The rollout of

state-guaranteed loans

2022 Annual Public Report

2

_________________________________

PRESENTATION _____________________________

One week after the lockdown was announced, the Supplementary Budget Act of 23

March 2020

1

provided for a state-guaranteed loans (PGE) scheme of which the parameters,

defined in a decree published the same day, were aligned with the communication from the

European Commission on 19 March 2020 regarding the temporary framework for State aid.

The first loans were granted by banks in the days that followed and the scheme rapidly got

under way: of the €143bn in PGEs that went to over 699,000 businesses as of 31 December

2021, 70% had been granted from June 2020 onwards.

The Court has initiated an assessment of PGEs, with the backing of an advisory group

bringing together economists, financial experts and business leaders, which will be published

in 2022 and answer three questions:

-

Have the design and rollout of PGEs made it possible to effectively meet the cash needs

of businesses given the other existing tools?

-

To what extent has the calibration of the scheme resulted in a balanced sharing of risks

and costs between businesses, banks and state? Have fraud prevention mechanisms

been put in place and have they been effective?

-

Has this crisis response scheme facilitated the medium- to long-term survival of

businesses and have relevant support mechanisms been defined? To what extent has it

benefited non-viable businesses?

Ahead of the conclusions of this assessment, the Court presents here findings on the

implementation of the scheme from April 2020 to the end of 2021, drawing in particular on a

qualitative survey of business leaders and on international comparisons.

State-guaranteed loans, a simple and flexible scheme, were very quickly set up within a

negotiated European framework and were based on the joint mobilisation of state

administration and banks (I). Rolled out on a large scale in the spring of 2020, they play a key

role in the system of aid to businesses to contend with the crisis (II). While the support thusly

provided has made it possible to preserve companies’ liquidity in the short term, its re

al cost

for public administration is still uncertain and will depend on the repayment of loans over time

(III).

1

Law 2020-289 of 23 March 2020 on the Supplementary Budget Act for 2020.

3

I - A simple scheme amidst an economic shutdown

The pandemic has led to a widespread slump in activity: the decline in GDP in France

stood at -7.9% in 2020, slightly lower than the decline in activity in Italy (-8.9%), the UK (-9.8%)

and in Spain (-10.8%), but much higher than in Germany (-4.8%) and the Netherlands (-3.8%),

as well as Japan (-4.8%) and the US (-3.5%).

This sharp decline in growth resulted from a contraction in domestic demand, which was

very heterogeneous and very pronounced, particularly in the service sectors most affected by

the successive lockdowns. Industry was further penalised by the global contraction in activity,

given the highly international aspect of production processes.

A - The rapid negotiation of a European framework

Fearing that a credit crunch

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would be triggered and business credit would dry up,

European governments wanted to rapidly implement “liquidity bridges” for b

usinesses, taking

the form of state-guaranteed loans.

To this end, on 19 March 2020, the Commission relaxed the rules and procedures

concerning state aid by publishing a

“State aid temporary framework to support the economy

in the current context of the Covid-

19 outbreak”

3

.

Article 3.2 of the temporary framework includes the ability to implement state-guaranteed

loans. It defines the criteria that these must meet, particularly the caps applicable to loans: the

amounts taken out cannot exceed 25% of 2019 revenue, or twice the 2019 payroll, or the

amount of cash requirements over 18 months in the case of SMEs and 12 months in the case

of the largest businesses. The negotiations were particularly intense concerning the maximum

proportion of loans that can be guaranteed (90%) and the repayment period (six years), the

maximum term of which the Commission initially wanted to set at four years.

These criteria also concerned minimum guarantee premiums that borrowers must pay to

Member States in compensation for the guarantee granted. They were set as follows:

Tableau n° 1 : amount of guarantee premiums per loan year

In basis points

One-year loan

2 to 3 years

4 to 6 years

Micro-enterprise/SME

25

50

100

Large company*

50

100

200

Source: European Commission temporary framework.

*Businesses with

over 250 employees or revenue of over €50m.

2

A drastic reduction in the supply of credit by banks.

3

This framework was successively revised on 3 April, 8 May, 29 June and 13 October 2020, and on 28 January

and 18 November 2021.

4

Discussions continued in 2020 and 2021 to make the system even more flexible. For

example, it was possible to grant PGEs to businesses that had negative equity as of 31

December 2019 without the banks being exposed to a possible cancellation of the State

guarantee for this reason alone. The term of PGEs can also be extended, up to ten years,

either as part of insolvency proceedings (decree of 8 July 2021) or subject to the credit

mediator’s agreeme

nt, as announced by the French Minister for the Economy on 4 January

2022.

B - The French scheme

1 - The PGE: a simple and flexible scheme

The French scheme uses the parameters set by the European Commission.

