By Leigh Thomas

PARIS (Reuters) – The French government on Thursday launched a new programme to relieve small and mid-sized firms’ strained balance sheets with quasi-equity debt partially guaranteed by the state.

After months of tough negotiations between the finance ministry and EU state aid regulators, firms will be able to tap up to 20 billion euros ($24 billion) in loans and subordinate bonds from early next month, Finance Minister Bruno Le Maire said.

“This will be an unprecedented raising of capital for investment in Europe and it should be a model for other European countries,” he said during a presentation of the programme.

French firms went into the COVID-19 crisis last year already with a record level of debt, and they took out an additional 130 billion euros in state-guaranteed loans from their banks as cashflow collapsed during France’s worst post-war recession.

Under the new programme, the debt will be junior to all claims other than a firm’s equity, it will have a longer maturity of eight years and must be used specifically for investment rather than refinancing existing debt.

The new debt is also more flexible, with a four-year grace period on principal repayments, but will also carry higher interest rates of 4-5.5% to cover the greater risk.

The scheme is innovative as banks will extend the loans to firms and then sell them on to institutional investors such as insurers through private investment vehicles, whose potential losses will be covered up to 30% by the state.

HELPING SMALLER FIRMS

While bigger companies have long had access to the high-yield debt markets, smaller firms in Europe have until now had to rely on shorter-term financing largely from banks, unlike in the United States where more flexible options have long existed.

France has in the past struggled to get a market off the ground for small-firm financing and hopes are high that this time the state guarantee will give an extra boost.

European firms’ heavy debt burden has fuelled concerns among economists and policymakers that they will not have the financial strength to carry out the investments needed for a strong recovery from the coronavirus crisis.

EU competition enforcers cleared the scheme on Thursday after lengthy negotiations to get the right risk-reward balance while not giving French firms an unfair advantage over their European rivals.

The onus will fall on banks to ensure through their client relationships that the loans are extended to firms strong enough to make good use of the funds.

“By taking 10% of the loans on our balance sheets without a state guarantee, that implicates us in the quality of these instruments,” said Credit Agricole Chief Executive Philippe Brassac, who also heads the French banking federation.

The state had originally planned to offer a guarantee of only 20% but had to increase that to 30% to attract institutional investors into the new market.

($1 = 0.8294 euros)

(Reporting by Leigh Thomas; additional reporting by Foo Yun Chee in Brussels, Editing by Gareth Jones)