A challenging interest rate environment in the last 12 months, inflation and energy costs have led to financial stress and several debt restructurings. Private equity funds and corporates may have been faced with squeezed liquidity, higher costs of fund and domestic banks tightening their standards, in a burdensome or sometimes unsustainable way for business plans already impacted by rising interest rates and high inflation. This situation has led to complex refinancings (including a mix of senior/junior/PIK/preferred equity structuring), numerous amend-and-extend requests on less favourable terms (notably when a pay-down is required) and, finally, debt restructurings. For this reason, cov-lite structures tend to evaporate, including for most established sponsors.
The war in Ukraine, in addition to wider geopolitical and economic volatility, has increased the uncertainty on the debt market and may have created turmoil for lenders and their ability to execute and perform their obligations. Arrangers and underwriters have tried anticipating those market challenges such as the potential escalation in the Ukrainian conflict, by including more systematically market-related material adverse change provisions in their commitment papers, thus affecting certain funds provisions. In addition, the conflict has also led to longer due diligence process because of heavier sanctions checks.
There has been some inertia in the high-yield market in France.
Alternative lenders are entrenched in the debt market alongside the banks, and have continued to step in to fill the gap in 2023; especially for mid-market financings that currently dominate, whilst mega-market deals have remained scarce. In an environment where loan maturities face funding gaps amidst higher interest rates, PE funds and corporates are turning to private credit solutions that may offer one-stop solutions providing debt and follow-on capital, including through preferred equity structures.
There is now a convergence between private debt documentation and the more restrictive banking documentation, likely as a result of portfolio management issues faced by alternative lenders, as well as to rationalise their expositions.
Banking and finance techniques have materially evolved to integrate ESG and sustainability considerations, including related reporting. In addition, and considering the combination of interest rate hikes, market conditions (tighter loan standards imposed by the banks) and lenders’ appetite, other structures such as preferred equity structuring have continued to be a suitable alternative for borrowers.
New companies have issued their first sustainability-linked bonds (SLBs). These SLBs are often linked to commitments to reduce greenhouse gas (GHG) emissions, including Scope 3 (Air-France KLM – EUR1 billion; Orange – EUR500 million; Carrefour – EUR500 million). To encourage the development of SLB, the ICMA has published a new version of its guidelines on SLB Principles. The AMF reiterated the benefits of these products while specifying that it would be vigilant about greenwashing. Banking loans linked to sustainability criteria are also developing steadily. In 2023, after publishing an update of its “sustainability-linked loan principles”, the LMA published a model documentation for these sustainability-linked loans. Entry into force of the CSRD directive and its ESRS in 2024 should increase the availability of more reliable and comprehensive ESG data.
As regards the impact on financial conditions, lenders increasingly reward success with margin reduction and more recently penalise failure through malus. Beyond usual commercial discussion on the KPIs and the magnitude of the margin reduction, the consequences of failure need to be agreed with a concern for fair treatment and short or medium-term remediation options, so as not to penalise the borrower on a long-term basis.
Under French law, only licensed French and EU passported credit institutions and finance companies (sociétés de financement) are authorised to enter into credit transactions for consideration and on a regular basis on the French territory, it being specified that credit transactions include lending activities, the purchase of non-matured receivables, financial leases when the lessee is granted an option to buy the leased asset, as well as the issuance of personal guarantees. Certain other entities or funds (including organismes de financement and securitisation organisations) may also carry out lending activities under conditions.
However, French law provides various exceptions to the requirement to hold a banking licence, such as payment delays, loans granted within a group, cash collateral in the context of a securities lending operation, and purchase of non-matured receivables by foreign entities whose corporate purpose or activities are similar to those of the regulated entities which are authorised to lend in France under the French banking regulations (such as foreign banks). Bonds issuance also falls beyond the scope of the French banking monopoly.
