The French Finance Minister Bruno Le Maire announced last week, among the many measures designed to help companies get through the current Corona crisis and its consequences, the establishment of a €3 billion guarantee package to be indirectly injected into SMEs in the form of “long-term loans similar to equity capital”. Understand: subordinated loans with a 7-year horizon. This measure has just been confirmed in the detailed announcement of France’s €100 billion recovery plan.
Why it is good:
The state-guaranteed short-term loans put in place at the time of the crisis were designed as a means to avoid a wave of “sudden death” type liquidations, to allow the supported companies to get through the summer, and to restart at full speed as soon as possible. These loans have a short-term horizon (18 months – 2 years), a maturity that a majority of companies, in the context of a recession that is taking hold, will probably not be able to meet.
One solution, already announced, is to facilitate the renegotiation of this debt by asking the banks for commitments to affordable restructuring. This has already been achieved. However, this will leave companies with a high level of short-term debt, hence less able to invest in their future growth.
Another, often mentioned, is for the State to invest equity into many small and medium-sized enterprises: here, one is quickly confronted with the limits of this type of operation which will question their added value in this context (ticket size vs. valuation, negotiation process inherent to the sharing of power and ownership to come, high cost for a potentially limited leverage effect compared to that of the guarantee, operations ring-fenced to plain vanilla commercial companies). A reinvention of this type of intervention could, however, make them very relevant.
The proposal to invest in long-term debt and as a junior lender makes it possible to circumvent the obstacles mentioned above.
What does it have to do with social finance?
Social finance intermediaries certainly have a lot of experience to share on subordinated loans, both to finance developments and to maneuver through difficult times. Movements such as France Active have financed thousands of social enterprises with risk profiles that are often penalizing for access to bank loans. The participative loans granted, although still classified as debt, have strengthened the bank debt capacity of these enterprises and have enabled the development of a sector that is now alive and well.
What can be retained from this many years’ practice?
To put it candidly, and certainly when it comes to social enterprises : a really long duration closer to infrastructure financing would have to be considered in the setting up of these vehicles/programs ; a well calibrated deferred repayment also; the participative loan does not necessarily have to be expensive (in its estimation of the risk/return ratio, State as a social investor can take into account as a return the benefits for all the stakeholders attached to the enterprise it finances, and moreover the interventions can be sufficiently standardized for a rapid and less costly implementation).
The issues that keep us on the edge of our seats:
What arrangement should be implemented to maximize the leverage effect of the public resource and reduce its cost to the company? Who will deploy this investment program at the end of the chain for optimal efficiency and true risk-taking? Can we ensure that the amount of equity loans granted will not be strictly based on the level of equity (otherwise we are going in circles)?