France mulls extension of €10bn debt guarantee

The French government is mulling the extension of a debt guarantee expiring later this year that can cover the majority of the debt used to finance public-private partnership (PPP) projects, since a number of deals that have qualified for this mechanism have yet to reach financial close.

Projects eligible for the €10 billion guarantee – which can cover up to 80 percent of the debt used to fund PPP contracts – were originally required to reach financial close before December 31 2010, when the guarantee expires. But since many of France’s multi-billion euro high-speed rail deals have suffered delays and are still some distance from reaching financial close, the government is now considering extending the guarantee mechanism.

“There is a proposal to extend the debt guarantee beyond its original expiry date but it would have to be voted on. One idea would be to allow projects that reach financial close after December 31 to still use the guarantee provided they were deemed eligible for it before the end of 2010,” a senior industry source revealed.

The government’s guarantee mechanism was a big part of President Nicolas Sarkozy’s stimulus plan and was implemented in early 2009 to keep PPP projects from stalling in the wake of the financial crisis. But while the mechanism boosted confidence, its practical impact has been somewhat muted. Ironically, France’s multi-billion euro pipeline was delayed, partly so that contracts could be revised to include the guarantee mechanism.

Furthermore, the first project deemed eligible for the debt guarantee – a €1.6 billion tram line across the French-administered island of Reunion in the Indian Ocean – did not survive a change in local government and was scrapped earlier this year.

This left the €7 billion-plus Sud-Europe Atlantique high-speed railway line, connecting the cities of Tours and Bordeaux, next in line to use the mechanism to help procure the more than €3 billion in debt it will need to reach financial close. This project, awarded to a VINCI/AXA Private Equity team, only held its first financial close meeting with all the public and private parties involved in the project last week, the source said.

Even if Tours-Bordeaux manages to reach financial close before the year ends, other legacy projects in the rail sector – including the €3 billion Bretagne Pays de la Loire (BPL) and the Nimes to Montpellier high-speed lines, as well as a rail link from the centre of Paris to Charles de Gaulle airport – are unlikely to close this year.

Projects that choose to use the guarantee mechanism can expect it to add between 75 basis points and 150 basis points to the debt portions it covers. This is determined by five risk categories, each with a 15 basis points interval. Since it is supposed to encourage refinancing as soon as possible, the guarantee only covers the first few years of a concession up to the first refinancing risk. For BPL, for example, it will add between 120 basis points and 150 basis points to the final price and will cover the construction phase.