In order to obtain a credit institution licence from the ECB (or a finance company licence from the ACPR), numerous and strict conditions must be satisfied, notably, minimum capital requirements, the activity must be effectively run by at least two people, whose knowledge, experience and appropriateness must be demonstrated, as must their availability, the operation programme must detail the various types of activities contemplated, the technical and financial means must be put into place to implement such programme, and the robustness of shareholders and other equity providers or guarantors must be demonstrated.
Foreign lenders shall comply with French banking monopoly rules described in 2.1 Providing Financing to a Company. Subject to conditions defined by EU law, an entity authorised to carry out banking activities in a European Economic Area (EEA) member state is entitled, if it chooses, to carry out the same permitted activities in any other EEA member state by either exercising the right of establishment (through a branch or agents) or providing cross-border services. An exception to the banking monopoly was introduced in 2017 allowing the transfer of unmatured receivables by a duly licensed French lender to assignee(s) not licensed in France subject to three conditions: the transferred receivables shall arise from credit operations granted by regulated entities, the transferee must have in its own country a similar activity and the debtor shall not be an individual acting for a non-professional purpose.
There is no specific restriction under French law on the granting of security or guarantees to foreign lenders, it being however specified that the benefit of assignment of professional receivables by way of security (Dailly assignment pursuant to L.313-23 to L.313-34 of the French Monetary and Financial Code), is reserved to duly licensed or passported lenders in France or otherwise authorised funds.
There are no exchange controls regarding foreign currency exchange in France.
Loan documentation generally provides for specific representations, warranties and further assurance provisions (usually not subject to remediation) from the relevant obligor that the loans/debt securities are subscribed for its own account, and it shall comply with sanctions and all applicable anti-bribery and anti-money laundering regulations.
The agent role in French-law governed credit documentation was routinely based on a civil law power of attorney (Article 1984 and seq. of the French Civil Code). In addition, a special security agent regime (Article 2284 and seq. of the French Civil Code) provides that a security agent may be appointed to be the direct holder of the security and guarantees created for the benefit of the creditors of the secured obligations, and such security agent may also file any claim in any bankruptcy proceedings. The security and guarantees are segregated from the security agent’s own assets, together with any proceeds received by the security agent in that respect (management or enforcement).
Since a decision dated 13 September 2011, the French Supreme Court recognises parallel debt structures in foreign-law governed financings subject to French international public policy rules.
A loan transfer may be affected (in writing) by way of (i) assignment of rights (cession de créances), (ii) novation, (iii) assignment/transfer of agreement (cession de contrat) and (iv) assignment/transfer of debt (cession de dette).
The consent of (and notification to) the borrower in the loan transfer is required if such loan transfer is made under a transfer agreement (cession de contrat), transfer of debt (cession de dette) or novation. However, it is not necessary when a loan transfer by way of assignment of rights (cession de créances) occurs, although such assignment shall be raised to the borrower by mere notification.
Debt buy-back is generally permitted and based on LMA market standard provisions in syndicated loans/leverage financing; for private debt financing it is less common, but sponsors may still approach their lenders to repurchase debt at a discount.
Before launching a public takeover bid, financing must be secured and the initiator of the offer must select a presenting bank, which will file the offer with the AMF on its behalf. The filing must include a guarantee of the tenor and irrevocable nature of the commitments and must be accompanied by the draft offer document drawn up by the offeror that shall mention, among other things, the terms of financing for the transaction.
By law, the guaranteeing bank undertakes to settle the purchase price of the securities tendered as part of the offer (whether voluntarily or due to any mandatory squeeze-out mechanism). Consequently, guaranteeing banks rigorously ensure that the facility agreement (which does not need to be publicly disclosed or filed) does not grant lenders any “out” options during the certain funds period (except for very limited circumstances such as insolvency proceedings, change of control or payment default). It is standard for the guaranteeing bank to benefit from an autonomous first demand guarantee, be party to the facility agreement and be entitled thereunder to request utilisations (without any condition precedent applicable) on behalf of the initiator during a certain funds period to cover the undertakings of the initiator under the offer.
