similar manner.
• As a consequence of the COVID-19 pandemic, his/her business has experienced a decrease in sales of at least 30% (per accounting entity) for the relevant period compared to the reference period. For the purposes of this calculation, “sales” shall mean revenue from operations and goods. The relevant period is the period from 1 November 2021 to 31 December 2021. The reference period is the period from 1 November 2019 to 31 December 2019. An applicant who was established or commenced operation/activities (or became self-employed) after 1 November 2019 may choose any two consecutive months between November 2019 and October 2021 as the reference period.
• Had at least one employee or collaborator or person with a contract of employment as of 1 November 2021.
• Has not yet used up the maximum amount of support under point 3.1 of the European Commission's Temporary Framework per beneficiary (enterprise).
• Has not repeatedly violated the emergency or crisis measures taken in connection with the spread of COVID-19.

Main terms and conditions of the Call:

• The applicant may submit one application only.
• The applicant should not cease its activities within a period of at least three months from the date of the Decision.
• Eligible expenses supported by the Call within the relevant period cannot be covered by any other public support

Eligible costs and amount of support granted:

• Costs and expenses of operating and maintaining a business or establishment
• Staff expenses, materials, services (including e.g. leasing), depreciation, taxes and fees, loan repayments, overheads etc. incurred from 1 February 2020 to 31 December 2021.
• The maximum amount of support per beneficiary is determined as follows:
  • In the event of a decrease in sales of at least 30% but less than 50%, as the product of CZK 300 times the number of employees, expressed as an equivalent of full-time contracts times the number of days in the relevant period.
  • In the event of a decrease in sales of at least 50% as the product of CZK 500 times the number of employees, expressed as an equivalent of full-time contracts (FTE) times the number of days in the relevant period.

COVID – Uncovered Costs 3

Like the previous Calls, the third Call of the COVID – Uncovered Costs programme is intended to help entrepreneurs overcome the coronavirus pandemic. It provides aid to businesses whose sales have fallen by at least 30% during the relevant period compared with the same period in 2019 (or 2018). The results of the applicant's operations will be demonstrated by an adjusted profit and loss account based on the interim financial statements for the relevant period.

An eligible applicant is an entrepreneur who:

• Is an entrepreneur (individual or legal entity) and carries out business activities in accordance with Act No. 455/1991 Coll., on Trade Licensing (Trade Licence Act) as amended, or in a similar manner.
• The business entity shall provide evidence of a decrease in sales of at least 30% for the Relevant Period compared to the Reference Period in relation to the COVID 19 pandemic.
• The business is in loss for the Relevant Period (1 November 2021-31 December 2021);
• It has not repeatedly violated the emergency or crisis measures taken in connection with the spread of COVID-19;
• As of 31 December 2019 it was not in difficulty within the meaning of Commission Regulation (EU) No 651/2014, or it was a micro or small enterprise (within the meaning of Annex I to Commission Regulation (EU) No 651/2014) which had not been the subject of collective insolvency proceedings and had not received rescue or restructuring support;
• If it has been granted rescue and restructuring support, it must have repaid the support by the date of the grant;
• As of the date of the application being filed, a court has not proclaimed the bankruptcy of the entrepreneur pursuant to Act No. 182/2006 Coll., on bankruptcy and the methods for its resolution (Insolvency Act), except for bankruptcy where a court has approved reorganisation between 1 January 2020 and the date of the application being filed;
• As of the date of the application being filed, a court or administrative authority has not issued a decision ordering the enforcement of a decision on its property or has not ordered the distraint of its property;
• Was not in liquidation as of the date of the application;
• As of the date of the application being filed, the enterprise or business activity does not meet the conditions of the Insolvency Act for the commencement of collective insolvency proceedings, except for those enterprises or business activities that meet the conditions for the commencement of collective insolvency proceedings as a result of the spread of the COVID-19 disease caused by the SARS-CoV-2 virus;
• Is not an unreliable taxpayer or an unreliable person according to Act No. 253/2004 Coll., on value added tax;
• Has no arrears with the selected institutions and the providers of support from projects co-financed from the EU budget as of the date of submission of the application. An agreement on instalments or tax postponement pursuant to Section 156 of Act No. 280/2009 Coll., the Tax Code, shall not be deemed a situation in which the applicant for support would be in arrears. Arrears do not include late payment of taxes or levies in relation to the spread of the COVID-19 disease caused by SARS-CoV-2 under the Ministry of Finance's liberalisation packages or measures taken by the Ministry of Labour and Social Affairs. Payments of taxes or levies that have been declared in the context of the insolvency proceedings of an applicant that has been granted reorganisation shall not be deemed arrears. A situation in which the applicant has been issued an instalment plan in relation to the spread of COVID-19 and thus is considered to be debt-free shall not be deemed arrears either.