Loans were therefore capped at three months of 2019 rev

enue or two years’ payroll

depending on the company. Due to the continued pandemic, the PGE scheme was adapted.

The loan subscription deadline was extended from 31 December 2020 to 31 December 2021,

then to 30 June 2022, and the cap was raised for certain sectors, resulting in two new

categories of guaranteed loans: the “season

PGE”, for the sector of services experiencing the

most difficulty and the cap of which corresponds to the three best months of revenue in 2019,

and the “aero PGE”, aimed at suppliers

and platforms in the aviation sector, for which the

borrowing cap also takes into account the amount of inventory.

Public administration provides its guarantee to a bank, based on a percentage of the

amount of the capital, interests and ancillary amounts remaining due on the debt commitment.

No other additional security can be required to ensure that the banks’ risk exposure is real,

thereby encouraging them to select companies likely to repay their loan. The guaranteed

portion for the largest businesses is theoretically lower (70% or 80%, versus 90% for most

companies), although in some cases (Air France and Renault), given the urgency of the

situation and the negotiations with banks, this was temporarily raised to 90% in agreement

with the European Commission.

Lastly, the cost of the guarantee, between 25 and 200 basis points depending on the

size of the business and the repayment period in accordance with the provisions of the

temporary framework, increases over time to encourage beneficiaries to repay their PGE

quickly.

The guarantee premium for the first year of the loan is paid by the banks to the State ,

with a second payment the following year for the remainder of the guaranteed period.

Meanwhile, businesses repay the banks throughout the loan repayment.

Characteristics of French PGEs

PGEs are available to almost all French businesses. Companies that are excluded include

those that, as of 31 December 2019, are subject to compulsory liquidation or professional recovery

proceedings, or are subject to an observation period for insolvency or receivership proceedings.

The amounts borrowed cannot total more than three months of 2019 revenue (i.e. 25% of

annual revenue) or two years’ payroll in the case of innovative businesses or those founded since 1

January 2019. The repayment period for PGEs is six years, with a first year of back-loaded repayment

and, optionally, a second year of back-loading. At the start of 2022, the Government announced the

possibility of extending the back-loading period by a further six months.

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For most businesses with fewer than 5,000 employees and revenue below €1.5bn, the portion

guaranteed by public administration amounts to 90%, with no other additional security able to be

required. This figure is lowered to 80% for businesses

whose revenue is between €1.5bn and €5bn,

and 70% for those with revenue of over €5bn.

Lastly, the cost of remuneration for the guarantee paid to the State is added to the interest rate

charged by the banks. For SMEs, this commission is 0.25% in the first year, 0.5% in the second and

third years and 1% in the fourth and fifth years. For the largest businesses, the cost is twice as high,

at 0.5% in the first year, 1% in the second and third years and lastly 2% in the fourth and fifth years.

2 - The operational implementation required strong coordination of all stakeholders

a) Loans distributed by banks

Banking institutions were tasked with distributing PGEs: they select the recipient

businesses and are required to make every effort to recover the loan from a defaulting business

before contacting Bpifrance and receiving the guarantee. The system must contribute to an

alignment of interests between the State and financial institutions, which can in particular

expect protection for their best customers and therefore assurance of recovering other debt

commitments that they would have seen disappear in the event of large-scale bankruptcies.

The meshing of banking networks, as well as their

institutions’

detailed knowledge of the

French production landscape and the financial health of businesses, was also intended to

enable large-scale distribution and a relevant selection of PGE recipients, with banks bearing

at least 10% of the credit risk. The success of the scheme therefore depended on the efforts

of thousands of advisors working remotely, in remote contact with businesses. These

exceptional conditions prompted the General Directorate of the Treasury, the French Banking

Federation and the main managers of banks to devise a simple and easily understandable

product.

Tasking banks with examining loan applications was facilitated by the banks’ good

financial health, enhanced by monetary and prudential policy measures.

French banks entered the crisis with capital adequacy ratios above the minimum and in

a much stronger situation than in 2009, especially compared with their European counterparts

4

.

Financial institutions’ involvement in distributing PGEs was also facilitated by the monetary

measures taken by the European Central Bank (ECB) during the crisis and in particular the

TLTRO III refinancing operations

5

, allowing banks to easily access monetary resources, as

well as through specific prudential measures. The IFRS 9 standard

6

, which can have pro-

cyclical effects by encouraging large-scale provisioning in times of crisis, has also been made

more flexible. Lastly, the French Prudential Supervision and Resolution Authority (ACPR) and

the ECB authorised French banks to use the State guarantee to reduce the credit risk on PGEs

granted, under certain conditions

7

.

4

McKinsey,

Managing and monitoring credit risk after the Covid-19 pandemic

, July 2020.

5

Targeted longer-term refinancing operations.

6

New accounting standard on financial instruments applicable from January 2018.

