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Coronavirus: impact of French measures on financing agreements

French mitigation measures in support of businesses affected by the Covid-19 pandemic will impact on the rights and obligations of both borrowers and lenders under project financing and other loan agreements.

Ordinance no. 2020-306 (link to ordinance in French), which was adopted by the French government on 25 March 2020, introduced protective measures for borrowers which will override the contractual position. These measures will be binding on both individuals exercising an economic activity in France and legal entities registered in France, irrespective of the law governing the loan agreement.

The government has also introduced a state guarantee system for new loans as part of a package of measures to support businesses in France during the pandemic.

New laws and regulations may be adopted during the health emergency period, so the situation should be continuously monitored.

Measures impacting existing loan agreements

As the coronavirus continues, borrowers will be keen to ensure that they can continue to access undrawn loan facilities, particularly where needed for cashflow purposes. For lenders, there is an increased risk that borrowers may be unable to repay their loans in the long term.

The ordinance has a direct impact on events of default which can be triggered by lenders under loan agreements. Under section 4 of the ordinance penalty clauses, termination clauses and clauses provided for forfeiture, when their purpose is to punish the non-performance of an obligation to be complied with within a specified period, shall be deemed not to have taken effect or to have been effective if that period expired during the 'reference period' set out in the ordinance. The reference period, which had retrospective effect, runs from 12 March 2020 until one month following the date of cessation of the declared state of health emergency, 24 June 2020, subject to any potential extension.

Eran Chvika

Eran Chvika


Application of the ordinance is not always clear-cut and it leaves much room for interpretation in certain cases, making decision making for both borrowers and lenders challenging.

The date on which the clause will become effective has been clarified by French ordinance no 2020-427 of 15 April 2020:

  • if the debtor has not performed its obligation, the date on which the clause will become effective is postponed at the end of the reference period, 24 June 2020, for a period equal to the time elapsed between, on the one hand, 12 March 2020 or, if later, the date on which the obligation arose and, on the other hand, the date on which it should have been performed;
  • the date on which the clause will become effective, when its purpose is to punish the non-performance of an obligation, other than the payment of sums of money, is postponed at the end of the reference period, 24 June 2020, for a period equal to the time elapsed between, on the one hand, 12 March 2020 or, if later, the date on which the obligation arose and, on the other hand, the end of that period.

The effect of the ordinance in real terms is to impose a 'standstill period' related to the health emergency in order to protect borrowers under loan agreements and, where the borrower's main obligation is to repay the loan within a specified period, to suspend that obligation.

However, application of the ordinance is not always clear-cut and it leaves much room for interpretation in certain cases, making decision making for both borrowers and lenders challenging.

Moratorium on payment default and default interest

The ordinance established a legal moratorium, in favour of the borrower, neutralising contractual sanctions related to any non-payment default which occurs during the reference period. Failure by the borrower to make a payment on the due date as provided for under the terms of the loan agreement, whether payment of the principal borrowed or contractual or late interest resulting therefrom, on its due date during the reference period will not be an immediate event of default and payment of the relevant sums by the borrower, in principal and interest, is deferred as set out above.

Other defaults

The ordinance applies to provisions in loan agreements "when their purpose is to punish the non-performance of an obligation within a specified period". Accordingly, lenders remain entitled to demand immediate repayment under the loan agreement following the occurrence of any other event of default applicable during the loan – for example, a breach of some undertakings or negative covenants, or a material adverse change or material adverse effect default.

Material adverse change or material adverse effect

Loan agreements usually do not include force majeure clauses. However, many include an event of default where the lender believes that there has been a material adverse change (MAC) in circumstances or that a change in circumstances has caused, or is reasonably likely to cause, a material adverse effect (MAE). The concept may also be framed as a repeating representation.

Depending on how the definition of the term was negotiated, the lender may be unable to proceed with the loan once a MAC or MAE clause is triggered. Any such provisions will therefore have to be considered on a case by case, fact- and language-specific basis.

MAC and MAE clauses serve as a 'sweep up' protection for lenders against unpredictable or unforeseen events or changes in a borrower's circumstances. Lenders are generally reluctant to rely solely on an event, or series of events, having or being reasonably likely to have an MAE as the sole event of default entitling them to accelerate debt and enforce security.

