The unique conditions of a French State Guaranteed loan
State guaranteed Loans have recently been introduced in France by the French government to support businesses during the coronavirus crisis and the economic slowdown that followed. In order to ensure liquidity to SMEs, the French State makes it less risky for lenders to finance SME projects by covering part of the loss in case of default.
October can distribute French State Guaranteed loans. The State Guaranteed loans are different from our standard loans. The French government has imposed a number of requirements and limitations to the conditions of the loan, before granting the guarantee. One of the most peculiar aspects of the State guaranteed loan is the duration. In this blog we explain in more detail about the duration of the State guaranteed projects.
What is the duration of a French State-guaranteed loan?
All State guaranteed loans are initially 12-month loans with one capital repayment and one payment of 2% interest at the end of the loan. However, what makes the State guaranteed loan unique is that the borrower can decide to extend the loan after the first 12 months and spread the repayment over 1 to 5 years. Therefore, after 12 months the following things can happen when you invest in a State Guaranteed loan:
- The borrower fully repays their loan. In that case, you will receive the capital you lent plus 2% interest on your October account at the end of the 12th month.
- The borrower pays 2% interest over the first 12 months, but does not repay any capital. The loan will be repaid over a period of 1 to 5 years, through monthly annuity payments. This period is at the discretion of the borrower. In this case we will notify you about new duration and rate. The 90% state guarantee will still apply.
- The borrower pays 2% interest over the first 12 months, but only repays part of the capital. The rest of the capital will be repaid over a period of 1 to 5 years, through monthly annuity payments. The borrower decides the new duration and how much capital they will repay. In this case we will notify you about new duration and rate. The 90% state guarantee will still apply.
At the moment we cannot say which borrowers will repay their loan after 12 months. When you invest, this is unknown factor for you. To compensate you for the increased duration of the loan, the interest rate will be increased as well. The height of the interest rate after 12 months is decided by a company’s credit score. The credit score is shown when you lend and will not change throughout the project. The rate will follow the grid below:
Repaying the entire loan at the end of the first year is the cheapest option for most borrowers: the interest rate will not be increased and the borrower will be relieved of their debts.
However, we do not expect a lot of borrowers to repay the full loan after 12 months. To repay the loan, a company should have enough margin. In other words, a company’s income should be higher than their costs. Many companies that request this type of loan, are experiencing reduced activity due to the coronavirus crisis. Therefore, we assume that the probability of a company generating enough margin to repay the full loan is low. By extending the loan, the repayment is spread out which reduces the burden on a company’s margin.
Nevertheless, we expect that most companies will repay a part of their loan at the end of the 12-month period.
*Pro-tip: Have a look at a company’s net-debt / EBITDA ratio. This ratio gives an indication how many years it takes for a company to repay their debts, based on their EBITDA margin. It thus gives an insight in the chances a loan will be extended.
How profitable is a French State-guaranteed loan?
Your return on a State guaranteed loan depends on whether the loan is extended. When the loan is not extended, the annual interest rate applied on the capital is 2%. Calculating your return is easy: an investment of €100 will be worth €102 after one year.
When the loan is extended, calculating your return becomes more tricky as the interest rate will be increased and the amortisation of the loan will be made though monthly annuity payments. Let’s have a look at what, we think, will be a common situation:
- You lend €100 to a B-rated project.
- €15 will be repaid after 12 months, together with an interest payment of €2.
- €85 will be repaid over 3 years through annuities at 4.46%.
The coming 3 years you will receive a monthly annuity worth €2.52 from the borrower. After 3 years, this adds up to €91.06. In total you will be repaid €108.06, which means your profit on this particular state guaranteed loan is €8.06. For the entire duration of this project, your loan will be guaranteed by the French State.
With a State guaranteed loan you can help companies get through the coronavirus crisis, while at the same time achieving a return on your investment. The size of that return is dependent on whether the loan will be extended and the duration of the extension. October can distribute State Guaranteed loans till the end of this year, when the guarantee ends. If you have not lent to State Guaranteed project yet, have a look at the projects to come in the next months!