7

In particular,the State has undertaken to pay an advance to banks if a guarantee is used, to cover a large

proportion of the potential losses that the financial institution will ultimately record.

6

All of the stakeholders interviewed by the Court highlighted the excellent work carried

out jointly by the private and public partners, and the banks’ major efforts to make contact with

their customers and distribute the PGEs. A survey of businesses conducted at the Court’s

initiative

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confirmed that the initial discussions with banks had been perceived as easing

matters

–

banks treated PGEs in the same way as standard loans, with simple files and a

review of the company’s situation. The amounts requested were not always obtained and

businesses that already had a high indebtedness ratio had more difficulties. The businesses

surveyed highlighted the climate of cooperation that characterised the discussions about the

repayment and back-loading conditions, although some criticised a lack of clarity about the

interest rates and their breakdown.

b) The management of guarantees by Bpifrance and the French Ministry of the Economy and

Finance

Bpifrance, which manages guarantees on behalf of State, was quickly included in the

discussions, notably on setting up a platform enabling businesses to request a guarantee and

obtain a certificate to provide to banks to demonstrate their eligibility for the scheme. At the

same time, the platform allows banks to check that there is no abuse by businesses and in

particular that the total amount of PGEs requested does not exceed the cap of 25% of revenue.

Based on the data provided by the banks when the PGEs are set up and then when they are

repaid, Bpifrance calculates the commission due for each loan and collects it directly from the

bank on behalf of the State. A second processing chain is also being rolled out to process all

declarations of PGE repayment, automate the processing of guarantee requests and handle

the checks defined by the General Directorate of the Treasury, by enabling the automatic

selection of samples of PGEs to check as part of the implementation of the State guarantee.

The implementation of PGEs was therefore based on a fluid online process for

businesses and benefited from a much-needed modernisation of communications between

banks and Bpifrance compared to the standard channels for managing guarantees. One of the

main aims of this modernisation was to make it possible to increase the security of the scheme,

its real-time monitoring by central government and the simplicity of the processes in the event

of guarantees being used, with banks wanting less administrative burden than with pre-existing

schemes. The Bpifrance platform was then extended to other schemes such as equity loans.

The businesses interviewed as part of the Court’s investigation felt that the involvement of

Bpifrance was very effective overall, with rapid availability

–

within 48 hours

–

of the certificate

required to obtain a PGE.

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As part of this survey, 30 telephone interviews with business leaders and financial directors lasting approximately

one hour were conducted by a service provider from 12 May to 5 July 2021.

7

The platform set up by Bpifrance

The platform allows a business that has obtained pre-approval from its bank for a loan amount

to request a

certificate, with a unique number (the “token”). Attached to each certificate of each

business identified by its Siren number, this unique number can then be used to ensure compliance

with the loan cap, which depends on the revenue declared.

This tool is also useful for banks, which have access to certificates already granted by

institutions belonging to the same banking network and, in the case of PGEs granted by a pool of

banks, to the amounts granted by the other contributors. In addition, because the platform

automatically verifies compliance with the regulatory cap, a bank can be certain that a business has

not already taken out multiple PGEs in the past with other institutions, resulting in the authorised cap

being exceeded.

However, the bank is responsible for checking the items declared by the company (revenue,

payroll, nature of the company, innovative or not) based on the information provided by the company

and with respect to the European definition.

In May 2020, Bpifrance launched a satisfaction survey on the use of this platform: most users

were very positive, with a net promoter score (percentage of very satisfied

–

percentage of very

dissatisfied) of 70.18%.

Guarantee applications from the largest businesses (with over 5,000 employees or a

rev

enue of more than €1.5bn) are subject to the Minister of the Economy’s approval and are

covered by a ministerial decree. They are examined by the Directorate General of the

Treasury, based on an initial financial analysis drawn up by Bpifrance, in liaison with the

Central Government Shareholding Agency (APE) in the case of businesses in which central

government is a shareholder and with the Interministerial Industrial Restructuring Committee

(CIRI) in the case of companies declaring themselves in difficulty.

Only these large businesses must commit to the conditions governing the use of funds

made available under the PGE scheme: supplier payment deadlines, improvement of

competitiveness, ban on paying dividends during the year in which PGEs are granted, etc.

Other businesses (with fewer than 5,000 employees and generating less than €1.5bn in

revenue) are granted a PGE without any considerations in kind, although they are expected to

use the funds to preserve business and employment in France.

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Schema n°1: PGE application process

Source: Court of Accounts

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C - Most countries have set up comparable schemes

Most countries have set up guaranteed loan schemes, either a new one (Spain, Belgium,

Italy, UK

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, US) or bolstering existing schemes (the Netherlands and Germany in particular, in

addition to new systems).