Integration of ESG and sustainability considerations in bank and bond financing has slightly amended the legal documentation. Please see 1.6 ESG/Sustainability-Linked Lending.
French law provides usury rules applying to loans granted to consumers, therefore individuals acting for their professional needs or legal entities engaged in a professional activity fall beyond the scope of usury law. However, the prohibition of usury is extended to (i) account overdrafts, including those granted to legal persons engaged in a professional activity, (ii) contractual interest-bearing loans and (iii) other transactions similar to money lending (eg, instalment sales, credit facilities).
Any contractual loan granted at an overall effective rate which, at the time it is granted, exceeds by more than one-third the overall effective rate charged during the previous quarter by credit institutions and finance companies for transactions of the same nature involving similar risks, constitutes a usurious loan. The maximum legal rate is published periodically by the French central bank and differs according to the type of loan concerned.
From a civil law perspective, French law sanctions usury by reducing the interest received to the maximum authorised rate. The overpayment is then automatically deducted from the normal interest and, subsidiarily, from the principal of the debt. From a criminal law perspective, any person who grants or participates directly or indirectly in a usurious loan may be punished by two years’ imprisonment and a fine of EUR300,000 (this does not apply to usurious account overdrafts).
There is no general rule under French law requiring the disclosure of loan agreements to an authority or client, and French law further provides a banking secrecy obligation prohibiting credit institutions from disclosing any information pertaining to a client obtained within the context of its professional activity and which is of a confidential nature. By way of exception, information subject to banking secrecy must or may be disclosed in certain situations.
Credit institutions owe a duty of information on various aspects (including overall global rate) and are required to make disclosure pursuant to Regulation (EU) 2019/2088 (SFDR) for investment products with regards to ESG considerations. According to the Taxonomy Regulation, banking institutions now have to publish their Green Asset Ratio (assets aligned with the European Taxonomy/total assets covered by the balance sheet).
Payments of principal made by French borrowers/issuers to lenders/bondholders are not subject to withholding tax. No French withholding tax applies to interest paid by a French borrower/issuer unless such payment is made onto an account opened with a financial institution situated in a country or territory which is deemed non-co-operative within the meaning of Article 238-0 A of the French Tax Code (NCCT). If payment is made into an NCCT, French withholding tax must be levied at the rate of 75%, unless otherwise provided in the relevant tax treaty or unless the borrower benefits from an “escape” provision by demonstrating that the main purpose and effect of the transactions in respect of which the interest is paid is not to allow the location of such interest in an NCCT.
French borrowers/issuers cannot deduct from their taxable income interest (i) paid or accrued to beneficiaries domiciled or established in an NCCT or (ii) paid onto an account opened with a financial institution situated in an NCCT. Non-deductible interest could then be reclassified as a deemed dividend in respect of which a withholding tax obligation could arise.
In addition, fee payments made to non-French beneficiaries are subject under French law to a 25% French withholding tax unless the beneficiary of the payment can benefit from the tax treaty protection (since most of the tax treaties prevent France from applying such withholding tax).
Most financial transactions are exempt from VAT in France. However, lenders may opt for VAT and send a written registration to the relevant tax office, which takes effect on the first day of the month following its submission until it is revoked (which is only possible from January 1st of the fifth year following the year in which the option is exercised). From 1 January 2022, a lender may decide to apply the VAT option only to eligible transactions of its choice (previously, the option was global).
French banks may be subject to bank levies by reference to their assets or liabilities, including the French taxe pour le financement du fonds de soutien aux collectivités territoriales (Article 235 ter ZE bis of the French Tax Code).
There are generally no stamp duties applicable to financing activities save for voluntary registration of the documentation or in relation to certain guarantees.
