The growth forecast for 2020 has been hard hit by the health crisis linked to the spread of COVID-19. According to the estimates in the present Amending Budget Bill, the gross domestic product (GDP) will decrease by 1.0% in 2020, whereas the initial Finance Act for 2020 predicted an increase in GDP of 1.3%. During the period of containment, domestic demand plummeted in the face of traffic restrictions and the closure of non-essential businesses. In France, the decline in productivity primarily concerns the transport and logistics sectors. For those sectors, the drop in production was 40% in June 2020 compared to the same period last year. Conversely, the pharmaceutical industry increased its production rate by 10% in June compared to the same month of the previous year.
2019 was a very active year for lenders; in fact, at the end of December there was EUR2.545 billion in loans to the economy. This year, due to the COVID-19 pandemic, outstanding loans increased significantly. At the end of May 2020, the outstanding loans to companies amounted to EUR1.156 billion (compared with EUR1.127 billion at the end of April) and loans granted to individuals amounted to EUR1.130 billion.
Faced with this unprecedented crisis, central banks have adopted the usual reaction, which is to lower interest rates. In fact, the French economy has benefited from historically low interest rates and the accommodative monetary policy put in place by the European Central Bank (ECB), which provides liquidity to the banking system. In line with this policy, when the COVID-19 pandemic began, the ECB's key rate was already at 0%. So the central bank had to take a series of monetary policy and banking supervision measures aimed at mitigating the impact of the coronavirus pandemic on the euro area economy and supporting all European citizens, such as the Pandemic Emergency Purchase Programme (PEPP). This programme aims to repurchase EUR750 billion of assets by the end of 2020. The aim is to buy bonds directly from banks so that they have more funds to lend to households and businesses. It also involves buying corporate bonds, which provides them with a new source of credit. Both types of purchases help to stimulate spending and investment to support economic growth.
Normally, in response to this credit dynamic, French public authorities should ask banks to increase their level of equity capital in order to readjust their ratio compared to the level of loans granted. But in view of the circumstances, the French HCSF (Haut Conseil de Stabilité Financière) kept the counter-cyclical capital cushion for France unchanged at 0%. The complete relaxation of the financial cushion, effective since 2 April 2020, should enable banks to mobilise and to preserve their ability to offer credit, particularly to SMEs that are mostly dependent on bank financings.
In the context of the health crisis caused by the pandemic and the anticipated economic recession induced by the government's measures to fight COVID-19, the economic support of the French state and banks to companies became crucial for French companies to fight the liquidity crisis.
Aware of this challenge, the French and European banking and financial supervisory authorities have adopted a number of recommendations and/or decisions aimed at supporting banks by enabling them to focus on their activity of providing financings to companies.
To support French companies, the French state, Bpifrance and French banks have taken several measures. The French state has granted guarantees up to a total amount of EUR300 billion in respect of new cash loans made available by banks to companies experiencing temporary cash-flow issues as a result of the COVID-19 pandemic (Prêt garanti par l’Etat). The state guarantee may cover 70% to 90% of the principal amount of the loan, depending on the size of the company. The granting of a state-guaranteed loan is at the bank's sole discretion. Also, for companies with more than 5,000 employees or with a turnover of more than EUR1.5 billion in France, the state guarantee is granted by individual order (arrêté individuel) of the Minister of the Economy, such as in the case of FNAC Darty (EUR500 million), Buffalo Grill (EUR65 million), Renault (EUR5 billion) and Air France (EUR7 billion).
According to an economic study in July 2020 of the Fédération Bancaire Française, the annual growth rate of business credit stood at 11.5% in May, after increases of 9.3% in April and 7.6% in March. Outstanding loans totalled EUR1,156 billion.
According to the Banque de France, at the national level, as of 17 July 2020, more than 548,000 companies have received EUR112 billion of state-guaranteed loans.
Bpifrance has also taken several measures to help companies to overcome the crisis. First of all, Bpifrance makes it easier for SMEs to receive loans in the riskier phases of their financing cycle by sharing the risk of these transactions with the banks. Coverage of guarantees has been increased to 90% of the loans (versus 70% previously) so that the lending banks now only support 10% of the borrower’s credit exposure. Secondly, Bpifrance has restructured medium and long-term loans upon request for Bpifrance customers by suspending all payments (of principal and interest) due in respect of the largest part of the loans granted directly by it for six months. Lastly, Bpifrance has offered zero-collateralised loans to companies such as very small enterprises, SMEs and medium-sized companies to meet their urgent need of cash through the "Prêt Atout" and the “Prêt Rebond”.
Besides the measures of the French state and Bpifrance, the French banks have taken a number of measures, such as a deferral of loan repayments for businesses up to six months, the cancellation of penalties and/or additional costs payable in relation to deferral of loan repayments, and the introduction of an accelerated procedure of credit committees approval (within five days) in respect of tense cash-flow situations.
The gradual implementation of all these measures has been possible thanks to the easing of constraints applicable to the banking and financial sector.
On March 12th, the ECB decided (i) to temporarily ease the regulatory capital requirements for banks to enable them to finance potentially EUR1,800 billion of loans and (ii) to postpone the EU-wide stress test exercise to 2021 to allow banks "to focus on and ensure continuity of their core operations, including support for their customers".
Finally, the Basel Committee on Banking Supervision decided on 27 March 2020 to postpone by one year to 1 January 2023 the prudential reform of Basel III to allow banks to commit their full resources to respond to the impact of the COVID-19 pandemic.
In France, the high-yield debt sector represents a significant part of the market in terms of number of transactions and volume. High-yield debt is a leveraged finance product, reserved for companies with a high level of debt. In particular, there are a large number of LBO companies held by private equity funds and companies that do not or no longer have access to other sources of financing for various reasons.
This type of financing can also be used to diversify the funding sources of companies that need significant financing, particularly to support their external growth.
In general, high-yield products have the particularity of being subject to terms and conditions governed by US law (usually the law of the State of New York), even if the issuer is a French, Italian or English company. However, if the issuer is a French company, the typical French law-governed security package would cover shares, intercompany loans and bank accounts.
Issuers turned towards this product since high-yield bond covenants tend to provide greater flexibility than bank loans and usually provide permitted baskets to be increased by reference to the increase of the issuer’s EBITDA. Such covenant flexibility has influenced the leveraged loan markets with the expansion of covenant-lite loans.
Investors see this product as a risky investment certainly, but above all as a high-return investment. In a very low interest rate environment, this is interesting for the overall performance of their portfolios.
With the COVID-19 crisis, credit spreads increased sharply in March 2020 as investors reallocated their investments from risky to safer assets. As a result, companies struggled to access bond markets. In France, risky assets are heavily penalised by the current crisis and, in particular, the high-yield market, which is highly dependent on macroeconomic data and the solvency level of issuers.
In recent years, there has been an increase in the financing of the economy by non-bank actors. The emergence of this new category of lender is one of the results of the 2008 financial crisis and recession (drying up of the interbanking market), regulatory shocks (tightening of capital ratios) and the emergence of digital technology (financial technology or fintech). Indeed, banks at the time pulled back on their lending activities because of balance sheet concerns, so companies had to seek new sources of financing from alternative actors.