The Covid-19 pandemic should not by itself cause a MAC or MAE breach, but the impact of the pandemic on the borrower and its operations could be a MAC or MAE. The lender would need to be able to demonstrate that the pandemic will have a MAE on the borrower's business for a sustained period of time. The borrower will need to provide information to the lender to help in that assessment.

Information undertakings

Loan agreements generally contain an obligation on the borrower to provide as much information regarding the finances, assets and operations of its group as lenders may reasonably require. This undertaking can enable lenders to obtain details on the performance of the business in the face of a sharp downturn in trading, allowing them to evaluate the risk. Failure to inform the lender could be a breach of these reporting requirements, which can lead to an event of default.

Accordingly, in the absence of a clear MAC, it is advisable for borrowers to keep lenders informed of their position as the Covid-19 situation evolves, to ensure they have the best information available for making any decisions.

Financial covenants

Many loan agreements include an obligation on the borrower to demonstrate that it is maintaining certain prescribed financial ratios. These are usually objectively determined by the initial financial reports that borrowers are required to provide to their lenders on a periodic basis. A borrower in financial difficulties may breach these covenants during the reference period. Given that the underlying rationale of the ordinance is to provide protective measures to businesses during the pandemic, financial covenant breach defaults will most likely be suspended.

Depending on the circumstances, borrowers may need to consider altering their short term business strategies in order to ensure that financial covenants are not breached after the reference period – for example, delaying dividend distributions or asset acquisitions. The parties to the loan agreement should also check whether any 'cure' rights are included - for example, an 'equity cure' provision where a sponsor or shareholder of the borrower can inject additional capital, by way of equity or subordinated debt, so that the financial covenant will be deemed not to be breached after the legal grace period offered to borrowers by the ordinance has passed.

Amendments and waivers

As the economic disruption caused by the Covid-19 pandemic continues to affect businesses, parties will need to carefully consider the possible ramifications of the outbreak under their finance documents. Lenders can expect a flow of amendment and waiver requests from borrowers. The parties should make themselves familiar with the amendment and waiver provisions in their loan documentation - including the voting requirements for different types of amendments or waivers - and look to adapt the contractual situation of the parties to the new circumstances.

Borrowers should also be aware of local stimulus packages and consider seeking alternative financing to introduce new money into the business under the loan schemes implemented by the French government in response to the pandemic. The French state guarantee scheme for new loans is one of those measures.

Scope of the French state guarantee scheme for new loans

The French government has set up a €300 billion state guarantee scheme for new loans granted by financial institutions to help businesses seeking help to overcome the near-total shutdown of the economy during the Covid-19 pandemic through loans and credit lines.

State guaranteed loans are available to companies between 16 March and 31 December 2020. The conditions of the state guarantee are defined by law no. 2020-289 of 23 March 2020 (link to law in French) followed by a decree.

Bpifrance Financement SA, a public bank, is in charge of the administration of the scheme on behalf of the state.

Borrower eligibility criteria

Eligibility extends to legal entities and individuals having an economic activity and duly registered, with a SIRENE number, with a French trade and companies register. Real estate companies (SCI), credit institutions and distressed businesses are excluded.

Companies held by private equity funds are also eligible for the state guarantee.

Lender eligibility criteria

Eligible loans must be granted by French or 'passported' foreign credit institutions or financing companies. Intercompany loans are therefore excluded from the scope of the state guarantee.

Main features of the loans

The total amount of state guaranteed loans that can be granted to an individual business cannot exceed 25% of the 2019 total revenue of the borrower or that of the last financial year available. Specific caps are applicable to some innovative companies or businesses created after 1 January 2019.

Eligible loans must not be secured or guaranteed by any other security interests or guarantees, and must include no principal repayment for at least 12 months - only interest should be payable by the borrower. The borrower will be given an option to amortise the loan over an additional period of between one and five years at the end of the first year.

The state guarantee gives rise to a fee, determined by decree and payable by the borrower.

The percentage of guaranteed outstanding loan in principal, interest and ancillary costs, is:

  • 90% for companies with less than 5,000 employees and revenue of less than €1.5bn in the last financial year;
  • 80% for companies with revenue between €1.5bn and €5bn in the last financial year; and
  • 70% for other businesses.
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