As a result of the NCCT legislation, it is now common for French borrowers/issuers to seek to include provisions that exclude gross-up obligations in circumstances where French withholding tax is due as a result of payments being made onto a bank account in a jurisdiction which, as a result of a change in the list of NCCTs, finds itself in an NCCT.
Financing agreements involving a French borrower/issuer also generally provide for a right of repayment and cancellation for the borrower/issuer and a mitigation obligation for the lender in case interest becomes non-tax deductible as a result of being paid or accrued to the benefit of lenders domiciled or established in an NCCT or paid onto an account opened with a financial institution situated in an NCCT. Restrictions on transfers to lenders domiciled or acting through an NCCT and countries of location of the agent are also common.
It is increasingly common for French borrowers/issuers to seek to negotiate exclusions to the gross-up provisions on fee payments and to request the lenders to provide them with tax residency certificates before any fee payment.
Security interests over assets located in France generally required for standard collateral packages are as follows:
As regards the trust (fiducie), such security requires the transfer of the concerned rights and assets to the trustee (fiduciaire) acting in favour of the secured creditor. The assets held by the trustee of the security trust are segregated. To be valid, a trust agreement must be registered with the local tax authorities within one month of its signing.
Registration always requires the payment of fees or taxes and a renewal on occasion to maintain the effectiveness and ranking of the security interests. All registered security interests must be drafted in French for validity or perfection purposes and shall address all the relevant (mandatory) information required by law to be validly received by the relevant registrar. They can however be signed electronically pursuant to Articles 1366 and seq. of the French Civil Code, it being recalled that under French law, agreements may not be executed by counterparts.
French law does not provide for floating charge, which means that all the security interest corresponding to the debtor’s available assets must be combined in order to achieve the effects of the floating charge as far as possible.
Under French corporate law, a company has a corporate interest distinct from that of its shareholders or affiliates even in the case of a wholly owned subsidiary. If the contemplated transactions, such as the granting of security or guarantees, are detrimental to the guarantor’s corporate interest, it may be characterised as a misuse of credit or misappropriation of company assets pursuant to paragraph 3 of Article L. 242-6 of the French Commercial Code. The president, the general managers or the directors at fault may be subject to criminal sanctions. Lenders may also be potentially exposed to the risk of being held liable as accomplices under those violations (same article).
Under prevailing French case law, security interests or guarantees granted by a subsidiary in order to guarantee the obligations of its parent company or another company within the same group do not constitute a misuse of credit or misappropriation of company assets if the following conditions are satisfied:
When enforcing these principles, the courts will always consider the circumstances of each particular transaction and tend to have a very strict approach.
Lastly, in case of opening of bankruptcy proceedings against a given debtor, if a creditor is held liable by a French court for damages resulting from the credit facilities granted to such debtor, the security and/or the guarantees guaranteeing such credit facilities will be null and void. French law provides that the creditors could be held liable by a French court only in case of fraud, interference (immixion) of the creditor in the management of the debtor or in the situation where the security interest and/or the guarantees obtained in consideration of the credit facilities are disproportionate to the credit facilities (see Article L. 650-1 of the French Commercial Code).
As regards a target granting guarantees or security, French law prohibits the use by a French limited liability company of its assets or credit to finance the purchase or the subscription of the company’s own shares. This applies to the granting of security by a company to secure the acquisition or the subscription of its own shares and gives rise to criminal sanctions (see Article L. 225-216 of the French Commercial Code). According to most legal scholars, this law should be interpreted restrictively as its violation gives rise to criminal sanctions. However, a minority of scholars adopt a broad interpretation and consider that the prohibition of financial assistance may still apply to the indirect acquisition of shares of a company acting as guarantor under the acquisition financing, for instance.
Financial assistance shall also be considered when merging the borrower and the target, or when implementing debt pushdowns financed by external indebtedness subscribed by the target to refinance the acquisition debt at the end.
