French debt guarantee extension to go to vote in October

A proposal enabling the extension of a French government debt guarantee expiring later this year that can cover the majority of the debt used to finance public-private partnership (PPP) projects is set to be sent to the legislature to be voted on in October, a source familiar with the process said.

The document will propose a change in the criterion governing the guarantee’s application. Originally, projects eligible for the €10 billion debt guarantee – which can cover up to 80 percent of the debt used to fund PPP contracts – were required to reach financial close before December 31 2010.

Under the new proposal, projects that are deemed eligible for the debt guarantee by November 1 2010 will be allowed to reach financial close later than the original date, opening the door for the guarantee to be applied to projects that will reach financial close in 2011. Since the change would have to be factored into next year’s budget, France’s National Assembly and Senate – the country’s legislative bodies – will have to approve it first.

Discussions within the French government about extending the debt guarantee started when it became evident that delays to many of the projects that form part of France’s multi-billion euro PPP pipeline had quashed their chances of reaching financial close in time to comply with the guarantee’s original deadline.

The government’s guarantee mechanism was a big part of President Nicolas Sarkozy’s stimulus plan 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 €7.8 billion Sud-Europe Atlantique high-speed railway line, connecting the cities of Tours and Bordeaux, next in line to use the mechanism to help procure some €3 billion in debt it will need to reach financial close.

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.