France has always been much more restrictive in terms of banking monopoly than its European neighbours. However, the rules governing the principle of banking monopoly have been considerably modified, to take into account developments in the credit sector and to stimulate the credit market by allowing non-bank entities to penetrate the market and originate loans directly (alternative lenders, usually funds). Private debt players are generally more flexible and faster than banks.
From a legal point of view, two new types of lenders have emerged: the private credit industry and crowdfunding platforms.
For crowdfunding platforms, the main evolution came from the EU legal framework, with the entry into force of the status of “European Crowdfunding Service Providers” after the adoption by the European Parliament in a second reading. In this way, a platform will be able to propose European service providers offers of up to EUR5 million per project owner per year. Before being able to operate on a cross-border basis, the platform will have to inform the National Competent Authority defined by the member state, in France the Financial Markets Authority (AMF). The AMF will be responsible for issuing the status and disseminating information to the European Securities and Markets Authority, which is in charge of co-operation between member states.
For the private credit industry, the main evolution came from the EU legal framework, with the entry into force of EU Regulation 2015/760 of 29 April 2015 on European long-term investment funds (ELTIFs) implemented under French legislation by Law No 2016-1691 of 9 December 2016 and Ordinance No 2017-1432 dated 4 October 2017, which allow certain French alternative investment funds (AIFs) to operate as lenders.
Banking and finance techniques are evolving, particularly with the appearance of new concepts linked to the fintech industry, the blockchain system, cloud computing and the goal to integrate sustainability considerations into the financial markets.
The European payment landscape is dominated by the Second Payment Services Directive (Directive No 2015/2366), transposed into French law with Ordinance No 2017-1252 on payment services in the internal market. The Second Payment Services Directive updated payment law and added two payment services: payment initiation and account information.
The Observatoire de la sécurité et des moyens de paiement (OSMP) published a migration plan for strong customer authentication on 14 September 2019. However, regarding the lack of preparation of the market, the OSMP, in accordance with the advice of 16 October 2019 from the European Banking Authority (EBA), postponed the deadline. The new French migration plan due for publication in the first quarter of 2020 was postponed to 22 September 2020 due to the coronavirus crisis.
Remote Customer Due Diligence
The main evolution regarding online identification (know your customer, or KYC) came from Ordinance No 2020-115 (the “Ordinance”), which was published in the Official Journal with two implementing decrees (No 2020-118, 12 February 2020, JO 13 February, and No. 2020-119, 12 February 2020, JO 13 February) strengthening the national anti-money laundering and counter-terrorism financing (AML/CTF) system.
The purpose of this Ordinance is to implement the Fifth Anti-Money Laundering Directive 2018/843, which itself amends Directive 2015/849. It also completes the implementation of the Fourth Anti-Money Laundering Directive 2015/849 in French regulation.
The 2020 Ordinance modified the due diligence requirements applicable in the case of remote establishment of the business relationship.
Blockchain and Crypto-Assets Industry
From a legal point of view, crypto-assets are not recognised as legal currencies, electronic currencies or a means of payment, as they do not meet the standards set out in the French Monetary and Financial Code in so far as they are not issued against the delivery of a real counterpart in legal currencies. Therefore, they offer no guarantee of security, conversion and value. For instance, Directive (EU) 2018/843 of 30 May 2018 on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing provides for a definition of virtual currencies.
French law has implemented a specific regulation on digital assets with the Loi PACTE (Law No 2019-486 of 22 May 2019), which creates a registration and licence for digital assets providers. The AMF is in charge of granting the licence and registration on digital assets. Licences on digital assets are always optional, whereas registration is mandatory if there is selling/buying of digital assets against money and/or safeguarding of digital assets on behalf of a third party. The Loi PACTE, in order to mitigate the consequences of the new registration obligation, allowed digital asset providers to carry on their activity without registration until 18 December 2020.
The Loi PACTE also created a visa for initial coin offerings (ICOs) delivered by the AMF. An ICO is an issuance of tokens by the organisation that created the ICO, and can be acquired by anyone in exchange for crypto-assets; this is the equivalent of a digital asset fundraising. These tokens can be sold and bought on trading platforms, at a rate depending on supply and demand. They are, therefore, very liquid. They are also intended to be usable in the project financed by the ICO.
The Banque de France and the French Prudential Supervision and Resolution Authority (Autorité de contrôle prudentiel et de résolution, or ACPR) are calling for a strengthening of the legal framework for token-related services. Indeed, since the Loi PACTE, token issuers wishing to carry out an ICO may apply for a visa granted by the AMF. This request is optional, and any ICO made without a visa remains valid but shall not be subject to public solicitation. The AMF has created a white list of ICOs who have been granted visas. On 18 December 2019, the AMF issued its first approval for a public offering of tokens. This initial public offering is being carried out by French-ICO, which has developed a platform for financing cryptography projects. Also, on 12 May 2020, WPO, a power generation asset management group, obtained the AMF's visa until 12 November 2020.
Sustainability Considerations in the Financial Markets
Following the Paris Agreement on climate change, France strengthened the transparency and reporting obligations on sustainable development for financial actors. France became the first country in the world to make it mandatory for investors to publish information on their contribution to climate objectives and the financial risks associated with the energy and ecological transition. Large insurance and credit institutions as well as financial services companies must now take environmental, social and governance objectives into account in their investment strategy, in order to promote and develop lower-carbon projects. On 14 November 2019, the European Investment Bank announced that it would stop financing fossil fuels by the end of 2021. The COVID-19 emergency has overshadowed other policy goals in the short term but climate change will continue to be at the top of the European Union’s political agenda for many years to come.
The current European prudential supervisory framework (CRD IV/CRR) has been updated following the adoption of a new banking package by the EU institutions at the end of May 2019 (CRD V/CRR 2). The European authorities have amended some of the requirements set by the CRD IV regulations and the Basel III standards, which defined the rules on strengthening the capital ratio requirements of credit institutions.
The new package pursues the same objective: to ensure the resilience of the EU-based credit institutions.
This new banking package was adopted in May 2019, just before the change of the European Parliament's legislature, through the Capital Requirements Regulation No 2019/876 (CRR 2) and the Capital Requirements Directive 2019/878 (CRD V).
The financial authorities have postponed the entry into force of the Basel III prudential reform by one year, which is a way to let the banks focus on the coronavirus crisis.
The banking monopoly is a principle of French law that prohibits any entity other than those expressly authorised to carry out credit operations on a regular basis.
Entities that carry out credit activities on a regular basis must be a licensed credit institution (établissement de credit) or a financing entity (société de financement), and must be an EEA-based entity that benefits from the European passport.
Indeed, any credit institution licensed in one of the EEA member states to carry out banking activities can grant loans in France, subject to the fulfilment of various conditions under the relevant EU directive and prior notification to its competent authorities, either by establishing a branch in France (right of establishment) or by operating directly from its country of origin (providing cross-border services).
