COVID-19: How does the new French State Guarantee Scheme work?

By Joss Hargrave, Nicolas Morelli, Romain de Ménonville, Celine Nezet

03-2020

The wide ranging package of measures announced by the French Government over the last few days to support businesses in the context of the COVID-19 pandemic is progressively being implemented.

Among these measures is a EUR 300 billion State guarantee scheme for new loans granted by financial institutions to French businesses between 16 March 2020 and 31 December 2020 (the “State Guarantee”). BPI Financement will manage the State Guarantee scheme on behalf of the French State.

The key features and conditions of this State Guarantee have been defined on 23 March 2020 in a law amending the 2020 finance act (law No.2020-289) (the “Amending Finance Act”) and a decree (arrêté) of the French Economy and Finance Minister (the “Decree”). This scheme was previously notified as a State aid scheme by the French Government to the European Commission on 17 March 2020 and approved by the latter on 21 March 2020.

This update sets out the key features of this scheme.

Businesses Eligibility Criteria

Legal entities and sole traders are eligible for the State Guarantee provided that they are registered with the national business identification and directory system (SIRENE).

The following companies are however excluded:

  • Real estate companies (sociétés civiles immobilières);

  • Financial institutions; and

  • Distressed businesses, defined in the Amending Finance Act and the Decree as businesses subject to insolvency proceedings, i.e. safeguard, reorganisation proceedings or compulsory liquidation.[1]

Companies held by private equity funds should be eligible for the State Guarantee.

Loans Eligibility Criteria

Loans eligible for the State Guarantee must meet the following criteria:

  • Granting Period - Eligible loans will be granted between 16 March and 31 December 2020.

  • Lender - Eligible loans must be granted by financial institutions. Intercompany loans therefore are excluded from the scope of the State Guarantee.

  • Security package - Eligible loans must not be secured by other security interests or guarantees.

  • Loan amortisation profile - Eligible loans must include the following features:
    o an interest only period of at least 12 months; and
    o an option given to the borrower, at the end of this first year, to amortize the loan over an additional period of one to five years.
  • New financing - The scheme is designed to secure new financings granted to address businesses’ needs in the context of the current crisis. As a consequence, enforcement of the guarantee will be subject to the bank evidencing that the loan granted under this scheme leads to an increase in the bank’s commitments to the borrower compared to commitments that existed as at 16 March 2020.

The loan agreement can provide for the automatic acceleration of the loan should the lender discover that the borrower of the loan was not eligible for the State Guarantee, in particular as a result of incorrect information given by the borrower.

Cap on total eligible loans per business

The total amount of State guaranteed loans that can be granted to one business cannot exceed the following caps:

  • General case - 25% of the 2019 revenue or that of the last financial year available.

  • Innovative companies (as defined in Article D.313-45-1 of the French Code of Entry and Residence of Foreigners and Right of Asylum) - Twice the amount of the business’ payroll for France in 2019 or in the last financial year available if such cap is more favourable for the business that the cap above.

  • Businesses created from 1 January 2019 - Estimated business’ payroll for France for its first two years of operations.
Scope of State Guarantee

The State Guarantee will be available for a total amount of loans (in principal, interest and ancillary costs) of EUR 300 billion.

For each eligible loan, the extent and duration of the State Guarantee are as follows:

Percentage of guaranteed outstanding loan (in principal, interest and ancillary costs)

  • 90% for companies with less than 5,000 employees and revenue of less than EUR 1.5 billion in the last financial year;

  • 80% for companies with revenue between EUR 1.5 billion and EUR 5 billion in the last financial year;

  • 70% for other businesses.

Indemnifiable base to which the guaranteed percentage will apply

The indemnifiable amount to which the percentages mentioned above will apply corresponds to the loss acknowledged by the lender as a result of the occurrence of a credit event, defined as the out-of-court or judicial restructuring of the loan or in relation to the borrower’s insolvency proceedings, and after possible amicable or court-based credit collection steps.

The Decree provides the following guidelines to determine the indemnifiable amount:

  • Credit event in relation to a restructuring of the loan: the indemnifiable amount will be determined after taking into account the value of the remaining claim held by the lender further to the restructuring;

  • Credit event in relation to insolvency proceedings: the indemnifiable amount will be determined at the end of the insolvency process, taking into account amounts collected by the lender.

The general rules set out above will require clarifications in the coming days and weeks as the State Guarantee is likely to be enforced in a wide range of scenarios.

Effective date and duration of the State Guarantee

  • Effective Date - The State Guarantee will become effective two months following the release of the funds to the borrower. In other words, the State Guarantee will not be available to lenders for credit events occurring during the first two months of the loan.

  • Duration - The State Guarantee will secure the loan until the contractual maturity date or the early repayment date in case of acceleration as a result of the occurrence of a credit event.
Cost of the State Guarantee

The State Guarantee gives rise to a fee determined in the Decree and payable by the borrower at the onset of the loan and again if the borrower decides to extend the amortisation schedule of the loan.

How should businesses apply for State Guaranteed loans?

Companies with fewer than 5,000 employees or a revenue of less than EUR 1.5 billion in the last financial year

The State Guarantee will be granted through a fast-track process including the following steps:

  1. Eligible pre-loan agreement agreed between the lender and the borrower;

  2. Online notification by the borrower to Bpifrance Financement on https://attestation-pge.bpifrance.fr/description

  3. Confirmation by Bpifrance Financement to the lender.

Companies with more than 5,000 employees and a turnover of more than EUR 1.5 billion

The State Guarantee will be granted upon completion of the following process:

  1. Eligible pre-loan agreement agreed between the lender and the borrower;

  2. Email request by the borrower to Bpifrance Financement to [email protected]

  3. Application is reviewed by the Treasury Department assisted by Bpifrance Financement;

  4. If applicable, the State Guarantee will be granted by an individual decree of the French Economy and Finance Minister in the last financial year.

For any question, please send an email to: [email protected]

The Bird & Bird Restructuring & Insolvency team

Last reviewed: 27 March 2020

[1] It is worth noting that the notion of distressed businesses in the Amending Finance Act and Decree of 23 March 2020 is different from that mentioned in the French State aid notification to the European Commission, which refers to the definition of distressed businesses set in Article 2(18) of Commission Regulation (EU) No 651/2014 of 17 June 2014. Early feedback from the market suggests that BPI Financement will refer to EU Regulation No 651/2014 to determine businesses’ eligibility to the State Guarantee.