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The French Government Ordinance enacted on 26 March 2020[1] create a solidarity fund intended to provide financial aid to natural and private law legal persons having economic activity severely affected by the Covid19 crisis. The Solidarity Fund is created for a three-month period (renewable once for the same duration by decree) and will be funded by the State, and on voluntary basis, by regions and certain other territorial authorities.
Conditions of eligibility to the financial aids, their amount, together with the operation and management conditions of the Solidarity Fund will be further determined by a decree.
The French government has already announced that the financial aid will concern small enterprise generating a turnover less than EUR 1M (very small enterprises, freelance and micro-entrepreneurs, startups), provided they are undergoing administrative closure or have suffered a turnover drop in March 2020 of at least 70% compared to their turnover in March 2019. Such companies will be able to apply for the aid as from 31 March 2020.
This mechanism, essential to support the vitality of the supply chain, completes the general mechanism of state guarantee of 300 billion euros and adds to other schemes (such as partial unemployment benefits, payment moratorium for tax and social security charges or tax redemption) that apply to individual cases.
FRENCH STATE GUARANTEE SCHEME TO SECURE LOANS
The French State guarantee of 300 billion euros scheme to secure loans granted by banks to companies affected by the Coronavirus pandemic was set up by Amendment to the French budget law for 2020 dated 23 March 2020[2] and completed by arretéof even date. It consists of the following:
Conditions applicable to lenders: Eligible loans are granted by licensed credit institutions and financing companies, without any condition of nationality. Loans granted by debt funds are excluded from such guarantee.
Conditions applicable to borrowers: Eligible borrowers are legal entity or natural person registered in France (including craftsmen, merchants, farming businesses, independent professionals,micro-entrepreneurs, startups), as well as associations and foundations with an economic activity relating to social economy. They must not be subject to safeguard, rehabilitation proceedings or liquidation proceedings. The guarantee is however possible in case of protective proceedings (ad hoc mandate and conciliation).
Conditions applicable to the loans:In order to be covered by the State guarantee, the loan shall in particular (i) allow for repayment of interest only during the first year and allow the borrower, at the end of the first anniversary date of the loan, to extend repayment of the loan over an additional period, within the limit of 5 years and (ii) shall not be the subject of any other guarantee or security. Furthermore, the loan shall be granted to support lack of cash flow of the company and not to refinance existing debt.
Terms of the guarantee:Guarantees are managed by BPI France. For eligible companies that have employed, during the last financial year, less than 5,000 employees or had a turnover below1.5 billion euros, the Guarantee will be granted automatically following notification of the lender to BPI France Financement. For eligible companies with more 5,000 than employees or a turnover exceeding 1.5 billion euros, the conditions will be specified by way of decree.
Remuneration of the guarantee:The cost of the State guarantee will range between 50 to 200 bps according the scale detailed under the arrêté dated 23 March 2020 depending of the size of the company and the duration of the loan.
POINTS OF ATTENTION
– Application must be accompanied with a business plan and a cash-flow forecast up to end of 2020.
– It is not specified whether the mechanism can combine with other credit enhancement mechanisms.
– The borrower should pay particular attention to representations and warranties on the basis of which the guarantor will commit and the lender shall monitor carefully compliance with such obligations in order to be able to enforce the guarantee.
PRUDENTIAL AND ACCOUNTING TREATMENT OF LOANS IN DIFFICULTY AS A RESULT OF THE HEALTH CRISIS: EBA AND ESMA PRESS RELEASE
The European Banking Authority (EBA) and European Securities and Markets Authority (ESMA) each presented the way in which the moratoria that the States will ask them to apply on loans to companies and individuals in the face of the consequences of the Covid epidemic should be approached from a regulatory and accounting point of view.19.
Under Basel 3 regulations, a loan is considered to be in “default” for any delay in payment (principal or interest) of more than 90 days, which mechanically results in the bank consuming more capital (standard weighting raised to 150%). For single European Supervision Authority, a non-performing loan (NPL) is 90 days past due, or 30 days past due for those that have already been restructured.
Regulators are proposing to move away from a downgrading to “default” or “restructuring” in the prudential or IFRS9 sense, which used to be automatic, to now make a case-by-case analysis of the borrower’s structural situation by not taking into account the structural shock suffered by the borrower.
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