France plans $ 23 billion state-backed program to avoid business bankruptcies

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PARIS (Reuters) – France plans to raise 20 billion euros ($ 23 billion) in quasi-capital loans for small businesses hit by the coronavirus crisis by offering investors a state guarantee against the 2 first billion euros in losses, officials said.

Fearing the failures of companies that were already grappling with record levels of debt before the crisis, the French government wants the program to be operational early next year, as it combats the economic impact of the crisis. COVID-19 pandemic.

According to the plans that will be presented to the financial sector on Monday, the banks would first lend to small and medium-sized businesses and then sell 90% of the loans to institutional investors, people familiar with the proposals told Reuters.

This would limit banks’ risk exposure to 10% of loans, while channeling funds to viable businesses.

Since this is a public guarantee, EU state aid regulators must agree to the program, in particular the interest rate that would be charged.

“The discussion is going well, the European Commission is very interested in the program, but we have not yet reached a precise figure,” said a source from the Ministry of Finance.

The interest rate is unlikely to be less than 3% -5% because the loans would be lower than other debts on companies’ balance sheets, another source close to the talks said.

A WAVE OF BANKRUPTCY?

With maturities of at least seven years and subordinated to the claims of other creditors, the loans would have the advantage of not being recorded as debt on the balance sheet, freeing up resources for operations and investments, essential for economic recovery.

While French law already allows such loans, they are rarely used because banks have so far had to set aside more capital to cover the greater risks they involve.

With cash flows undermined by the crisis, the French Treasury and the central bank estimate that small and medium-sized businesses will need a total of 20 billion euros of equity.

However, companies could be collectively undercapitalized by up to 30 billion euros, estimates Euler Hermes, who as a credit insurer closely follows the balance sheets of companies.

Starting with more than € 120 billion in state-guaranteed bank loans to help businesses meet their immediate cash flow needs, government measures to keep them afloat have so far avoided a wave of bankruptcies.

Business bankruptcies have fallen to levels not seen since 1989, research firm Altares said.

However, three out of four bankruptcy cases brought to French courts in the third quarter ended in liquidation, which Altares believes could be the prelude to a sharp increase in deposits, especially in the first quarter of 2021.

Reporting by Leigh Thomas; Additional reporting by Maya Nikolaeva; Edited by Alexander Smith

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