In general, the corresponding schemes are based on article 3.2 of the temporary

framework and provide guarantees for loans with a six-year term. This is notably the case in

Italy, Denmark and, in the case of countries offering several categories of guaranteed loans,

at least one of the schemes offered (UK, Netherlands, Belgium). Some countries offer, often

in parallel, the ability to take out shorter loans, from three to five years (Netherlands, UK,

Belgium), based on the model that has been adopted in the US (two- or five-year term).

Some countries, such as Germany, Italy and the United Kingdom, have, however,

introduced longer loans (up to ten years), but with a guarantee covering 100% of loan amounts.

These alternative schemes are based on another article of the temporary framework (article

3.1), which caps the total amount of aid at €1.8m per company and therefore constrains the

amount of the loan. Germany has also referred, for some of its aid and certain periods of

administrative closure, to other legal bases of the Treaty

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, enabling it to be exempt from this

cap in the event of complete cessation of activity, at the time likened to a pandemic-related

“natural disaster”.

The portion guaranteed by central government and the remuneration of the guarantee

often vary according to the size of the business. Some countries have also introduced more

complex eligibility criteria or aid caps depending on the nature of the business.

France offers one of the most advantageous systems for businesses in terms of cost

(interest plus guarantee premiums), with a rate of 0.25% in the first year, moving to between

1% and 2.5% in subsequent years. Other countries generally opt for a position between two

benchmark rates depending on whether the guarantee is 100% (the rate then amounts to 2%

in Italy, 2.5% in the UK and 3% in Germany) or not (Italy and the UK use the market rate in

this case, while Germany has defined a range of between 1% and 2.1%).

Mechanisms have also been made in several countries to reserve loans for viable

businesses (no bad credit in Italy for example, businesses that on average made a profit over

2017-2019 in Germany, no payment arrears in Belgium). Lastly, in some cases, codes of good

practice or good conduct (Spain, Netherlands) aim to guide banks in the selection of

businesses. In the UK and the Netherlands, additional guarantees are required for certain

loans (guarantee from the majority shareholders or personal guarantee from the director).

Meanwhile, France has mainly relied on selection by banks, bolstered by the introduction of a

two-month waiting period

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during which the guarantee cannot be used.

9

The Trade and Cooperation Agreement between the European Union and the UK came into force on 1 January

2021. It states that in return for access to the single market, the UK must follow European rules on central

government aid.

10

Article 107, paragraph 2, point b) of the Treaty on the Functioning of the European Union.

11

The government guarantee cannot be used if the company defaults within the first two months of the loan being

taken out.

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II - The rapid and large-scale rollout of PGEs

A - An important role in aid to businesses

1 - A rapid ramp-up in the spring of 2020

France is characterised by very rapid loan distribution, with 70% of amounts ultimately

applied for having been granted between March and June 2020, in similar fashion to Italy and

Spain, which have been hit hard by the pandemic. The start-up of schemes was slower in other

European countries, particularly Germany. Overall, the rate at which loans were granted

slowed significantly from the end of the summer of 2020, except in Italy, where the rollout of

loans continued, including in 2021.

Graphic n°1: guaranteed loans relative to the added value of non-financial businesses

(2019)

Source: data from ICO (Spain), KfW (Germany), SACE from the Ministry of the Economy (Italy) and

data.gouv.fr (France), listed in the study “Covid

-

19 credit support programmes in Europe’s five largest

economies”, Julia Andersen, Francesco Papadia, Nicolas Véron

Part of the success of the French PGE scheme is due to the large-scale efforts to raise

awareness of it, enabling it to quickly establish itself as a major crisis management mechanism.

All of the businesses responding to the qualitative survey said they had quickly become aware

of the scheme, which was seen as clear, relevant and identified as an effective cash support

system, alongside other public aid (short-time work, deferral of social security contributions,

solidarity fund).

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Most of the PGEs were taken out in April and May 2020. Only a few businesses (head

offices and holding companies in particular) made more use of the scheme during the summer

of 2020. In 2021, the subscription rate slowed significantly. Therefore, the justification for

extending the scheme until 30 June 2022 still does not appear obvious at this stage.

Several large businesses in the transport sector have received large amounts of PGE,

including Air France-

KLM (€4bn) and CMA

-

CGM (€1.5bn). Within the manufacturing industry,

PGEs were particularly substantial in the autumn of 2020, with funding granted successively

to Renault in September and December.

The scheme was particularly popular with very small businesses (which had received

nearly 88% of loans as of 31 December 2021). However, by amount, the breakdown is less

concentrated, with 11.9% of amounts going to large businesses, 11.1% to mid-market

companies, 38% to SMEs and 37% to micro-enterprises.

