In January, French Treasury and the French banks agreed to offer companies that raised a PGE (prêt garanti par l’Etat — French State Guaranteed Loan) an additional  one-year deferred amortization. Muriel Nahmias, Senior Director Debt Advisory at Redbridge, provides an update on this grace period and the options for extending PGEs.  

– What kind of repayment schedules apply to PGE loans that were taken out last year?

Muriel Nahmias: Before answering this question, I would like to underline that PGEs can be put in place until June 30, 2021. So far, the scheme has allowed to secure €135 billion of loans granted to  companies at banks’ funding cost, out of a total State budget of €300 billion.

With regard to the repayment schedule, the borrower must exercise any extension option during the period set out in each loan agreement . This period is usually between the fourth and third months , and one and a half months before the contract anniversary date.

 

– How do the PGE deferred amortization period and option to extend work?

– Together with the banks, the public authorities have introduced the option of an additional year’s period of deferred amortization. So, for example, if a company has signed a PGE in April 2020 but does not wish to begin making repayments in April 2021 as originally planned, it may request a one-year deferral, thus begin making repayments in April 2022.

During this additional year deferred amortization, only the interest and the State guarantee fee will be due. The total loan period still must be no longer than six years, which is the maximum loan period authorized by the European Commission. In this case, the PGE is similar to a 1+1+4 loan instead of 1+5.

All borrowers must now opt for the final maturity and amortization plan for their PGE. They may opt for a repayment schedule that starts in 2021 or 2022 and that will span one, two, three, four or five years depending on their choice regarding the deferred period.

Banks have begun to contact their clients and we notice that they  are choosing to take up the option of a second year’s grace period.

 

– What bases should companies use to set the amortization period of their PGE?

– The company should decide it regarding its projected business activity, funding needs, changes in gross debt and, finally, the overall cost of each PGE amortization option, which are then to be compared with its other sources of funding.

Please note that for PGE raised by SMEs, banks are committed to offer the extension at their funding cost. Integrating the State guarantee fee between 1.0–1.5% for loans repaid between now and 2022 or 2023, and between 2.0–2.5% for loans repaid between 2024 and 2026.

The PGE is a cheap loan. Of course, there is the cost of the guarantee, but its impact gradually decreases with amortization as the guarantee is calculated based on the outstanding capital.

Regarding PGE signed by Large Corporates, negotiations  with lenders will probably be tougher, but they have to be assessed on a case-by-case basis.

In any case, it is worth contacting each of your banks to ask them for a quote on all options if they have not already taken the initiative to provide any. You will then need to consider the total cost in terms of other sources of funding, your own criteria and the terms of your PGE (such as its flexibility and documentation constraints).

Despite its initial purpose as a source of temporary funding, keeping the PGE could be a good decision in some cases. It represents an opportunity to integrate the loan into a fully fledged funding structure established as part of the crisis exit plan. The price is attractive to many SMEs, and even companies with non-investment-grade risk profiles.

 

– Will banks be comfortable with the idea of providing companies with sustainable funding under the PGE scheme?

– It is true that in the early days of the crisis, some banks were critical about this funding scheme, especially with their net margin being close to zero. They  are there to support the economy. It seems to be that since then, relations with companies have improved.

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