Covid-19: Adapting measures to help businesses – focus on state-guaranteed loans (so called “PGE”), 01/26/2021

 

Following the return of the restriction and containment measures linked to the second wave of Covid-19, some economic aid and emergency measures set during the first wave of the pandemic have been reactivated, amplified and completed. In this context, the State-guaranteed loans (so-called « PGE ») system has been extended and modified for the current PGEs.

Introduced by the Amending Finance Act of 23 March 2020 (loi n° 2020-289 du 23 mars 2020 de finances rectificative pour 2020), the PGEs are aimed at companies of all sizes (mass or large company schemes) and in all sectors in order to provide support for their cash flow. The Government had released an initial budget of €300 billion for this scheme.

As a reaction to the second wave of the pandemic and announced on 29 October 2020 by the Minister of Economy and Finance, Mr. Bruno Le Maire, this scheme has been renewed and approved by the 4th amending finance law of 30 November 2020 (loi n° 2020-1473 de finances rectificative pour 2020) which mobilises more than €20 billion in additional funding for companies. Pursuant to the amending decree of 29 December 2020, PGEs are now granted until 30 June 2021 included (initially until 31 December 2020), with loans to be disbursed before 30 June 2021.

Such strengthening of the mechanism is in line with the European Council’s recommendations dated 13 October 2020 (Council recommendation (EU) 2020/1475), extending, at current thresholds, the provisions of the temporary framework for an additional six months, until 30 June 2021, with the exception of recapitalisation measures, which are extended for a further three months until 30 September 2021.

LOAN SCHEME GRANTED IN THE FIRST HALF OF 2021

However, the PGE regime remains largely unchanged from that of the 2020 PGEs. The duration of the loan remains limited to a maximum of six years. Eligible borrowers are divided identically, and according to the same threshold criteria, between the mass scheme and the scheme for large companies. The condition of the company’s not being in difficulty remains the same.

Focus: It should be remembered that the French scheme is applied in a less restrictive manner than that provided for in Brussels’ State aid framework.

Indeed, companies are eligible for the scheme if, as of 31 December 2019, they were not subject to judicial liquidation or professional recovery proceedings (for sole proprietorships) or were not in the observation period under a safeguard or receivership procedure, unless a safeguard or recovery plan had been adopted by a court before the date on which the loan was granted (Article 4 of the Order of 6 May 2020). Companies for which collective proceedings have been opened as of 1st January 2020 are therefore not excluded.

This scheme is therefore explicitly based only on the sole criterion of the absence of collective insolvency proceedings and seems to exclude the other European criteria.

Not without ambiguity, the Frequently Asked Questions of the Ministry of the Economy (in its version of 7 December 2020) nevertheless specifies that “a bank granting a PGE to a company (regardless of its size) which for example the equity capital would be negative at 31 December 2019 or less than half of its capital would not then be exposed to a possible cancellation or forfeiture of the State guarantee on this sole ground” and then to remind that aid incompatible with the rules of European law may be the subject of a request for recovery by the competent European authorities and that loan contracts must include, as of 1st May 2020, information from the borrower to this effect.

However, in view of the European framework, the European authorities could consider that a company that was already in difficulty before 31 December 2019 (particularly with regard to its equity capital) should not have benefited from the PGE and that it is therefore illegal State aid, if the difficulty did not disappear when the PGE was granted. In such a case, the risk would be borne by the borrower, who would be required to repay the portion of the loan corresponding to the amount considered as illegally received. Nonetheless, lenders should be reassured that the guarantee given by the State is unconditional and irrevocable. Lenders are therefore protected even in the event that Brussels should call into question a PGE which would oblige the borrower to reimburse the unduly received benefit (e.g. subsidised interest).

The lenders covered by this extension of the facility remain unchanged. They are mainly credit institutions and finance companies, excluding funds (Securitisation Undertaking (Organismes de titrisation) and Specialised Finance Undertaking (Organismes de financement spécialisés)) and, since a decree of 6 May 2020, crowdfunding intermediary can be part of the scheme. In practice, these will primarily be the usual banking partners, although it is also possible to bring in a new bank if a club deal is established.