Main terms and conditions of the Call:

• The support provided through the Programme meets the conditions of point 3.12. Communication by the Commission: Temporary Framework for obtaining state support to sustain and boost the economy during the current spread of the coronavirus disease COVID-19 (hereafter referred to as the “European Commission Temporary Framework”), under which support may be granted for uncovered fixed costs.
• The decision to grant the support and the release of relevant funds will be possible after a positive decision by the European Commission.
• The support is granted up to the unspent amount of EUR 12 million per beneficiary under point 3.12 of the European Commission's Temporary Framework.
• The subsidy is provided in accordance with Act No. 218/2000 Coll., on Budget Rules and on Amendments to Certain Related Acts, as amended.
• The beneficiary is obliged to keep the documentation related to the receipt of the support for ten years from the date of the Decision.
• The beneficiary of the support is obliged to allow the provider or other control bodies to carry out a full audit within ten years of the grant being awarded.

Form and amount of support:

• In the event of a decrease in sales by at least 30% but less than 50% during the Relevant Period compared with the Reference Period, the amount of support shall be 40% of the uncovered costs for the Relevant Period.
• In the event of a decrease in sales by at least 50% during the Relevant Period compared with the Reference Period, the amount of support shall be 70% of the uncovered costs for the Relevant Period.
• In the event of a decrease in the sales of a microenterprise, as defined by the European Commission, by at least 80% during the Relevant Period compared with the Reference Period, the amount of support shall be 90% of the uncovered costs for the Relevant Period.
• Support under this call is granted up to a maximum of CZK 30 million per applicant.
• For the purposes of the Programme, uncovered costs shall mean the loss reduced by the subsidies provided to the applicant for support and notified under paragraph 3.1 of the European Commission's Temporary Framework, Antivirus A, B and other subsidies for eligible expenses. Details will be specified in Call 3.
• Eligible expenses are those on uncovered costs.

Comprehensive information on subsidies is available in the payroll manual for employers on the website of the Czech Ministry of Labour and Social Affairs HERE

Please contact:
Jiřina Kovaříková, Head of Payroll
jirina.kovarikova@rsm.cz
+420 731 193 980

For current information on taxes we recommend following the website of the Ministry of Finance of the Czech Republic.

RSM CZ has a team of professionals who can take care of your IT, both remotely and in the form of regular visits.

Please contact:
Karel Fišnar, Head of Cloud Solution & Services
karel.fisnar@rsm.cz
+420 602 614 817

A team of IT specialists from RSM CZ will conduct an initial security analysis and is here to take care of all vulnerability risks and the availability of your infrastructure on a continual basis.

Please contact:
Karel Fišnar, Head of Cloud Solution & Services
karel.fisnar@rsm.cz
+420 602 614 817

We are able to move your applications to a data centre run by RSM CZ in a very short time and run them in a full 24x7 mode.

Please contact:
Karel Fišnar, Head of Cloud Solution & Services
karel.fisnar@rsm.cz
+420 602 614 817

Our team of process specialists offers you a helping hand and guidance aimed at increasing the efficiency of your company management and accelerating and streamlining your processes.

Please contact:
Mária Straňáková, Implementation Manager
maria.stranakova@rsm.cz
+420 702 233 104

The financial function is growing within organizations to become a strategic enabler. We help you modernize your financial functions by optimizing strategy and operating models, improving business processes and leveraging digital finance solutions.

Please contact:
Mária Straňáková, Implementation Manager
maria.stranakova@rsm.cz
+420 702 233 104

Monitoring all existing processes, deep understanding of the company’s inner workings and identifying areas with potential for improvement. We provide the process design and improvement strategy planning that aims to build your processes in the most efficient way for your organization. “If you can’t measure it, you can’t manage it”; therefore, we can also offer the implementation of lean six sigma process methodologies.

Lean is about smooth process flow, focusing only on those activities that add value for the customer and eliminating all other activities that don’t. It’s about removing waste and increasing customer value.

