France announces loan plan to boost post-COVID business investment
After months of negotiations between the finance ministry and EU state aid regulators, companies will be able to leverage up to € 20 billion ($ 24 billion) in loans and subordinated bonds from early next month, said Finance Minister Bruno Le Maire.
“It will be an unprecedented fundraising for investment in Europe and it should be a model for other European countries,” he said during a presentation of the program.
French companies already entered the COVID-19 crisis last year with record levels of debt, and they took out an additional € 130 billion in state-guaranteed loans from their banks as liquidity collapsed during France’s worst post-war recession.
Under the new program, the debt will be subordinated to all receivables other than equity of a company, it will have a longer maturity of eight years and must be used specifically for investment rather than for refinancing the company. existing debt.
The new debt is also more flexible, with a four-year grace period on principal repayments, but will also carry higher interest rates of 4-5.5% to cover the greater risk.
The program is innovative in that the banks will grant the loans to companies and then resell them to institutional investors such as insurers through private investment vehicles, whose potential losses will be covered up to 30% by the ‘State.
While many companies in the service sector still face restrictions on coronaviruses, the small business association CGPME has said it is important to help companies that want to invest now. He urged banks to match every euro borrowed under the program with one euro of traditional loans.
HELP SMALL ENTERPRISES
While large companies have long had access to high-yield debt markets, small European companies have so far had to rely on shorter-term funding largely from banks, unlike the United States. where more flexible options have been around for a long time.
France has in the past struggled to create a market for financing small businesses and hopes are high that this time the state guarantee will give an extra boost.
The heavy debt burden on European companies has raised concerns that they lack the financial strength necessary to undertake the investments necessary for a strong recovery from the pandemic.
EU competition authorities cleared the program on Thursday after tough negotiations to get the right risk-reward balance while not giving French companies an unfair advantage over their European rivals.
It will be the banks’ responsibility to ensure that loans are made to businesses that are strong enough to put the funds to good use.
“By taking 10% of the loans on our balance sheets without government guarantee, this involves us in the quality of these instruments,” said Crédit Agricole CEO Philippe Brassac, who also heads the French banking federation.
The state had initially planned to offer a guarantee of only 20%, but had to increase it to 30% to attract institutional investors to the new market.
($ 1 = 0.8294 euros)
(Reporting by Leigh Thomas; additional reporting by Foo Yun Chee in Brussels, editing by Gareth Jones)
By Leigh Thomas