There are certain exceptions for insurance companies and AIFs, and for intra-group loans.
As regards AIF, in recent years such funds have been authorised under certain conditions to provide loans to strengthen credit offers in France.
Following Decrees No 2018-1004 and No 2018-1008, and under the conditions set out herein, the following entities are now authorised to provide financing to French companies:
Moreover, intra-group loans are possible under French law, whereby one company can grant loans to another company with which it has economic ties. The implementation of this exception of the French banking monopoly rules implies the meeting of a large number of legal and regulatory conditions.
In addition, the restrictions relating to credit operations should not apply to ELTIFs, which provide long-term financing to certain companies across the EU under several conditions, nor to participating loans (prêts participatifs), which are long-term subordinated loans that can be granted by commercial companies to another company.
As mentioned above, foreign lenders are subject to the French rules on banking monopoly, and only EEA-based establishments are allowed to provide credit services in France, if they are eligible through the European passport or the ELTIF label.
For credit institutions whose headquarters are in a state that is not a party to the EEA, the French monetary and financial code provides that branches established in France must obtain a banking licence from the ACPR before carrying on their activity.
The granting of security interest from France to foreign lenders is not prohibited in itself. However, undertakings by signature (such as a cautionnement and first-demand guarantee) are banking operations that can be granted on a regular basis only by licensed or duly passported entities. Any entity willing to grant this type of guarantee for consideration on a regular basis must be a credit institution licensed or passported in France (as well as French investment firms). Besides this kind of guarantee, French law enables any entity to grant security interest or guarantees to foreign lenders. Nevertheless, corporate law requires the respect of the company’s corporate benefit and statutory object provisions.
There are no specific restrictions on granting security to the benefit of foreign lenders. Regarding the assignment of professional receivables by way of security (Dailly), the security can only be granted to the benefit of duly licensed or passported lenders in France (eg, credit institutions or financing entities), or to the new category of entities called organisme de financement spécialisé (specialised financing funds, or OFSs) created by French Ordinance No 2017-1432 published 4 October 2017. With securitisation funds, the OFS forms the new debt-financing funds called organisme de financement (financing funds).
Foreign currency control disappeared in France about 30 years ago, so there are no exchange controls regarding foreign currency exchange. Cash can be freely transferred from abroad to France, regardless of the country of origin, without the intermediary of a banking institution. However, a customs declaration is required for amounts above EUR10,000. Apart from these declarations, credit institutions, financing and investment firms, and asset management companies must make monthly statistical declarations to the Banque de France regarding payments over EUR12,500 completed in France between residents and non-residents. Any direct investment transaction (carried out abroad by a French resident or in France by a non-resident) of more than EUR15 million must be reported to the Banque de France within 20 working days for the compilation of the balance of payments.
The financial sector is subject to anti-money laundering and anti-terrorist financing provisions. Regarding the French Monetary and Financial Code, certain professionals, including credit institutions, are required to report any suspicions to the French service Tracfin, regarding any sums or transactions that they know, suspect or have reasonable grounds to suspect arise from an offence punishable by a term of imprisonment of more than one year or from participation in the financing of terrorism. Moreover, credit institutions must comply with KYC rules to prevent and fight against money laundering and terrorism.
It is common practice for loan agreements to provide for the use of proceeds in a specific contractual provision. Hence, the borrower must use the loan’s proceeds for the purpose expressly stated in the loan agreement.
The concept of agent is largely used in France regarding syndicated loans. It is generally based on a power of attorney granted by the lenders to a bank institution acting as agent. Ordinance No 2017-748 dated 4 May 2017 has considerably improved the agent regime created by the law of 19 February 2007. This reform amended some of the previous restrictive provisions and introduced new useful provisions (Articles 2488-6 to 2488-12 of the French Civil Code) relating to the rights of the security agent. Henceforth, the use of a security agent is permitted in order to take, register, manage and enforce any security interest (including personal guarantees since 2017) securing a transaction on behalf of the secured creditors. The 2017 reform of the agent regime has borrowed some features from the fiducie regime (see paragraphs below on fiducie). The security agent will hold title to the security interest in an autonomous estate, separate from its own estate, being bankruptcy remote in the event of the opening of insolvency proceedings against the security agent. French law now has a security agency regime that can compete with the common law trust structure.
France has not ratified the Hague Convention on the Law Applicable to Trusts and on their Recognition, so it is not possible to create a trust under French law. Nevertheless, French law provides for a quite similar concept known as a fiducie, which is an operation by which one or more settlors transfer assets, rights or security rights, or a set of assets, rights or security rights, present or future, to one or more fiduciary agents, who, keeping them separate from their own assets, act to achieve a specified goal for the benefit of one or more beneficiaries. This concept enables the temporary transfer of property of the relevant assets or rights to the fiduciary agent, and enables such assets or rights to be isolated in an autonomous entity, separate from the settlor’s estate.
The fiducie can be divided into two main categories: the fiducie-gestion, which consists of the assignment by the settlor of the management of assets to the trustee; and the fiducie-sûreté, which consists of a security to secure the performance of a payment obligation.
Despite this description, the fiducie should not be confused with the concept of trust.
Initially, the transfer of unmatured receivables was restricted to credit institutions. However, since 2017, financing institutions or investment funds that are authorised to grant loans and hold unmatured loans or other professional receivables are able to assign them directly to French-licensed or EU-passported financial institutions, and to foreign institutions or entities with a similar regulatory nature, foreign financial institutions or non-banking financial investors, with the exception of receivables whose debtor is an individual acting for non-professional purposes.
It is possible under French law for a loan to be transferred. Such transfer may occur by way of assignment (cession de créance), novation, transfer of contract (cession de contrat), transfer of debt (cession de dette) or sub-participation.
Concerning the transfer by way of assignment, it is a contract by which the assignor transfers, whether for valuable consideration or free of charge, all or part of his claim against the assigned debtor to a third party called the assignee. According to Article 1321, paragraph 4 of the French Civil Code, the consent of the debtor is not required, unless the claim has been stipulated to be non-transferable. With regard to effectiveness against the debtor, Article 1324 of the French Civil Code specifies that an assignment is effective against the debtor, if he has not already consented to it, only if it has been notified or if he has acknowledged it (pris acte).
With respect to the transfer of contract, its purpose is to allow the replacement of one of the existing parties to a contract by a third party, without breaking the contractual link. According to Article 1216 of the French Civil Code, a contracting party may, with the consent of its co-contracting party, transfer its position as party to a contract. Such consent may be given in advance. Pursuant to Article 1216-1 of the French Civil Code, if the transferred party expressly consents to the transfer of contract, the transfer of contract releases the transferor for the future. Failing this, and unless otherwise agreed, the transferor remains jointly and severally liable for the performance of the contract.
The novation is a contract pursuant to which a new debtor is substituted to an existing debtor, and the transfer of debt allows an original debtor to be discharged from a debt by giving his creditor a new debtor. Both these mechanisms require the consent of the debtor.
