Restructuring state-guaranteed loans: an essential lever

Against this backdrop of economic slowdown and uncertainty, the French government decided at the start of the year, in agreement with the Banque de France and the French Banking Federation, to extend until December 31, 2026 the possibility offered to companies to renegotiate their PGEs amicably and confidentially, in order to extend the repayment period by up to 4 years. The reason why the extension of the agreement is longer than previous ones is that it aims to “go right up to the end of the repayment schedule for the majority of EMPs granted”, explains the Ministry of the Economy.

Companies wishing to redevelop their EMPs can do so in one of two ways.

For loans of less than €50,000, credit mediation is the best way to benefit from restructuring. This possibility is only open to companies that are unable to meet their EMP repayments, but have prospects for repayment in the future. Credit meditation is not about comfort restructuring.

In addition, as soon as a restructuring of the PGEs is envisaged, the restructuring of other bank loans must be undertaken at the same time. This is a commitment made by France to the European Commission. Failure to do so would constitute prohibited State aid. The agreement reached with the banks only covers mature loans, with the exception of factoring and leasing contracts.

The mediated agreement must also specify the fate of short-term financing, and in particular the period until which it will be maintained for the benefit of the company.

The mediated agreement must also specify the fate of short-term financing, and in particular the period until which such financing is to be provided.

PGEs in excess of 50,000 euros may be restructured under conciliation procedures. Under the aegis of the Commercial Court, and with the assistance of a professional specialized in dealing with difficulties, companies can negotiate, in an amicable and confidential framework, the terms and conditions for restructuring their EMPs in line with their repayment capacities.

However, the fact that executives can opt to restructure their EMPs should not obscure the fact that, like any bank restructuring, this comes at a cost. Remember that these loans were taken out in 2020 at very low rates of around 1-2%. Renegotiating the EMPs will inevitably see rates rise to current levels of around 4.5%. This significant rise will necessarily generate additional costs that need to be taken into consideration and anticipated.

In addition, a question that company directors frequently ask themselves before restructuring their PGEs is the impact this restructuring would have on their BDF rating. Indirectly, their fear is that this restructuring will have a more negative impact on their supplier outstandings (possibly covered by credit insurance) than the settlement of their PGE debt at maturity.

While this question does not really arise when cash flow is insufficient to cover the repayment due date, it does arise acutely for business owners who anticipate repayment difficulties over the long term, when their repayment capacity does not cover the cost of repaying their loans. It should be remembered that under European rules, a loan that has not been honored according to its initial contractual schedule must be declared in default with the Banque De France, whether or not it is guaranteed by the State. If an EMP is restructured, the initial contract has not been honored, and this mechanism applies.

Contagion rules also require us to consider that if one loan has not been repaid, all other loans are in default.

More specifically, there are three default rules that trigger the mechanism:

• The bank identifies an outstanding debt,
• The bank considers that there is a risk of non-recovery,
• The banking institution notes a restructuring with a loss of value.

As soon as one of these cases is declared, the Banque De France rating must take it into account, and can at best be set at 5 (best rating among non-eligibles).

If an event of default is declared, it must be maintained for at least one year. It will then be lifted at the discretion of the bank, taking into account compliance with the new repayment plan and the company’s prospects. It may be maintained until the restructured loan has been repaid in full.

In practice, almost all companies anticipating difficulties in repaying their PGEs already have ineligible ratings. Consequently, the restructuring of bank loans for these companies generally has no effect on their Banque De France rating. It should also be noted that companies with sales of less than 750,000 euros are not affected by Banque De France ratings.

It therefore appears that the impact of restructuring PGEs on Banque De France ratings should not be a real difficulty in practice, and cases of PGEs to be restructured for highly-rated companies should remain rare.

In addition, any loan restructuring that extends the amortization period also entails a financial charge that weighs longer on the company’s accounts. The impact on the company’s valuation and financial profitability is therefore worth considering.

Contrary to popular belief, however, the restructuring of PGEs does not entail the loss of the State guarantee, provided that the restructuring is granted as part of a conciliation procedure. It is therefore essential to anticipate the steps to be taken by using the procedures for preventing difficulties.

Restructuring PGEs is an excellent way of consolidating cash over the long term. To support the company’s thinking and strategic orientation, it is advisable to model different restructuring hypotheses with the accounting firm or through a specific audit/IBR (independent business review). These documents will also support the company’s requests to banks during negotiations, and provide evidence of its ability to turn around its business.

In addition, the restructuring of PGEs is often the occasion for a broader restructuring of the company’s banking liabilities. It is thus common to see “classic” medium-term loans included in the scope of restructuring, so that bank debt is treated in its entirety, senior debt and PGE.

Restructuring your banking commitments is a powerful lever that can only be fully effective if demand is anticipated. When it comes to managing difficulties, and cash flow difficulties in particular, anticipation is the key. The tools available to managers are numerous and effective if used in good time. Difficulty prevention procedures, such as ad hoc mandates or conciliation, conducted confidentially under the aegis of a professional specialized in dealing with difficulties, in most cases enable solutions to be found that are adapted to the difficulties encountered.

You need to know how to use them, and not hesitate to call on the support of specialized professionals (lawyers, ad hoc agents or conciliators, accounting and financial advisors, etc.) to take advantage of all the schemes available.

In conclusion, we must not shy away from the fear of a rating downgrade. Comprehensive restructuring integrated into a strategic business development project facilitates bank discussions and enables agreements to be reached that are favorable to rebound. Companies that take this approach with agility and anticipation will be better positioned to prosper.

If you have any questions on this subject, please do not hesitate to contact Maître Justine Pelenc and our restructuring department.