Graphic n°2 :Breakdown of PGE amounts by size and business sector

(as of 31 December 2021)

Source: economy.gouv.fr; processing: Court of Accounts

2 - A scheme that has largely dominated other loans, both public and private

The pandemic prompted Bpifrance and the regions to take several initiatives, even

before the PGEs were implemented.

These schemes made it possible to bridge the gap pending the implementation of the

first PGEs by central government and banks, although the amounts granted remain very low

compared to the total amount of PGEs distributed (€120.8bn in PGEs as of 31 December

2020): total financ

ing aid excluding PGEs granted by Bpifrance in 2020 amounts to €10.4bn,

including €2.4bn in Atout loans, €3.2bn in general schemes (versus €4.1bn in 2019) and €2bn

under sectoral schemes. The qualitative survey also reports very occasional use of other

existing aid, which has mainly been used by businesses that already had a relationship with

Bpifrance or as a supplement to PGEs, with over 80% of businesses that obtained an Atout

loan also receiving a PGE.

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The Atout and Rebond loans

The Atout loan is a Bpifrance loan granted since February 2020 for a three- to five-year term,

with a back-loaded capital repayment of up to 12 months. Its amount is more modest than the PGE,

being capped at €5m for SMEs (whereas the PGE can amount to up to €12.5m, as the maxim

um

annual revenue of an SME is €50m), and €30m for mid

-market companies (whereas the PGE can

total €375m, as the maximum revenue of a mid

-

market company is €1.5bn).

The Rebond loans, distributed by Bpifrance using resources from the regions and the ERDF

and the parameters of which vary according to the territories, can be taken out by micro-enterprises

and SMEs for amounts of €10,000 to €300,000, with repayment over seven years and a two

-year

back-

loading period. According to Bpifrance, nearly €0.5bn in fin

ancing was provided in 2020 under

this scheme.

The implementation of the large-scale and attractive PGE scheme put an end to the

distribution of other bank loans, which were nearly 15% lower on average during the period

from April 2020 to March 2021 compared to the flows distributed between April 2019 and March

2020.

Graphic n° 3 :Monthly flows of bank loans to businesses

(in billions of euros)

Source: economie.gouv.fr and Banque de France; processing: Court of Accounts

3 - Extensive use of bank repayment extensions

Large numbers of businesses have deferred their bank repayments. In accordance with

the recommendations of the prudential and supervisory authorities, French banks have

granted them significant deadline extensions on their own loans, with automatic six-month

extensions initially, renewable thereafter on a case-by-case basis. As of 30 June 2020, the

cash support resulting from these extensions for businesses amounted to €20bn, compared to

€87bn in PGEs distributed as of the same date.

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4 - The mobilisation of the scheme reflects the disparity of economic situations at a

territorial level

The impact of the pandemic has been unevenly distributed across the territories, with

areas particularly affected in the Provence-Alpes-

Côte d’Azur, Île

-de-France and Auvergne-

Rhône-Alpes

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regions.

The work of the Monitoring and Evaluation Committee on Financial Support Measures

for Businesses facing the Covid-19 pandemic found concentrated use of emergency aid in

these regions.

In terms of amounts, however, the PGE was mainly distributed in Île-de-France, which

totals 37% of loans but represents 31% of national added value in 2018, as well as in Provence-

Alpes-

Côte d’Azur (8.3% of PGEs and 7.2% of added value) and Corsica (0.8% of PGEs and

0.4% of added value).

The intensity of the use of PGEs in Île-de-France is mainly due to the concentration of

head offices in this region: as such, it accounts for 54% of guaranteed loans distributed to large

businesses, including the €4bn paid to Air France and the €4bn taken out by Re

nault.

Carte n°1: intensity of use of PGEs

Source: economie.gouv.fr; processing: Court of Accounts

Note: the intensity of use is deduced by comparing a region’s share of total PGEs distributed with that region’s

share of national added value.

12

Jean-Noel Barrot,

Accelerating the economic recovery of the territories

, report to the Prime Minister, June 2021.

14

Conversely, discounting the amounts paid to Renault, the PGEs mobilised by the

manufacturing industry are evenly distributed across the country.

By amount, the retail sector is the main recipient of PGEs, with €34bn in loans out of the

€143bn distributed at the end o

f December 2021. The non-food retail sector has been

particularly affected by the pandemic (its activity declined 9.3%)

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and wholesale sales have

been adversely affected in most sectors throughout the country, so much so that the uptake of

PGEs in these sectors is consistent. Île-de-France accounts for 31% of PGEs in the retail

sector, a level close to its share of national retail added value (34.8%).