A lender under a loan agreement may agree to share its participation (to a sub-participant) with one or several sub-participants without the occurrence of a loan transfer. Regarding the loan agreement, the initial credit provider remains the lender, and the sub-participants have no direct rights under this agreement as they do not become the contractor. The borrower does not have to be aware of the sub-participation so it is a way to share credit risk or revenues without having to comply with contractual restrictions on assignment and transfer.
Within the framework of a syndicated loan, a part of or the total lender’s participation might be transferred to one or several credit institutions, in accordance with the provisions of the loan agreement.
Buy-back by the borrower is possible under French law. If the borrower is both the debtor and the creditor of a claim, said claim is automatically extinguished. Generally, contractual provisions of loan agreements may restrict the possibility for a borrower to repurchase its debt.
Buy-back by sponsors is also permitted under French law but may be limited by the French banking monopoly rules, while buy-back by the borrower may be limited by contractual provisions.
If the parties to a loan agreement have not provided for any debt buy-back provisions, they shall determine whether the loan agreement contains any restrictions regarding the prohibition of debt transfer.
Some specific rules apply to the buy-back of bonds:
Several entities may intervene in public acquisition finance, such as financial advisers and legal counsels. The financial adviser can be a credit institution or an investment firm, and will manage the deal towards the market. Then the legal counsel handles the draft of the documentation as the prospectus and all required documents under the applicable process.
The French legal framework regarding takeover bids is provided in the French Monetary and Financial Code, the Commercial Code and the Règlement Général de l’AMF. Takeover bids are governed by the rules of equality between shareholders and free competition. The AMF plays a central part in the process, including the crossing of the threshold declaration. An investment service provider that is authorised to carry out the underwriting activity shall act on behalf of the bidder.
Under French law, in public acquisition finance, the bidder in a takeover bid is required to guarantee to the holders of the shares or securities of the targeted company that it would fully pay their purchase price.
Payment of the principal is not subject to taxation.
If the Beneficiary of the Interest is a Legal Entity
With effect from 1 March 2010, no withholding tax is, by principle, levied on French-source interest paid to non-resident companies.
However, a compulsory and final 75% withholding tax is applicable if the interest is paid to non-cooperative states, unless the company proves that the payments are not motivated by tax avoidance.
A list of non-cooperative states or territories is published yearly by the French Minister of Economic and Financial Affairs.
Lastly, French withholding tax could apply on income related to bonds or assimilated instruments issued before 1 January 1987, and on interests from bonds de caisse regardless of the issuance date.
In any case, careful attention should be paid to the nature of the loans, the date of conclusion and the nature of the income in order to validate the exemption of withholding tax.
If the Beneficiary of the Interest is an Individual
Interest paid to French-resident individuals is subject to a non-final withholding tax.
No withholding tax is levied on French-source interest paid to non-resident individuals, unless the interest is paid to a resident in a non-cooperative state. In this case, a final withholding tax at a rate of 75% is applicable, unless it is proved that the payments are not motivated by tax avoidance.
Please note that there could be VAT issues to consider for the lender if their supply of services is deemed to be localised in France.
For the fiscal year 2020, lenders established in France are liable to corporate tax, the current rate of which is 28% for all companies on the first EUR500,000 in profits, as well as 28% beyond this threshold. This rate will be reduced progressively to 25% for all companies in January 2022. However, companies with an annual turnover exceeding EUR250 million are subject to a 31% rate on the fraction of their profits exceeding EUR500,000 (and 28% up to EUR500,000). It is common practice for a specific provision in a loan agreement to provide that the lenders would be indemnified for any tax that arises in connection with the loan other than by way of withholding.
The French Consumer Code provides for usury laws. A usurious loan constitutes any conventional loan granted at a global effective rate that exceeds, at the time it is granted, by more than a third, the overall effective rate charged during the previous quarter by credit institutions or financing entities relating to operations of the same type and involving similar risks. Failing to comply with this requirement is a criminal offence.
The Banque de France publishes the usurious rate and the average effective rate charged by credit institutions and financing entities, on a quarterly basis. Depending on the type of loan and the different thresholds, a different rate is applicable. For example, the usury rate for the third quarter of 2020 is 21.16% for loans below EUR3,000. The French Consumer Code and the French Monetary and Financial Code require that loan agreements must contain a provision regarding the overall effective annual rate, which takes into account all the costs incurred when taking out a loan (ie, interest, insurance, fees, costs incurred by the credit institutions, etc).
French law distinguishes between (i) a security interest over movable and immovable assets that may or may not have possessory rights, and (ii) a personal guarantee (such as a cautionnement and first-demand guarantee).
Under French Law, the legal lien includes a right to retain physical possession of tangible assets as security for the underlying obligations.
A mortgage is often used in France for real estate property. A mortgage can be granted in favour of any type of creditor, and can be used to secure any type of debt. However, since the mortgage deed must be signed before a French notary (notaire) to be valid, and because the applicable registration formalities are onerous, such security interest is rarely used in acquisition financings but is very common in real estate financings.
The creditor can also require a non-possessory security interest in the forms of a pledge over:
In an LBO acquisition financing where the target company is French incorporated, the typical French law-governed security package would include a securities account, intercompany loans and bank accounts. According to the industry or sector of the target group, a specific security interest may be requested by creditors (such as intellectual property – trade marks/patents).
Since the transposition of the Collateral Directive, French law also provides for collateral guarantees, which are well used and appreciated by credit institutions, most commonly in transactions on financial instruments (ie, derivatives). The main advantages of collateral arrangements are the simplified formalities and the ability to enforce such collateral even after the opening of insolvency proceedings against the debtor.
French law provides for requirements regarding the perfection of certain security interests.
The concept of floating charges does not exist under French law. Therefore, creditors will take several separate pledges or security over each type of the debtor’s assets. However, there is a similar concept according to French law: the pledge over ongoing business, although this security is more limited than the floating charge concept.
The pledge over ongoing business covers corporate and trade name, leasing rights, goodwill, custom and passing trade, commercial furniture, equipment and tools used for the operation of the business, patents, licences, trade marks, industrial drawings and designs, and, in general, the intellectual property rights attached thereto.
Under French law, sociétés anonymes, sociétés par actions simplifiée and sociétés à responsabilité limitée may provide upstream and cross-stream guarantees, provided that such guarantees comply with the company’s corporate benefit, statutory object provisions and prohibition on using the corporate assets wrongfully.
The common forms of guarantees are cautionnement, first-demand guarantee (garantie à première demande) and letter of intent (lettre d’intention).
A guarantee granted or given by a French company in the form of a société anonyme requires an approval from its board of directors.
Failure to comply with this rule may trigger the liability of the managers or directors of the company. Some French courts have even declared security interests and guarantees granted by some unlimited French companies that did not comply with this requirement to be null and void.
