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New Guidelines from Danish FSA Facilitate Lending to High-Growth Businesses

Writer's picture: Andreas TamasauskasAndreas Tamasauskas

Updated: Jan 30

The Danish Financial Supervisory Authority (the FSA) has published a new guideline introducing specific criteria for the assessment of credit risk and credit impairment of companies which experience rapid revenue growth.


Key Changes for High-Growth Businesses

The updated guideline introduces specific criteria for the assessment of credit risk and credit impairment of companies which experience rapid revenue growth (high-growth businesses). As mentioned in our insight on venture debt early-stage companies with high growth are often precluded from obtaining traditional bank financing given that they may be EBITDA negative, have low or negative equity or otherwise exhibit signs of what would otherwise indicate financial difficulties.

 

Under the previous regime, a loan to a company with negative EBITDA or low or negative equity would need to be flagged as being credit impaired making it difficult or impossible for such companies to obtain financing in the first place.

 

The new guideline changes this by stipulating that a bank no longer per se needs to assign a credit impairment marker to such loans provided that the borrower’s business satisfies the following conditions:


  • The business has raised significant equity financing relative to its size, with a minimum of DKK 10 million.


  • The business has positive equity, considering a realistic valuation of its assets, and can demonstrate future positive equity.


  • The business has achieved annual revenue growth of at least 20% for the past three years.


  • The business can demonstrate the likelihood of achieving profitable operations within 12 months by shifting its strategy from a focus on revenue growth to profitable operations.


  • The business can demonstrate that it possesses the necessary liquidity and capital to implement the changed strategy.


  • The business can provide documentation that its owners or investors have the willingness and capacity to inject further liquidity and capital if the assumptions for the changed strategy in point (d) above do not hold.


Our Assessment

The new guideline marks an important step in the right direction by adopting a more holistic approach to assessing companies with negative EBITDA or low equity etc. Subject to compliance with the assessment conditions referred to above banks providing growth finance will no longer to the same extent be penalised for providing such financing.

 

Whether this will actually increase the amount of growth financing available however remains to be seen. We in particular note the following:

 

  • Firstly, it will still be up to the banks to decide whether they find the risk/reward ratio attractive to finance in company in question. To this end we note that unlike private credit funds which would often have some form of equity kicker banks in general do not participate in the equity of the company.  

 

  • Secondly, the conditions for assessing the credit risk more favorable are still quite tight. While a number of high growth companies may satisfy some of the conditions such as (a) and (c) they may still struggle with satisfying the conditions relating to liquidity and the ability and willingness of the owners to inject additional capital.

 

In our view the new guideline will probably not lead to significant changes to the amount of growth financing available to high-growth businesses, but it will likely make bank financing available at an earlier stage to such businesses than would otherwise be the case.

 

Carsted Rosenberg Advokatfirma: Your Partner in Navigating Financial Regulations

Carsted Rosenberg Advokatfirma possesses extensive expertise in financial regulations and can provide comprehensive guidance on the implications of these new guidelines for your business. For more information on banking and financial regulation law for banking or capital markets transactions in Denmark, please contact Dr. Andreas Tamasauskas or Michael Carsted Rosenberg at Carsted Rosenberg or consult our Borrower's Guide to Venture Debt for more in-depth information.


This briefing is intended to provide general information on financial regulation in Denmark It is not intended to provide definitive legal or tax advice. No legal, tax or business decisions should be based solely on its content. The briefing does not necessarily deal with every important topic and is not designed to provide legal or other advice. It shall not be used as a substitute for legal advice and none may be inferred. It is only intended for general information on matters of interest. While we endeavour to represent the information as accurately and correctly as possible, we cannot accept any responsibility for any errors or omissions.


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