French participating loan (prêt participatif)

A participating loan (prêt participatif) is a long term loan governed by articles L. 313-13 to L. 313-20 of the French Monetary and Financial Code. The law treats it as equity when assessing the financial position of the company that receives it (article L. 313-14). The State, credit institutions, financing companies, commercial companies, alternative investment funds authorised to lend to companies, insurance companies, mutual insurers and provident institutions grant it from their long term available resources (article L. 313-13). The loan appears on a separate line of the lender’s and the borrower’s balance sheets, and the borrower mentions it in the notes to its accounts. It ranks last among creditors: in an amicable liquidation, a judicial liquidation or a judicial reorganisation by sale, it is repaid after all other creditors, preferential or unsecured, have been paid in full (article L. 313-15). In safeguard or in judicial reorganisation by continuation, its repayment and the payment of its remuneration remain suspended throughout the performance of the plan (article L. 313-16). Article L. 313-17 allows the fixed interest to be increased by a clause providing for a share in the borrower’s net profit, taken in priority from distributable profit in the case of a company. For a company negotiating senior or unitranche debt of €20m or more, the participating loan strengthens the quasi-equity that senior lenders take into account. The transaction does not dilute the share capital.

A mid-sized company with €120m of revenue receives a €15m participating loan over eight years from an authorised alternative investment fund. Its equity used for the financial analysis rises from €30m to €45m, which then allows it to raise €60m of senior debt.

• The rank: repayment after all other creditors in a liquidation (article L. 313-15).
• The suspension during the performance of a safeguard plan (article L. 313-16).
• The net profit participation clause and its approval (article L. 313-17).
• The treatment of the loan in the senior debt covenant calculations.