Guarantees or security granted by a company to secure the obligations of its subsidiaries are generally considered to be in the corporate benefit of such holding company. Upstream and cross-stream guarantees granted by a company to secure the obligations of its holding or sister companies are generally limited to a secured amount equal to the amount directly or indirectly (intercompany loan) on-lent to the guarantor out of the loan proceeds made available to its holding or sister company so as to justify a corporate benefit in this respect.
A French joint stock company (a société anonyme, a société par actions simplifiée or a société en commandite par actions) cannot grant any financial assistance in the form of a guarantee, loan or security interest for the acquisition of its own shares by a third party. A violation of such prohibition can lead to a criminal liability charge against the executives (managers or directors), and the loan, guarantee or security interests may be null and void. It goes against the company's own corporate benefit. Also, the prohibition is extended to financial assistance in the acquisition of shares in a company that directly or indirectly holds shares in the initial company.
The provisions of the French Commercial Code for sociétés anonymes with a board of directors or an executive board and supervisory board establish specific rules regarding the company’s commitment. Indeed, the board of directors or the supervisory board "may within the limit of a total amount that it fixes" authorise the managing director or the management board to give security, endorsements or guarantees on behalf of the company. It should be noted that this authorisation is given only to the chief executive officer (CEO) and cannot be granted directly to the deputy chief executive officer. Nevertheless, the CEO may then grant a delegation of authority to the deputy chief executive officer or to another proxyholder, with the option of sub-delegation. The beneficiary of the guarantee should always verify the reality of this delegation.
Therefore, if such commitment alone does not exceed one of the two thresholds (eg, the total amount or the nature of the commitment), the overrun cannot be prejudicial to third parties who were not informed. The case law is not fixed on the applicable sanction. Some jurisdictions consider that the commitment will be unenforceable as a whole, while others consider that the company remains liable for the guarantee up to an amount not exceeding the threshold. However, the commitment must not be taken beyond the authorisation, which may not be global but must be given for a specific operation.
The board of directors may, without any limit of amount, authorise its CEO to give security, endorsements or guarantees on behalf of the company. The same option is given to the supervisory board in a société anonyme with a management board and supervisory board.
It is necessary for the minutes of the board of directors or the supervisory board that gave the authorisation to be communicated to the beneficiary of the security who may require it.
Without authorisation, any acts subscribed by the director on behalf of the company are not enforceable against the company.
Moreover, the granting of security or guarantees by a company does not require any prior consent from the work council (comité social et économique), but the work council will be informed on matters concerning the organisation, the management and the general business of the company. Therefore, if the guarantee granted by the company should have an impact on the employees, a prior consultation of the work council shall be done, but opinions expressed by the work council are not binding, so may be disregarded by the company.
Under French law, guarantees and security are ancillary to the secured obligations, and when the secured obligations are discharged, it automatically releases such guarantees and security. However, it is common practice for the debtor to request a formal release of the security to the creditor. In general, creditors issue a release letter, particularly when the security is registered.
Under French law, any creditor is entitled to a general lien on all debtor assets. However, it is only related to the assets that are in the debtor’s patrimony at the time the obligation arises, provided that the debtor is the beneficial owner of the assets.
A creditor can require a specific security from the debtor, and such security confers a privilege to the creditor.
Creditors can enter into competition and therefore a ranking is in place. If the security is registered, the ranking of the security interest is determined by the date of registration. If not, the ranking is determined by the date on which the relevant perfection requirements of the security are completed. Also, loan agreements may provide for a negative pledge or a pari passu provision, so that the borrower must obtain a waiver before granting another security to a third party (other than the lender).
This may vary depending on whether the debtor is subject to insolvency proceedings. In the event of liquidation proceedings, certain creditors are preferred in the allocation of payment. The proceeds of enforcement shall be allocated to the creditors following the order of priority ranking as set out in 7.3 The Order Creditors Are Paid on Insolvency.
The privilege is a right that allows a creditor to be paid from the sale proceeds of the property of a debtor in preference to other creditors. Being derogatory to the principle of equality of creditors, a strict interpretation is made by French courts, and no privilege can be created by will (only by law).
In general, disputes between creditors regarding the distribution of proceeds are settled by the order of privilege.
Moreover, under French law, it is possible for creditors to enter into a subordination agreement or an intercreditor agreement, which provides that junior creditors shall be subordinated to senior creditors (and therefore not be paid until the senior creditors have been fully repaid), provides for the ranking of security interest and sets forth waterfall and enforcement rules. Upon the occurrence of an insolvency proceeding of the debtor(s), the subordination agreement remains effective. In that respect, it should be noted that French law expressly provides that the safeguard or reorganisation plans submitted for approval in safeguard or judicial reorganisation proceedings must take into consideration the provisions of intercreditor arrangements.
Enforcement by a secured lender will occur when the debtor is in default (ie, acceleration and failure to repay any amounts due under the facility provided, such as interest, fees and principal).
The enforcement methods vary according to the security in force.
Ordinance No 2020-306 of 25 March 2020 was issued on the basis of Law No 2020-290 of 23 March 2020, to deal with the COVID-19 pandemic. Article 2 of this order provides for an extension of appeal deadlines.
Pledges may be enforced by judicial allocation, by public sale before the court or by automatic transfer to the beneficiary of the pledge. Also, a private foreclosure (pacte commissoire) is permitted under French law for most security interests, but is prohibited during certain pre-insolvency and insolvency proceedings.
The time the enforcement may take varies depending on the proceedings engaged against the insolvent debtor, and such proceeding shall have a great impact on the creditors’ rights. The rules of the insolvency proceeding have to be followed, with it being specified that an insolvency proceeding must provide for a moratorium of enforcement with respect to the creditor claim. So, creditors may never be totally reimbursed if the assets of the debtor are not sufficient to satisfy all the creditors.
The choice of a foreign law to govern a contract will be upheld as a valid choice of law by French courts, according and subject to the provisions of the European Parliament and Council Regulation (EC) No 593/2008 of 17 June 2008 on the law applicable to contractual obligations.
The submission to a foreign jurisdiction is binding, according and subject to the provisions of Regulation (EU) No 1215/2012 of the European Parliament and of the Council of 12 December 2012 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters. As mentioned above, French law gives the parties to a contract freedom to choose a jurisdiction for their disputes, except for disputes regarding a real property matter, which must be tried by the court at the place where the property is located. The choice of a foreign jurisdiction is valid as long as the dispute is international, with it being specified that French courts do not require the dispute to have a material link to the foreign jurisdiction elected by the parties, the jurisdiction choice clause does not preclude the mandatory exclusive jurisdiction of a French court in relation to certain aspects (eg, employment contracts) and the clause is not a unilateral dispute resolution clause giving only one party the choice between several jurisdictions while the other party is bound to bring actions before one jurisdiction only.
Also, it is possible to waive immunity under certain conditions, and this waiver of immunity is legally binding and enforceable under French law.
Any final and conclusive judgment rendered by the foreign court of an EU member state that is enforceable in such jurisdiction shall be recognised and enforceable by French courts without review of its merits, according and subject to the provisions of Regulation (EU) No 1215/2012 of the European Parliament and of the Council of 12 December 2012 (the “Brussels I Bis Regulation”).
