Bringing color back to the food industry
For over 10 years, the agri-food industry has been facing economic and structural upheavals that have both reduced the financing of its activities and increased its financing requirements. This situation has been exacerbated by the economic crisis linked to COVID-19.
However, in this period of crisis, the French Ministry of the Economy has set up a system of State-supported Participative Loans (PPSE). These Prêts Participatifs Relance and Obligations Relance are designed to help SMEs and ETIs boost investment despite the crisis.
Could this scheme be a solution for boosting business investment in the agri-food sector?
Underinvestment in the agri-food sector over the past 10 years, exacerbated by the Covid-19 crisis
Companies in the agri-food sector (producers, processors, craftsmen, etc.) primarily turn to banks to finance their business. However, since Basel III banking regulations (in 2010) reduced banks’ lending capacity and increased their collateral requirements for borrowers, banks have found themselves choosing low-risk projects.
Before the Covid-19 crisis, French companies already had a shortfall in equity and a higher level of debt than their European neighbors. Unfortunately, with the crisis, corporate solvency ratios have deteriorated sharply. According to Rexecode, the French economic research institute, the gross operating surplus of French companies will be cut by more than 150 billion euros over the two-year period 2020-2021.
According to a recent report by the French Chambers of Agriculture on the “Competitiveness of the agricultural and food sector (1970 – 2020) [1], over the last ten years, and even twenty years for certain sectors of the agri-food industry (such as meat), the agri-food sectors have shown an investment deficit. This historical under-investment, coupled with a current rise in debt levels, is having a major impact on companies in the sector. Their investment capacity is reduced both in terms of self-financing and bank debt, at a time when they are facing numerous upheavals and need financing to modernize their business and remain competitive.
But under-investment is not the only difficulty facing companies in the agri-food sector.
Industries undergoing profound change requiring long-term investment
Environmental and behavioral constraints
France’s leading industrial sector in terms of sales and employment, the agri-food sector has been undergoing major changes for many years, and is facing major constraints.
The rapid evolution of European consumer habits, combined with the agro-ecological transition, means that production and supply methods must change to protect the environment, while meeting consumer expectations in terms of process, quality and price.
Producers are being asked to produce certain products (organic, HVE, etc.), and to refrain from using certain pesticides that until now enabled them to ensure a substantial harvest, all without affecting the quantities delivered to manufacturers and mass retailers.
Similarly, the food industry and supermarkets are working to improve the quality of their products by using local agricultural produce and reducing food imports. Improving the carbon footprint of products comes at a cost.
These constraints are forcing companies in the agri-food sector to modernize in response to changing eating habits and to comply with new regulations, while at the same time improving their productivity. They must also invest in research and development projects to innovate or maintain a competitive edge in sectors of excellence.
A sector losing popularity
In addition to changing customer and government requirements, there is a vocational crisis, with one in three farmers (i.e. over 150,000) set to retire in the next 3 years. Many farms are being abandoned, as farmers struggle to find buyers.
Indeed, few young people are attracted to the agri-food professions (butcher, farmer, beekeeper, etc.). Despite awareness-raising efforts financed by players such as cooperatives and supermarkets, these professions have the reputation of being poorly paid, lacking in outlets, and physically and mentally demanding.
As a result, many farms are abandoned for lack of takers. According to INSEE, the number of individual farms has fallen by 19% since 2010, and only 17.5% of farm managers were under 40 in 2016. Abandoned farms are partly taken over by cooperatives, but they too are limited in their scope of action by a lack of investment.
This crisis is leading to a drop in French production capacity, and therefore supply difficulties for processing and marketing companies…To secure their supplies, agri-food companies are forced to import products from other countries, which has a negative impact on their carbon footprint. When these companies wish to structure short-distance supply chains and/or secure their production chain, they encounter difficulties in finding local partners capable of keeping pace with their growth.
Relance Equity Loans and Relance Bonds
Relance Participative Loans and Relance Bonds come at just the right time to boost investment in the agri-food sectors.
To give players affected by the COVID-19-related crisis the capacity to invest, Economy Minister Bruno Le Maire announced, as part of the Relance plan, in March 2021, his plan for State-Supported Participative Loans (PPSE).
This scheme for financing by private investors (Banks, Insurance, Funds, …) worth €20bn guaranteed up to 30% by the State, should come to the aid of SMEs and ETIs that lack the financial capacity to borrow from banks in these times of crisis.
Relance Equity Loans and Relance Bonds are aimed at all SMEs with 2019 sales of €2m or more, and all ETIs. This offer, which is due to start in May 2021, is an opportunity for companies to invest in production equipment, R&D, or hiring, for example.
How does it work ?
— Participative Relance loans: Banks grant participative Relance loans to companies (SMEs and ETIs). They sell 90% of these Relance equity loans to a number of investment funds, which then benefit from a government guarantee (30%) on their net asset value.
- Obligations Relance: Companies (SMEs and ETIs) issue subordinated bonds (Obligations Relance). These bonds are subscribed by investment funds. As with Relance equity loans, the funds benefit from a government guarantee (30%).
It is interesting to note that non-financial companies – industry leaders – are already using equity loans (in existence since 1978) to finance partner companies in order to structure and develop their industries. Equity loans align the interests of the parties involved (the financiers and the financed).
In the case of the new equity loan scheme, Relance Bonds are a good alternative financing tool for companies (SMEs and ETIs) in the agri-food sector. By involving a company – the industry leader – as a co-financer, couldn’t Relance Bonds make it easier for SMEs and midcaps in the agri-food industry to find private debt funds to complete their financing?
What are the benefits for companies in the agri-food sector?
Advantages for SMEs and ETIs financing themselves with Prêts Participatifs Relance or Obligations Relance.
- Attractive rates for quasi-equity financing: Although the cost of the PPSE scheme is unrestricted, companies are likely to benefit from rates of between 4 – 5.5% for SMEs and 5 – 6% for ETIs for quasi-equity financing over an 8-year period. This will enable companies to strengthen their equity capital and ratings, which have been weakened by the COVID-19 crisis.
- Leverage effect: With the strengthening of equity capital and ratings, Prêts Participatifs Relance or Obligations Relance should be seen as leverage financing that can be supplemented by traditional bank financing that would not have been possible without PPSEs.
- A solution that protects companies’ capital: Relance Bonds enable companies not to open up their capital and thus retain decision-making power over their business. This is a significant advantage for family businesses or group subsidiaries.