The situation in the hotel, café and catering sector is more mixed, with a high uptake of

PGEs in Corsica, Île-de-France and Provence-Alpes-

Côte d’Azur. In Île

-de-France, PGEs in

the hotel, café and catering sector account for 37% of all PGEs, while the region represents

30.4% of the national added value of accommodation and catering. This finding of excess use

of the scheme in the capital region is due to strong sensitivity to the pandemic: companies in

this sector. In Île-de-France specialise in events and under normal circumstances attract

business from foreign customers (42% of luxury hotels are in Île-de-France), unlike other

regions, which have a greater concentration of small structures eligible for the solidarity fund

when it was set up and which have been able to benefit from the recovery in domestic tourism.

Lastly, the use of PGEs in the construction sector also reveals territorial differences,

although to a lesser extent, with uptake mainly in the north-east and south of France.

B - Generally limited PGE rejections, credit mediator consistently active

1 - Limited rejections

The success of the scheme is also due to a certain flexibility among financial

establishments in terms of the distribution of loans, meaning that the PGE rejection rate has

remained relatively stable over time. The PGE award rate, following prior negotiations between

businesses and banks resulting for example in a reduction in the loan amount, is therefore

around 97%, higher than the award rate usually seen in cash loans (71.1% on average for

micro-enterprises, 82.2% for SMEs and 92.8% for mid-market companies in 2019), but

comparable to the award rate for investment loans (88.5% for micro-enterprises, 96% for SMEs

and 97.9% for mid-market companies in 2019).

A Senate report

14

from May 2021 also highlights that the introduction of PGEs has not

changed the profile of businesses accessing bank credit compared to 2019, so much so that

there is not thought to have been any preference among banks to choose businesses with a

good rating, nor on the contrary an anti-selection phenomenon, with PGEs also granted to

companies in less good financial health.

Ultimately, the most complicated cases in terms of granting PGEs involved either highly

indebted companies or companies with no access to banking services

15

.

13

Insee,

At the start of 2021, business is improving in retail after plunging in 2020

, Insee Première, July 2021.

14

Information Report No. 583 (2020-2021) produced on behalf of the Senate Finance Committee on state-

guaranteed loans by Mr. Jean-François Husson, Senator, 12 May 2021.

15

A study by the Institute of Public Policy, commissioned by the Senate Finance Committee for its aforementioned

report, also found that PGE recipients have a median position in terms of financial position and that the 10% of

companies that saw the biggest impact on their sales benefited slightly less from the scheme.

15

2 - Credit mediator highly active, alternatives to the PGE not extensively used

When they reject a PGE, banks are required to report a possible appeal to the credit

mediator, which is a local, free and confidential service provided by Banque de France to

facilitate dialogue with banks. In practice, this system, which businesses are not always aware

of, has not been routinely used. Of the 2.9% of PGEs rejected (i.e. around 20,000 rejections

out of 700,000 loans), nearly two thirds were handled by the mediator. The mediator was

contacted fourteen times more in 2020 than in 2019, with 14,147 referrals, primarily following

an initial rejection to grant a PGE. The mediation success rate amounts to 50.2% of

applications.

The credit mediator’s activity is concentrated on very small businesses, which account

for 84.1% of mediation requests, and, to a lesser extent, SMEs (15.3% of requests). The

sectors that used the mediator are the same as the main recipients of PGEs. The m

ediator’s

involvement was particularly pronounced in the retail sector (22.6% of cases), accommodation

and catering (17.8%) and construction (11.5%). In line with the roll out of PGEs, the mediator

has been particularly active in Île-de-France, Auvergne-Rhône-Alpes and, to a lesser extent,

Provence-Alpes-

Côte d’Azur, Nouvelle

-Aquitaine and Occitanie.

If negotiations failed, the mediator suggested that the companies use the other schemes

set up specifically in response to the pandemic to offer a solution to businesses refused a PGE:

loans from the economic and social development fund (FDES) for businesses with over 250

employees, subsidised loans and repayable advances for SMEs and mid-market companies,

and lastly exceptional loans for small businesses (PEPE). The amounts distributed, very late

in 2020, under these schemes are modest compared to the PGEs. At the end of July 2021,

nearly €500m of FDES loans had been distributed to 61

businesses and just over €100m of

subsidised loans and repayable advances had gone to 139 companies, while 340 businesses

had received PEPE loans totalling €12m.

III - Large-scale support for company cash flow, a real cost that

is still uncertain for central government

A - A response to the short-term needs of businesses, disparate financial

positions

1 - Cash preservation and avoided bankruptcies

The significant mobilisation of public and private stakeholders enabled the scheme to

quickly achieve its short-

term goals, consisting of preserving companies’ liquidity and avoiding

any

credit crunch in a time of great uncertainty.

Since the start of the pandemic, the rise in macroeconomic indicators has not shown

company cash declining or running short, having on the contrary increased very sharply in the

second quarter of 2020 due to the effect of PGE distribution. The qualitative investigation

conducted by the Court also confirms that several businesses took out a PGE simply to secure

resources in an uncertain economic context. According to a survey conducted by Bpifrance in

16

mid-2021

16

, 33% of recipients said they had used their PGE not much or not at all and 24%

had spent only a small portion.