Pursuant to the Brussels I Bis Regulation, the recognition of a foreign judgment shall be refused only in the following circumstances:
As per French arbitration law, recourse to arbitration, in the presence of an arbitration agreement, is binding. Any binding arbitral award rendered by arbitrators shall be recognised and enforceable in France, according and subject to the provisions of Article 1514 et seq of the French Code of Civil Procedure. An international arbitral award rendered outside France shall be recognised in France, provided such recognition is not manifestly contrary to French international public policy, upon presentation of the original arbitral award and of the arbitration agreement (with copies) to the competent French court (a sworn translation of such documents may be required by the court).
Upon the request of the interested party, recognition of an international arbitral award rendered outside France shall be made, through an enforcement order (ordonnance d'exequatur) issued by the Paris High Court (Tribunal Judiciaire de Paris), and filed with the registry of the court. Such enforcement order will allow for the enforcement of the award in France.
The creditor must notify the opposing party that the award and the enforcement order have been issued prior to introducing any enforcement measures. However, the service (signification) of the award, once rendered by the arbitral tribunal, is not a prerequisite to enforcement.
The decision of a French court on the recognition and enforcement of an arbitral award rendered abroad may be subject to appeal before the competent Court of Appeal. Recognition or enforcement of an arbitral award may be refused only on the five grounds provided for in Article 1520 of the French Code of Civil Procedure.
During the Brexit transitional period that will end on 31 December 2020, the Brussels I Bis Regulation shall remain applicable to the enforcement of French judgements in the United Kingdom and the enforcement of UK judgments in France. At the end of the transitional period, the existing Brussels I Bis Regulation will no longer apply. Therefore, if no agreement is entered into between the United Kingdom and the EU, the enforcement of judgments will depend on domestic rules relating to enforcement in the UK and France, which will be significantly more cumbersome in practice.
To remedy this issue, the United Kingdom has requested to join the Lugano Convention dated 30 October 2007, which governs jurisdiction and the enforcement of judgments between the member states of the EU and the European Free Trade Association.
There are no other matters that might have an impact on a foreign lender’s ability to enforce its rights under a loan or security agreement.
There is a specific insolvency procedure for credit institutions, regarding total prohibition of activity and liquidation. Such procedure is monitored by the ACPR and, if the relevant entity is a systemic credit institution, in co-operation with the ECB. This specific regime is not examined in the following section.
French law offers various tools and workout processes to address distressed situations before the occurrence of insolvency.
In order to face the COVID-19 crisis, the French government has passed Ordinances No 2020-341 dated 27 March 2020 and No 2020-596 dated 20 May 2020 to adapt French restructuring and insolvency law (the "COVID-19 Regulations"). The key changes brought by the COVID-19 Regulations are presented below.
Under French law, debtors who are insolvent are required to file for judicial reorganisation proceedings (redressement judiciaire) or compulsory liquidation (liquidation judiciaire), subject to the opening of conciliation within the first 45 days of the occurrence of insolvency.
Under the COVID-19 Regulations, and until 23 August 2020, insolvency is assessed by the court on the basis of the situation of the company on 12 March 2020.
Reorganisation proceedings, compulsory liquidation and safeguard proceedings qualify as insolvency proceedings within the meaning of Regulation (EU) 2015/848 of the European Parliament and of the Council of 20 May 2015 on insolvency proceedings.
The opening of reorganisation proceedings and compulsory liquidation has effects on creditors’ rights that are, to a large extent, identical to those of safeguard proceedings and are described above.
At the end of the observation period, the court may:
The content and process for the preparation and approval of a restructuring plan is identical in safeguard and reorganisation proceedings. See 7.1 Company Rescue or Reorganisation Procedures Outside of Insolvency.
Subject to certain conditions and limitations, creditors whose claims are secured by pledges may exercise certain of their rights under the pledges and request the transfer of title to the pledged asset.
Pursuant to the COVID-19 Regulations, and until 31 December 2020, the debtor company’s management or the court-appointed judicial administrator can petition the court, seeking authorisation for the management to submit an offer to purchase the assets of the debtor company in the context of a sale plan, when such offer is likely to preserve employment.
Lenders in safeguard or reorganisation proceedings will be repaid as provided in the restructuring plan approved by the court (and by the creditors’ committees, if applicable), with no enforcement of security interests being possible while the plan is being performed.
In compulsory liquidation or in the sale of the company’s business by way of a sale plan, lenders will be repaid by the court-appointed officials out of existing proceedings, subject to a mandatory and complex waterfall of priorities, the first categories of which are as follows:
There is no concept of equity subordination under French law.
As mentioned above, the main risk for lenders if the borrower, security provider or guarantor were to become insolvent is the opening of proceedings regarding the economic and financial position of the insolvent entity, as the lenders would then be subject to those proceedings and would not be certain to be repaid. As creditors, lenders would have to follow the order of priority ranking.
Project finance can be described as a technique for financing the construction, development and operation of large-scale infrastructure. The sponsors involved in the project shall create a dedicated company (special-purpose vehicle, or SPV) that will support the fundraising and implementation of the project, and the management of the infrastructure. This kind of operation generally has a high proportion of debt (rather than equity) and the repayment scheme is almost exclusively based on the cash flows generated by the exploitation of the assets. Indeed, the decision to grant the loan is mainly based on the future performance of the project and the underlying activity or assets. The financing is self-liquidating as the income expected each year during the operating phase must be sufficient to repay the debt.
The timescale of a project financing depends on the type of asset: brownfield or greenfield. For brownfield investments, the timescale for the acquisition or disposal of an existing asset is quite short: five to seven years. Conversely, the timeframe for a greenfield investment is longer – between 15 and 25 years – although this differs according to the type of asset.
In France, during the last 20 years, project financing has often involved public-private partnerships (PPPs). A PPP is a public contract by which a public entity entrusts to a private company the global mission of designing, building (or rehabilitating), financing and operating public infrastructure that provides a public service. Through this type of process, which has been used in France for centuries for financially freestanding PPPs, the public entity transfers the risks associated with the construction and operation of the project to the private sponsors, as well as the major investments required for the construction of a public structure without affecting its debt. More recently, since 2004, PPPs with payments by the public sector have emerged to erect public buildings or facilities that can be assimilated to long-term leases for ministries, local municipalities buildings or other equipment dedicated to the public.
However, several studies have shown that the choice to operate through project financing would sometimes imply a higher financial cost for the public sector in so far as the French state and its public entities often borrow at preferential rates compared to the private sector.
On the other hand, at the end of the operating period set out in the framework contract, one of the main difficulties is the determination of the rules that apply to the transfer of return goods to the public entity.
Indeed, in order to award a PPP contract, it is necessary to identify and negotiate all aspects of project implementation: financing, operation and maintenance, and even performance indicators and evaluation systems, which are usually not part of the traditional procurement procedure for public projects. This need to plan so many legal and financial elements in advance has led to additional delays in the implementation of projects.