Focus: It is to be noted that in the event of assignment of the loan receivable, the State guarantee is lost, unless the receivable is assigned to a credit institution belonging to the same group or in the context of monetary policy operations.

The amount of the PGE granted is capped at 25% of the 2019 turnover for companies or 2 years of payroll if the company was created after 1 January 2019. However, an exception exists for certain seasonal businesses for which it is possible to obtain a loan of 25% of the sum of the best 3 months of turnover in 2019. The amount of PGE that may be granted to innovative companies if such criteria is more favourable to them, shall be limited to twice their 2019 French payroll or, that of the last financial year preceding 2019. Air and space companies may benefit from PGEs limited two twice their 2019 inventory or twice the median amount of their 2018 and 2019 inventory.

PGEs are granted at cost price (at each lender’s liquidity cost). However, there is no legal provision establishing a specific interest rate.

With regard to the PGEs of the mass scheme, they cannot be combined with other guarantees or security interests, with the exception of the new money privilege. The situation is different for large companies’ scheme (i.e. companies with more than 5,000 employees and a turnover of more than €1.5 billion): these may grant additional guarantees or security interests, at the discretion of the lenders.

The State guarantee within the framework of the PGE of the mass scheme (companies with less than 5,000 employees and a turnover of less than 1.5 billion euros) is automatically granted by notification from the lender to Bpifrance Financement, while the guarantee for the Large Companies scheme is granted by order of the Minister of the Economy.

The coverage rate of the loan is 90% in the mass scheme. It is 80% for companies whose turnover is between €1.5 billion and €5 billion, and 70% for other companies. In these cases, the guarantee can only be granted on the condition that the total assistance provided by the lending institution (or crowdfunding intermediary) to the company has not decreased at the time the guarantee is granted, compared to its level on 16 March 2020 if the guarantee has been granted prior to 1 January 2021, or at the level on 31 December 2020 if the guarantee is granted from 1 January 2021 and onwards, taking into accounts any reduction between the grant of the guarantee and respectively 16 March 2020 or 31 December 2020, resulting from the contractual amortization scheme applicable respectively prior to 16 March 2020 or 31 December 2020, or upon the borrower’s decision.

In accordance with the precision provided by a decree of 17 April 2020, this guarantee given by the State is unconditional and irrevocable and valid for the entire duration of the loan. However, there is a waiting period of 2 months from the disbursement of funds during which the guarantee cannot be called upon in the event of default.

This State guarantee can also be called in the event of a credit event or payment default when the amount to be indemnified is not known. The lender then has the right to obtain, at the latest within 90 days of the date of the request for the guarantee, a provisional payment representing “an estimation of the amount of the losses likely to be borne by the lending institution”. The State is subrogated in the lender’s rights.

CHANGES TO THE PGES IN PROGRESS

Companies that are unable to reimburse their PGE by 1 March 2021 will be able to benefit from a grace period of 12 months (in addition to the 12 months amortization holiday required by the PGE scheme). The French Banking Federation (FBF) indicated in a press release dated 29 October 2020 that lenders would undertake to offer personalised amortisation terms that best correspond to the customer’s situation and needs.  In order to take advantage of this deferred amortization, businesses will have to apply directly to their lender, who will review their application on a case-by-case basis.

Focus: Such deferral should not systematically lead the lender to consider the borrower to be in default of payment. Further, if the current PGE contract does not provide for a deferral of more than one year or does not open an option for a longer deferral on the part of the borrower, it will be necessary to document the second year of deferral requested by the borrower and accepted by the lender by an amendment or at least by an exchange of letters valid as an amendment. If this was provided for in the original contract, the option will be exercised in accordance with the agreed terms and conditions.

Both options, deferred amortization and loan extension, have to be exercised simultaneously at the end of the first year.

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