Financing of development projects : Is the recovery bond mechanism an appropriate solution ?
With a delay of nearly 6 months, the recovery bond scheme designed by the state in partnership with insurers and private equity players is about to be rolled out, beginning in September 2021. This plan closely follows a another bank-based scheme, that of state-supported equity loans (« PPSE »), which has been deployed since spring 2021 and has met with mixed success, while other crisis support instruments, such as EMPs, are still available: The hoped-for target amount of €14 billion has not been reached, after an initial closing at the end of April of €11 billion. Now that the contours of the scheme are a priori decided and known, FirmFunding deciphers the conditions and advantages: is this solution suitable for all growing SMEs?
Recovery bonds, subordinated bonds with an interest rate between 5 and 6% and a « bullet » repayment for the totality
The "relance bonds" are subordinated bonds granted by private equity players (management companies), i.e., they are repaid only after all other creditors have been paid in full in the event of collective proceedings.
The interest rate is attractive and below industry practice, ranging from 5 to 6% depending on the size of the company. A notable advantage compared to the equity loan is that the repayment will be entirely "in fine": only the interest will be repaid during the 8-year term, the amount of the bond being repaid in full at maturity, which preserves the company's cash flow.
The State provides a 30% guarantee on the totality of the funds contributed, within the framework of a two-tier structure: An umbrella fund will group together the bond compartments managed by the management companies and each of them will be required to co-invest up to 10% (without a State guarantee on this part) in order to ensure an alignment of interests Seven management companies or groups of managers have been selected, representing 33 entities, based on their ability to deploy the system, their management and reporting standards, their risk management and their territorial coverage. Each of the seven "pockets" of relaunched bonds is targeting a minimum of €200 million, or €1.4 billion in total.
The rate, 5.9% on average, can be reduced to 0.25% if the SME strengthens its equity and achieves ESG (environmental, social and governance) objectives.
This device brings together all the advantages of high-level private debt financing: strengthening of equity without diluting the founder, deferred and even bullet repayment of capital, rates below those usually charged...
But stimulus bonds are not in principle open to all SMEs, and their subordinated nature will likely lead to a significant selection by management companies. SMEs must meet certain conditions and not all needs are covered :
- Minimum turnover of 2M€ in 2019
- SMEs with a minimum Fiben rating (Banque de France) of 5+.
- Maximum amount of 12.5% of 2019 sales (and 10% if combined with an EMP)
- Impossible to finance pre-existing debt, which excludes refinancing and, probably, cash out.
In terms of timing, these funds must be deployed by June 30, 2022, a deadline that is currently imperative.
All equity financing solutions, whether or not from the stimulus package, are available on FirmFunding
In view of the conditions for the granting of stimulus bonds and the selection, probably strict, that will be made by the management companies, not all SMEs will be able to benefit from this scheme. Fortunately, other private debt solutions exist and continue to be offered, which provide the same advantages (preservation of cash flows due to repayment at maturity, strengthening of the balance sheet structure, non-dilution, etc.). The challenge for the SME is therefore to easily find the solution adapted to its situation.
FirmFunding, the first and only funding platform dedicated to private placement, allows SMEs to submit their financing project online, likely to be structured between all the categories explained above: pure private debt, equity, equity/debt mix, revival bonds, depending on the financed need, its amount and the SME's major metrics. It allows companies to make « tailor-made » solutions.
For example, an SME with both a €1 million working capital financing need and a €1 million refinancing need can submit and put online a single file, for an amount of €2 million, which will be instantly presented to the registered professional investors (+200). Depending on the possibilities of these investors, the file can be financed in relaunching bonds (for the working capital financing part only), in debt and/or equity for a part or the totality, by one or several investors.
In order to meet the requirements of private debt professionals and enable SMEs to find the most suitable solution for their situation, the FirmFunding teams provide their expertise to determine which financing solutions are possible and most suitable. They assist SMEs and advise them on the points to develop and highlight in order to attract the interest of investors registered on the marketplace.
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