In France, there are two types of PPP that are mainly used: concession agreements and partnership contracts. They are both administrative contracts under French law but the main difference is that under a partnership contract, the grantor will pay rent to the private partner in exchange for the performance of the project, while under a concession agreement, the compensation of the concessionaire will mainly arise from payments made by users of the service.
Since 1 April 2019, the French government has integrated public procurement rules into a single code (the "Public Procurement Code", or PPC). This code is applicable to procurement contracts, concessions and PPP contracts, which are now called marchés de partenariat.
In France, it is not necessary to pay any taxes, fees or other charges in a project finance transaction. However, there is a specific procedure in PPPs, called a public tender, in which the bidder is requested to submit a financial and technical plan in its proposal, and the contracting authority will select its preferred bidder on the basis of this proposal.
In addition, different administrative authorisations, building permits, licences and approvals must be obtained from the relevant administrative entities.
However, if the financing documents are built according to a capital market scheme, they must be approved by the French Autorité des Marchés Financiers, and the security packages must be notified to the debtor in order to be enforceable against the debtor. Security interests such as mortgages must also be registered at the relevant registry (land registry).
Partnership contracts signed by the state or a state public institution have to be approved by decree of the Minister of the Economy and Minister of the Budget. In partnership contracts signed by public bodies that are established by the state, project documents have to be approved by the minister in charge of its supervision. For local authorities, there is no need for such authorisations, according to the principle of free administration of local entities.
The award notifications of project agreements must be made publicly available as official material in order to enable challenge periods, and usually lapse after two months.
The main governmental body with authority over project finance is FinInfra (formerly called "MaPPP" – Mission d'appui aux PPP), which is a dedicated unit within the Minister of the Economy that oversees the financing of complex public projects and assists in their implementation.
In France, only governmental bodies can grant mining titles for the exploration and production of hydrocarbons. These responsibilities are shared between the Ministry of Energy and the Minister of the Economy, specifically the departments of the competent ministries and, at the regional and departmental level, the prefects and the DREALs (Direction Régionale de l’Environnement, de l’Aménagement et du Logement). The Mining Code regulates activity relating to hydrocarbon research and exploitation, on land or at sea, by issuing two mining titles: the exclusive exploration licence for the exploration phase and the concession for the operating phase. The regulation applicable to the issue and management of mining titles is Decree No 2006-648 of 2 June 2006.
The exclusive research permit is issued by ministerial decree; it confers to its holder an exclusive right to carry out exploration works in order to discover hydrocarbon deposits within the demarcated perimeter, as well as the possibility of obtaining a concession to exploit the discovered deposit. The processing of applications for new research permits is the subject of a public participation phase organised by the Ministry. The main elements of the file (the letter of application, the impact notice and the cartographic documents) are made available to the public, who can express their opinion. The administration is required to take the opinions expressed on this occasion into account.
The exclusive research permit is awarded for a maximum of five years and may be extended twice, with each period not exceeding five years. The size of the permit is reduced with each extension, with the company targeting more specifically the areas to be explored. It should be noted that the exclusive research permit grants exclusivity and does not authorise any right to do field work – this is subject to a "work permit".
Mining concessions are issued by a decree in the Council of State, and confer upon the holder the exclusive right to exploit a delimited area. Such concession is granted after a competitive bidding phase (unless the application follows an exclusive research licence), for an initial period not exceeding 50 years, and may be renewed for one or more successive periods, each not exceeding 25 years. Each grant application or renewal application is subject to a public inquiry lasting no fewer than 30 days.
The main issue that the project sponsors will face in project finance is how they finance a particular project, how to invest in it and how to fund the project. They can choose to enter into a joint venture or consortium (unincorporated association), a partnership, a limited partnership, or an incorporated entity like a limited company (société par action simplifiée).
After setting up the project vehicle, the sponsors must have an agreement in place on some matters related to their roles in the project. Prior to entering the sponsor group, it is highly important for the sponsor to know precisely what its tasks are.
Due to the absence of recourse, the capitalisation of the project or the project company must be looked at carefully. Some lenders require the sponsor’s capital to be considered at the outset, prior to any bank funding. They might not request such condition if they are satisfied of the credit standing of the sponsors or the security (bank guarantee or letter of credit) to ensure the sponsor’s capital commitment.
The sponsors and lenders might be concerned about the sale of shares and pre-emption rights, and the lenders will want to know if the initial sponsor group will still be in place until the loan is paid in full.
The sponsors may choose to raise finance directly themselves for financing a project, or indirectly through a project vehicle. If they choose the latter option, the financing may be raised on balance sheet terms or on limited recourse terms. Projects are often debt financed using loans as opposed to other forms of finance. All projects cannot share the same structure, although they might have similarities.
Multilateral agencies such as the Asian Development Bank, the European Bank for Reconstruction and Development (EBRD), the European Investment Bank (EIB) or the International Finance Corporation (IFC) are able to boost the bankability of a project by providing protection to banks against a wide range of risks.
Export credit agencies (ECAs) also play a very important role in the financing of infrastructure and other projects in emerging markets, providing subsidised finance to direct exporters or to importers. ECAs are to assist in the export of goods or services sourced from that country. They can also be used to assist developing countries by financing the export of goods or services to those countries. The use of ECAs is to provide political risk insurance, commercial risk insurance, interest rate support and direct lending to the importer or buyer.
In France, bonds are not commonly used. The main disadvantage of the bond financing is that the consent and waivers often sought by the lenders are practically impossible to obtain because it is impossible to identify the bondholders. Also, bonds are made on the basis that payment is made by one large sum, which is not very compatible with project finance. Because of the anonymity of the bondholders, loans have more onerous warranties, covenants and events of default.
The owner of the surface is different from the holder of the mineral title, who holds the rights to the mineral resources. Under the French Monetary and Financial Code, any foreign investor who seeks to acquire control of a branch of activity in a French company in matters deemed to be essential to the national interest is subject to the prior authorisation of the Minister of the Economy.
Property taxes are due to the local authorities from holders of mining titles for the occupation of the land (the local authorities are entitled to a tax on each tonne of product extracted).
Holders of a mining concession are supposed to fulfil their obligation to pay an annual royalty to the state, based on their production.
Also, if seabed minerals are considered part of the public domain, the title-holder must pay a royalty.
With regard to exports, a commodity classification tool is applied, which was created to meet the requirements of the Common Customs Tariff and EU external statistics, and is called the Combined Nomenclature.
The assets held and/or managed by the SPV can meet the criteria of a classified installation for the protection of the environment, in which case a declaration, registration and authorisation process must be followed, in compliance with the environmental laws.
The installations and activities are to be controlled and monitored by the state services in charge of the protection of the environment (Directions régionales de l’environnement, de l’aménagement et du logement). These services may impose additional prescriptions to be followed, apply financial penalties, and modify or withdraw granted authorisations.
