Put in place by the French Government to offer companies easy access to COVID-19 special financial support, the banks are not entirely comfortable with some of the terms and conditions of the measures. They are exercising their normal due diligence, as they would do with any credit applications. Treasury departments should therefore not spend time thinking about the optimal financing structure in the context of more or less rapid economic recovery.
Since Bpifrance’s announcements, and the publication on 23rd March of Supplementary Budget Act, as well as the Decree governing the Loan Guaranteed by the State (PGE), a race against time has begun to provide massive loans to all French companies who need them. The COVID-19 special financing measures are to be widely available. As, failing this, there is a risk that some companies who could benefit from the measures, might fail due to difficulties experienced by their customers and suppliers, who would not have the chance to receive the aid in time.
Our initial feedback seems to indicate that the €30m maximum limit applied to Bpifrance’s ‘Atout Loan’ is only in theory (very few companies have received an Atout Loan of more than €15m, or even €10m), although the process is moving forward.
The rules of the PGE are gradually being clarified
Among the four special financing measures, the total amount allocated by the State to the PGE scheme is a comfortable €300bn, equivalent to one year’s bank lending in France. Issues relating to companies’ eligibility, and the operation of this scheme, have been clarified. Eligibility criteria; rules applied to the calculation of the maximum loan amount (tax implications, multiple legal structures, no intra-group re-statement, etc.); criteria relating to granting the guarantee (automatic vs. an individual decision by the Treasury); form of the loan (either bilateral or a syndicated credit).
Some issues are still open. Those concerning how companies in financial difficulty should be treated; the Amending Budget Bill (PLFR) presented on 15 April provides that companies that were not under court protection, receivership or compulsory liquidation as at 31 December 2019, will be eligible for the PGE scheme. “The precise application of the criteria for a company in difficulty as at 31 December 2019 within the meaning of European Union law is necessary and this will require an amendment to the decree of 23 March 2020 on the specifics and the granting of the State guarantee”, explains the Government.
Reluctance on the part of banks
Working on the PGE, banks have expressed reservations about the measures on several fronts;
- The legal form of the guarantee. With a two-month deferment period, it is not an on-demand guarantee (GAPD) that is callable on the first default of the borrower. Closer to a surety in its form, the guarantee creates uncertainty in the event of a possible default by the borrower or, at the very least, regarding the time it takes to recover the funds. Consequently, the banks do not know what Loss Given Default (LGD) ratio to use, which has an impact on the capital to apply to the asset. The situation promises to resolve itself favourably in the coming days. In the new PLFR, the government is planning an adjustment to the form of the guarantee, which, according to our sources, will be closer to an on-demand guarantee after publication of an amended order or a series of FAQs.
- The non-guaranteed portion of the loan, which can be as high as 30%, whereas in Germany, for example, there is talk of a 100% guarantee;
- The interest rate ‘at cost’ for the first year, i.e. at the lender’s cost of funds, without any margin. After some vagueness, a consensus among banks is said to have been reached on using Euribor (i.e. a zero floor) as the cost of funds. Combined with the residual exposure, this lack of margin and, in many cases, the application of fees, still generates a negative RAROCs, which is leading banks to prioritise granting loans to higher credit quality clients, who can offer additional business; and this in the context of stress appearing in the Euro liquidity markets for the first time.
- The option to extend the loan for up to six years at the borrower’s discretion creates additional exposure that banks may not want. This option places lenders at refinancing risk and may create a temporary subordination with respect to other important loans.
- The fact that eligibility applies to some firms in difficulty (e.g. under an ad hoc protection).
Money does not fall from heaven
Despite these concerns, the banks are volunteering and encouraging their sales teams to process their clients’ loan applications on an accelerated basis. However, they are still exercising their due diligence in the same way as they would for a traditional credit application.
Faced with the threat of ‘indigestion’ at the banks’, as well as on the Bpifrance Treasury platform, the companies who are the most efficient will be the ones served first. Consequently, applications must demonstrate, as well as document, the impact of the slowdown on business caused by the pandemic. Every treasury team is therefore obliged to produce cash flow forecasts, with impact scenarios on a 3, 6 and 12-month horizon. It is also necessary to show how strategically the company intends to bounce back after the lock-down period and, if necessary, how its products and services will evolve.
In the end, it is clear that the COVID-19 special financing measures are not “helicopter money” and it is worth recalling their primary objective: to provide a source of widely available and affordable liquidity to companies to support them in the first months of the crisis and help them bounce back.
The PGE is a financing measure that, after one year, will attract an applicable margin grid (which the banks logically do not want to determine in advance), to which needs to be added the price of the guarantee. This increases to 100 bps per year for years 2 and 3 for medium and large sized enterprises and to 200 bps per year for years 4 to 6. Therefore, the PGE should be seen as a “bridge”. On leaving the lock-down, each company will have to reassess its debt in order to find an optimal structure in the context of an uncertain recovery. The challenge will be to determine its necessary liquidity in a very different environment.