The PGE also had an impact on payment deadlines, allowing businesses in difficulty to

pay their suppliers and thereby avoid a chain of repercussions.

Lastly, the pandemic measures, chief among them the PGEs, have made it possible to

curb the number of business failures, which fell by 39% in 2020 (compared to 21% on average

between 2019 and 2020 in the European Union) and 18% in 2021.

Indeed, state-guaranteed loans have been mainly taken up by businesses significantly

affected by the pandemic. As such, at a sectoral level, a study by the Institute of Public Policy

commissioned by the Senate Finance Committee found that the rate of use is particularly high

in sectors heavily affected by the pandemic, namely in the hotel and catering sector and the

manufacture of transport vehicles. Although retail, where business is also very affected,

accounts for large PGE amounts, both in wholesale (9.5% of PGE amounts granted at the end

of 2021) and retail (7.6% of PGE amounts granted at the end of 2021), the rate of use by

number of businesses is lower in this sector.

2 - The contrasting financial position among French businesses

Before the pandemic, French businesses already had a high level of indebtedness

compared to companies in European Union countries. The difference is particularly significant

in bank loans, the amount of which rose from 22% of that of the eurozone during the financial

crisis to 27% currently

17

.

However, the upward trend in indebtedness seen at the aggregate level masks very

disparate trends between companies.

INSEE

18

found that while the indebtedness ratio of micro-enterprises fell between 2014

and 2018, there were significant differences between sectors (with the least capitalised sectors

of accommodation and catering, services to individuals and real estate); one in five micro-

enterprises had negative equity with a significantly higher default rate in this case. Similarly,

although overall, the net and gross indebtedness ratios (net or gross indebtedness to equity)

of SMEs was on a downward trend between 2011 and 2018, their financial position is very

diverse

19

.

The pandemic has exacerbated pre-existing fragilities. At the aggregate level, cash and

in particular bank deposits measured by Banque de France grew rapidly (+27% for bank

deposits and an overall increase in cash of +€204bn) between 2019 and 2020, although at the

same time, companies’ financial debt, which includes both bank loans and compulsory

financing, i

ncreased very sharply, by €219bn according to Banque de France. The net debt of

French non-

financial companies therefore remained almost stable (+€15bn between 2019 and

2020) but the high level of gross debt remains a factor of fragility for businesses.

Th

e increase in companies’ debt and the extensive diversity in their financial positions

requires improved detection and support of those that are viable but in difficulty. To this end,

in June 2021, Banque de France published an initial analysis of the 179,607 balance sheets

16

73rd economic climate survey of SMEs

, published in July 2021.

17

Source: financial balance sheets, Eurostat.

18

Noémie Morenillas, Gabriel Sklénard,

Micro-

enterprises’ low equity capital increases t

heir fragility

, Insee

Références, 2020 edition.

19

The financial position of businesses: strengths and weaknesses on the eve of the pandemic

, Banque de France

bulletin, January-February 2021.

17

received from SMEs, which correspond to some of the companies rated by the institution

20

. It

transpires that 39% of them, or just over 70,000, have taken out a PGE.

At the aggregate level, the ratio of net debt to equity of companies in the sample has

decreased. However, at the individual level, 54% of the SMEs studied saw their gross debt

increase, and 10% show a decrease in cash at the same time. Of these businesses, Banque

de France told the Court it had identified just over 7,700 businesses that need to be closely

monitored, just over 2,800 of which received PGEs. The proportion of PGE recipients deemed

“at risk” as part of this work is therefore approximately 4%, a level consistent with computations

of PGE default rates (see below).

B - Actual cost uncertain for central government

1 - Estimated cost is lower but could change

In 2020 and 2021, central government benefited from the premiums received under the

PGEs, while guarantee requests remain limited at this stage. The cost to central government

will ultimately depend on the default rate among PGE recipients. The computations available

so far do not suggest a huge cost.

Banque de France and Bpifrance regularly conduct computations of PGE default rates,

based on data on companies’ financial pos

ition and by examining, for each company, the

impact of the shock on accounting data and therefore on the probability of a default. The

Institute of Public Policy has also made computations, although based on a slightly different

rationale, by assessing the value of the guarantee for banks. All of this work, based on

maximalist assumptions in terms of PGE maturity and companies’ decision to choose a two

-

year back-loading period, initially led to estimating default rates of around 5%.

As part of the budget bill for 2022, taking into account the fact that nearly 15% of

businesses have chosen to repay their PGE from 2021 and that only around 50% opted for a

two-year back-loading period, the Government revised the default rate to 3.78%, down from

initial computations.