Lean is based on the ability to achieve more with fewer resources by continuously eliminating waste. Products and Services are driven in the right amount, to the right location, at the right time and in the right condition.

Please contact:
Mária Straňáková, Implementation Manager
maria.stranakova@rsm.cz
+420 702 233 104

Business leaders face challenges in terms of how to attract, engage, manage and retain talents every day. RSM's people and organization consultants can help you address your people challenges with custom solutions for your organization.

Please contact:
Mária Straňáková, Implementation Manager
maria.stranakova@rsm.cz
+420 702 233 104

Digital is evolving quickly, and the right solutions can significantly enhance your efficiency and productivity. Our team helps your organization understand your technology and digital needs and works with you to design a strategy that aligns with your goals.

Please contact:
Mária Straňáková, Implementation Manager
maria.stranakova@rsm.cz
+420 702 233 104

Continuous Improvement will move an organization further along the path of becoming a digital business, where IT systems and the embedded processes they support become virtually self-managing, steering them toward truly intelligent IT.

Please contact:
Mária Straňáková, Implementation Manager
maria.stranakova@rsm.cz
+420 702 233 104

The current economic developments contrast sharply with the expectations presented in early 2020. It is evident that even with the high level of existing knowledge, there are events which recur in the economy and lead to more or less significant negative economic fluctuations.

In the Czech economy, a number of small businesses have grown into successful enterprises. Often, they grew organically, with the scope of their activities gradually expanding and more production capacity being added. In many cases, this development took place within a single company.

The negative economic situation is an opportunity to consider steps towards the long-term diversification of business risks. One step is to split companies into several business units, where the key tangible assets are concentrated in one of the entities and leased out to others under standard market conditions. This can be done using the process of legal transformations, such as split-ups.

RSM CZ has long-term experience with restructuring processes, including related activities (valuation, financial statements, related tax guidance, etc.).

If you are considering changes to your company/holding structure, we are here to discuss your plans with you.

Please contact:
Rudolf Hájek, Senior Manager
rudolf.hajek@rsm.cz
+420 739 609 022

Currently, all businesses are working hard to stay resilient through tough economic times. As lockdown measures are gradually easing, questions may arise as to whether a particular company has suffered damage for which it should be compensated. At the same time, the question of damage cannot be narrowed down just to damage caused by restrictions imposed by the state; it is necessary to take into account the aspect of contractual relationships and other justified expectations.

If you are considering bringing your claims to an independent court, a legal analysis by a legal specialist is something to start with. In the next step, it is worth considering the calculation of the damage by an independent expert. This can take various forms – including an indicative valuation (which usually serves to define the basic scope of the possible damage) or an independent expert’s opinion, which can be presented to the court as independent evidence according to the rules of the current legislation. The advantage of an expert opinion is also that it is a detailed economic analysis that the judge can become acquainted with in detail.

The expert office RSM CZ has extensive experience with the processing of expert opinions for the purpose of court litigation, acting either at the request of a party involved in a court dispute or on the basis of appointment by a court.

We will be happy to discuss various options for our future cooperation with you.

Please contact:
Rudolf Hájek, Senior Manager
rudolf.hajek@rsm.cz
+420 739 609 022

As regards commercial real estate, the attitude of individual investors will be of importance. The commercial market, dominated by foreign investors, may be influenced by an outflow of these investors in the event of difficulties in their home countries. The impact of the coronavirus pandemic on commercial real estate is highly individual and is mainly related to the structure of the current tenant in terms of income stability, operational resilience, and occupancy rate. In these terms, a portfolio consisting of international corporations appears to be ideal. The biggest risks are faced by owners who offer short-term leases or those negotiating the conclusion or renewal of lease agreements. It will therefore be important in the long run for companies and real estate owners to be prepared and able to respond effectively in the event of the occurrence of a similar situation. A number of tenants will wish to cover these circumstances in their future lease agreements.

In our newsletter you will found our summary of the potential impacts of the coronavirus pandemic on the individual commercial real estate segments. We have focused on one of the likely scenarios of the development of the rates of return on premium real estate in a premium location with the best tenant structure (Prime Yields), which are crucial in terms of the valuation of real estate and which should reflect the impacts of this new pandemic crisis.

The full newsletter on the Impacts of Coronavirus on Commercial Real Estate can be found HERE. In this article, we focus on individual segments of commercial real estate - office, industrial and logistics spaces, retail, and hotels.