Moreover, in order to be granted a project agreement by the state or an administrative authority, the successful bidder must prove its compliance with tax and labour law and regulations, and must prove such compliance every six months after the award of the contract. More generally, under the French Labour Code, every company signing a contract above a certain threshold must regularly check that its contractor meets certain labour law obligations.
Finally, construction sites are carefully monitored by inspectors attached to the Ministry of Labour in order to check the measures taken by the construction company regarding the health and safety of employees and subcontractors, and in order to check that the construction companies meet all their health, safety and labour law obligations regarding their employees or subcontractors.
The Wall of French COVID-19 Loans: is Winter Coming?
There is nothing more difficult to take in hand, more perilous to conduct, or more uncertain in its success, than to take the lead in the introduction of a new order of things. – Niccolo Machiavelli, The Prince.
It is difficult – if not impossible – to foresee what the year 2020 would have been without the COVID-19 pandemic and its many disruptions. It took the legal community by surprise, and brought its share of anxieties and challenges, both personal and professional. And it is probably fair to say that its consequences will be long-lasting and far-reaching. The French banking eco-system was not immune to this crisis. Quite the contrary.
The first months of 2020 looked very promising to lawyers and market participants. Everyone had every reason to be optimistic: an influx of liquidity was still available across all sectors and industries (corporate lending, acquisition and leveraged finance, real estate, infrastructure and projects); the effects of the European Central Bank's quantitative easing policies were stronger than ever before; lenders were still willing to underwrite large amounts of debt and able to take "bridge to bond" risks; corporates and funds benefited from very competitive pricing (low margins and aggressive levels of upfront fees); the syndication market was still buoyant; extendable maturities were the norm; borrower-friendly "certain funds" arrangements were available across the acquisition finance market; and market flex clauses were almost never relied upon. The financings of the purchase of Tiffany & Co by LVMH and of the acquisition of Bombardier Transportation by Alstom are probably the epitome of this bullish trend that prevailed until the outbreak.
And then, all of a sudden, in a matter of just a few weeks, French banks were projected to the centre of the COVID-19 crisis: they became key players in the stimulus package that the French authorities introduced in the course of March 2020 to try and minimise the dire effects of the pandemic on the French economy in general, and on French corporates in particular. On 16 March 2020, French President Emmanuel Macron announced that the French State would guarantee up to EUR300 billion of loans that would be made available to French corporates in order to help them cope with the outbreak and the lock-down. The French Banking Federation (Fédération Bancaire Française – FBF) responded to this call of arms immediately, and stated that French banks would actively support this scheme (which was actually co-designed by the French State and the FBF), and that French corporates could count on them to "play their part".
Over the next five months, French banks stepped up in a significant and commendable way (and, to be perfectly fair, so did international banks authorised to lend in France). At the end of August 2020, more than 550,000 French companies had benefited from loans guaranteed by the French State (referred to as "PGE" loans – Prêts garantis par l'Etat). To date, the quantum of new money injected into the French economy under this scheme amounts to EUR114 billion, and French companies have until the end of the year to request such loans. French banks have not been particularly picky: only 2.7% of requests for PGE loans have been denied. The vast majority of French companies (90% to be exact) that were granted a PGE loan are very small companies, but a number of large French corporates have also relied on the scheme, including FNAC Darty, Europcar, Air France, Mobivia (which owns Norauto), Constellium and Renault, to name a few. In short, the whole market benefited from these loans, including companies held by private equity funds.
These loans were structured, negotiated and signed in very special, unusual circumstances. Shortly after the PGE scheme was announced by the French government, the French Treasury published a dedicated set of regulations that provided a bespoke framework for these PGE loans. These regulations were enacted in a hurry and, as a result, proved to be quite elliptical. On the back of them, the French Treasury published an FAQ sheet on its website to try and clarify the rules and their unintended intricacies. But the answers provided by the French State, at least initially, did not necessarily help. Fortunately enough, some key features of the scheme were clear from the onset, including that these facilities must take the form of term loans with an initial 12-month maturity. The borrower has the right to extend this maturity up to five additional years, provided it pays a form of extension fee to be shared between the lenders and the French state. These loans do not amortise during the first year, but may in case of an extension. Their purpose is to support the liquidity needs of the borrower, and the proceeds must be applied in a way that supports its activities and employees. But, as mentioned above, beyond these few overarching principles, a number of rather intricate queries remained unclear. How should these loans be priced? Can lenders impose an amortisation profile if the borrower extends the maturity of the loan? What events of default may give lenders the right to accelerate the loan? Can they bear fixed or floating interest rates? How will the guarantee be called? The questions were many, and time was of the essence...
To add another layer of complexity, these rules differ depending on the size of the borrower. PGE loans granted to large companies are vetted by the French Treasury directly, but those granted to small and medium size companies are not; their compliance with the regime will be tested as and when the French State guarantee is called. This made it even more important to make sure that the terms of the loan agreements documenting these PGE loans comply with these rules, complex as they may be.
Lawyers involved in these transactions were therefore faced with three challenges:
As time went by, positions somehow aligned, and the processing of these transactions improved: additional FAQs were published, informal discussions with the French Treasury and Bpifrance Financement (the French investment bank owned by the French State that will manage these PGE guarantees granted by the French State) provided further guidance on how to interpret these rules. As a result, the documentation used for these loans became more and more standard, although differences of interpretation still remain.
For banking lawyers and practitioners at the forefront of this scheme, drafting and negotiating these PGE loans can only be described as a once in a professional lifetime experience. For the companies that benefited from these loans, it was a welcome and often live-saving support in the face of unprecedented difficulties. And for the banks and financial institutions that made these loans available, it was, in the words of Frédéric Oudéa, Société Générale's President and Chairman of the FBF, a "considerable challenge"; this is anything but an understatement.
But this is just the beginning of the story. Many of the corporates that have relied on this scheme are now heavily indebted. In some instances, PGE lenders have been able to convince shareholders to inject additional equity if certain trigger events materialise. But not always. Some corporates have had to request waivers and covenant holidays so that these PGE loans do not trigger events of default under their other financing arrangements. All of them now need to figure out how to live with these loans… Although they can be extended, they are not necessarily designed to stay on their balance sheets for too long, as they often impose constraints that, once the crisis is behind us, will not necessarily allow them to operate in the normal course of business and with sufficient leeway. In addition, the pricing of these loans is probably the most complex and uncertain feature of this regime. During the first year, most but not all PGE are zero interest loans, but they will bear interest if they are extended. In most instances, PGE loan documents only provide for general indications as to how the pricing of these loans will be determined… As a result, some statutory auditors now argue that these PGE loans should be converted into deeply subordinated loans (which would be treated as quasi-equity from an accounting point of view) to be held by the French State. Be that as it may, French corporates having borrowed PGE loans will need to manage their capital structure proactively in the coming months.
For French banks and French companies alike, uncertainty seems to be the new normal. It is therefore almost impossible to anticipate how the market will manage this "Wall of COVID-19 debt" that will rise in a year from now. For those reading these lines who are fond of Game of Thrones, let's just hope that nothing too dreadful is lurking beyond this wall…