These computations are surrounded by many uncertainties at both a macroeconomic

level, depending on the pace and extent of the recovery, and a microeconomic level, with

widely diverse individual situations.

The Court’s qualitative investigation also

revealed that some businesses, with no

financial strategy other than resuming activity, seemed fairly unprepared in June 2021 to meet

their repayment obligations. The smallest of them also seem to be unaware of the existence

of the recovery aid schemes they could use. Lastly, some businesses fear being suffocated in

their attempts to restart, given the short term of PGEs (five-year repayments) compared to the

additional amount of debt they have taken on.

20

Pandemic: what is the impact on SME indebtedness?

, Banque de France, Bloc-notes Éco, note no.224, 23 July

2021.

18

2 - The cost of PGEs will also depend on optimisation and fraud mechanisms

Faced with massive cash requirements, the design and distribution of PGEs focused on

the success of rolling out the loans, without any in-depth control having been put in place

further up the line to limit the optimisation risks.

Indeed, although a two-month waiting period was introduced and banks are supposed to

increase their exposure to PGE recipient businesses, no specific mechanism is arranged to

check that the loans granted are not replacing existing debts.

Furthermore, there is a risk that the debt commitment held by central government will

become less senior in case of default if new loans have a shorter maturity, or are backed by

assets provided as collateral, which is not the case with PGEs. Raising new debt would be

evidence of

the “leverage effect” of PGEs, facilitating access to other traditional loans for

businesses, but must not jeopardise the repayment of PGEs.

Lastly, banks assess their customers’ consolidated financial position when distributing

PGEs, but it is not possible to verify the circulation of PGE debt commitments and whether

there are optimisation possibilities within groups at a French and foreign level.

However, the Government has taken measures to prevent fraudulent behaviour. In

particular, by making them bear part of the credit risk and therefore by closely associating them

with the selection of businesses that are often already known customers, the aim of involving

banks in the scheme was to prevent the risks of loans being granted to businesses that have

no legal existence or real activity. The platform set up by Bpifrance also made it possible to

ensure the identity of recipients and compliance with the loan caps, based on the revenue and

payroll figures declared by companies, with banks being responsible for checking their

accuracy by comparing them with the accounting data they have available.

Tracfin’s activity report published in July 2021 mentions just six cases of fraud, with a

single file reported by banks concerning a PGE misappropriation in 2020 and five cases in

2021. The 10% of risks borne by banks appears to have provided sufficient incentive for them

to ensure that any illegal behaviour was curbed.

This is not the case in many countries, especially those that have opted for 100%

guarantee rates. In the UK, the Department for Business, Energy and Industrial Strategy

(BEIS) estimated, following a report by the National Audit Office that fraud and loan losses due

to payment defaults could cost UK taxpayers up to £17bn, with an estimated fraud rate of

between 7.5% and 11% of loans. British guaranteed loans, widely distributed by banks (more

than £47bn was released to 1.5 million businesses between May 2020 and September 2021),

have a 100% government guarantee.

19

__________________________________

CONCLUSION ______________________________

Devised and implemented very quickly, state-guaranteed loans were rolled out to

businesses thanks to strong and concerted efforts by central government and banks. The

choices made to establish a simple scheme, disseminated by banks to their customers and

with an online guarantee application platform, proved effective, which facilitated

communication and the wide dissemination of information in an emergency situation.

The first lesson learned from the rollout of PGEs is the benefit of having devised a simple,

universal legal scheme with parameters that facilitated communication and the large-scale

distribution of loans.

Although the €300bn total is far from being reached, the loans have met the goal of

creating a liquidity bridge and avoiding any credit crunch in a period of uncertainty. The

examination of applications by banks made it possible to meet the short-term cash flow needs

of businesses affected by the pandemic, with a rejection rate remaining low. However, in the

medium term, PGEs are increasing the indebtedness of French businesses, which were

already in a more distressed financial position. Although the net increase in their indebtedness

remains low overall, there are highly contrasting situations, requiring the detection and careful

monitoring of the businesses most in difficulty. The final cost for government finances, which

is difficult to estimate, will depend on companies’ ability to repay the amounts due. The default

rate is currently estimated at around 4%, which corresponds to a net cost for State of less than

€3bn.

A second lesson from the rollout of PGEs is the need to have tools for monitoring

company cash flow that are sufficiently detailed to measure the impact of the support measures

and adapt them.

Lastly, while the characteristics chosen for PGEs in France have made it possible to

avoid the large-scale fraud phenomena seen in other countries, attention should be paid to the

optimisation risks and the improvement of the financial management tools.

The complete assessment of the PGE scheme, which the Court is currently conducting,

should make it possible to clarify these initial findings, formulate audit recommendations and

measure whether, beyond the immediate “liquidity bridge”, state

-guaranteed loans have

helped secure the long-term viability of businesses affected by the pandemic.