What can we do for you?

Whatever your need for valuation in this situation, we will be happy to discuss the issue with you. The RSM CZ expert office provides a wide range of real estate valuation services.

Please contact:

Jiří Skotnica, Senior Manager
jiri.skotnica@rsm.cz
+420 739 680 970

This newsletter loosely follows our previously published comment concerning the development of real estate prices in the context of the economic downturn, with a specific focus on the impact on what are called Prime Yields.

In this article, we complete our view with the possible development of the cost of the financing of real estate properties and a wide group of industrial enterprises.

Development of the Cost of Financing Real Estate Projects

As we mentioned in our previous newsletter, there are currently no real estate transactions from which it would be possible to estimate the current level of Prime Yields. The situation is also similar as regards the cost of financing real estate properties using senior loan resources. In this case, however, we can use the bond markets, which publish information on the required yield of bonds, as a source of information. In our analysis, we used the Real Estate data published in the Capital IQ database, based on values as of 3 February 2020 and 15 April 2020. We used bonds in the AA- to A- investment category denominated in USD or EUR and, as a second group, bonds in the BBB + to BB- category (this category will include most transactions in the Czech Republic).

In our analysis, we use IRS 5Y as the basic interest rate – i.e. a five-year fixation of the rates like PRIBOR or EURIBOR. Where these rates are negative, we use the rate of 0% p.a.

As of 3 February 2020, the risk spreads in bonds in the AA- to A- category had a median level of 36 bps – i.e. the bonds offered a yield close to the relevant IRS rates. However, as of 15 April 2020, the median of the risk spreads was at 214 bps. The required performance in such highly creditworthy bonds thus grew by approximately 180 bps. In the case of the very frequent financing in EUR, this development directly corresponds to the increase in the cost of financing from senior sources, while in the case of the less frequent financing in CZK, we can see the positive effects of the central bank’s policies[1], which resulted in the reduction of IRS rates. Five-year funding would thus be more expensive by only 70 bps (however, this would still be more expensive in absolute figures compared to financing in EUR).

In the case of the less creditworthy but still reasonably high-quality bond group with a BBB+ to BB- rating, the development between the two dates is only slightly more dynamic, with the risk spreads at the median level growing from 77 bps to 283 bps – i.e. by approx. 200 bps. This development would also correspond to the increase in the cost of financing in EUR; as regards financing in CZK, the cost of external loan resources grew by only 100 bps (financing in CZK would continue to be more expensive than financing in EUR).

In recent history, senior loan resources have been the most significant resource of real estate financing, with their share in the value of the real estate normally exceeding 60% of the real estate’s market value. Although bonds are generally considered an instrument bearing a higher risk, the increase in risk spreads even in the high creditworthiness category clearly indicates an increase in Prime Yields and an increase in investors’ demands for capital investments in real estate.

Development of the Cost of Financing Industrial Enterprises

At the same time, we examined the development of bond yields in the category of broadly defined industrial enterprises.

Here we first worked with the category of highly creditworthy businesses, with their rating in the AA- to A- category. The median risk spread of these bonds grew from 26 bps to 93 bps – i.e. by approximately 70 bps. As a consequence of the CNB’s policy affecting financing in CZK, the cost of financing in this category decreased slightly, by 40 bps.

The development of yields from bonds in a purely speculative group of businesses with the rating grade of BB+ to B- is significantly more dynamic. Enterprises with such a credit quality represent a large group in the context of the Czech Republic. The median risk spread grew from 259 bps to 768 bps – i.e. by approximately 510 bps. The cost of financing in CZK would then grow from 4.41% to 8.43% – i.e. despite the decline in key interest rates, the cost of external resources would almost double.

It is again true that the bonds may be affected by lower liquidity and a worse security level compared to senior bank resources.

The above development shows how significant the government’s policy aimed at guaranteeing a part of the loan resources within what are called the COVID programmes can be. For a considerable number of businesses with limited financial strength, such an increase in the cost of financing in a situation of falling demand for their products may represent an acceptable option. If you are considering the use of financing with state programme backing, we will be happy to offer our guidance.
[1] The 2T repo rate dropped from 2.25% p.a. as of 7 February 2020 to 1.00% p.a. on 27 March 2020

Please contact:
Rudolf Hájek, Senior Manager
rudolf.hajek@rsm.cz
+420 739 609 022