It is generally admitted that in case of financial assistance, the guarantees granted by the guarantor can be voided by the French court.
A certain number of transactions/acts, such as security and guarantee, can be challenged by the judicial administrator, the creditors’ representative or the liquidator or the Public Prosecutor (Ministère Public), if they have been granted during the hardening period.
No consent is required with respect to the creation of security unless foreign investment control regulation applies to the relevant assets over which security is created, or except for the prior consultation of the works council of a company (if any) when the granting of the relevant security involves any question on the organisation, management or general conduct of the company.
The contractualisation of a deed of release generally applies to the parties when external debt repayment has occurred, and related security shall be released. Such release agreement pertaining to French law security may be governed by the same foreign law governing the underlying credit documentation even though it remains necessary to draw up a specific release agreement, drafted and governed by French law, when the release must be filed with a specific French register.
Beyond contractual priority arrangements provided by the intercreditor agreement for governing various groups of secured creditors, the priority of competing security is dealt with by the security itself and its perfection or registration, depending on the nature of the security. If the security is subject to registration, the ranking of the security interest is determined by the date of registration. Otherwise, the ranking of the security is determined by the date on which the relevant perfection of that security is completed.
There are essentially two ways of implementing subordination, either structural subordination through dedicated capital structures to spread the senior/junior/PIK debts at different levels with separate covenants and collaterals; or contractual subordination through subordination/intercreditor agreement.
As regards contractual subordination, Articles L 626-30 and L 631-19 of the French Commercial Code provide, in the context of safeguard, accelerated safeguard and rehabilitation proceedings, that when classes of affected parties must be summoned, the formation of the classes must comply with intercreditor/subordination agreements entered into by the affected parties before the commencement of the proceedings. The affected parties shall notify the existence of such agreements within ten days. Otherwise, they will not be unenforceable in the context of the proceedings. To date there is at least one precedent where senior and subordinated lenders voted in separate classes based on an intercreditor/subordination agreement.
As matter of principle, a security which is duly enforceable against third parties will not be primed by other security arising by operation of law except as follows:
Under French law, enforcing collateral requires unpaid sums – ie, payment default when principal or interest are due and payable or a notified acceleration; it being specified that security arrangements such as trusts (fiducie-sûreté or fiducie gestion) or golden share arrangements may however contractually provide for specific rights for the beneficiaries anticipating the payment default.
As regards means of enforcement, creditors have the choice between appropriating the collateral and/or disposing of it, either by way of judicial proceedings (judicial foreclosure or public auction) or, depending on the type of security, by way of private appropriation as a result of contractual enforcement provisions (pacte commissoire) in the relevant security agreement. Enforcement under judicial proceedings may take some time while contractual enforcement may be swift, provided that the relevant security provider does not benefit from an automatic stay resulting from insolvency proceedings.
As regards contracts concluded in civil and commercial matters, the effectiveness of a clause on governing law, according to the Rome I Regulation, depends on whether it forms part of a domestic or international contract. In accordance with the Rome 1 Regulation:
it being specified that certain matters are excluded from the scope of the regulation (Rome I Regulation, Article 1.2).
Cases of international disputes before French courts are as follows:
Finally, the clause may be asymmetrical by allowing one of the parties the right to bring proceedings either before the court or courts designated in the clause, or before any other competent court or the courts of another state. Such a clause is valid only if it specifies the objective elements on which this alternative jurisdiction is based and must not be contrary to the objective of foreseeability and legal certainty. It should be highlighted that a decision of the EUCJ is expected shortly as to whether the validity of asymmetrical jurisdiction clauses shall be subject to EU member domestic laws or to EU Law.
Waiver of Immunity
The waiver of immunity may concern immunity from jurisdiction or immunity from enforcement. On one hand, immunity from jurisdiction allows a state not to be judged by anyone other than its courts. This waiver is valid under certain conditions. The French Supreme Court has held that if a state may waive its immunity from jurisdiction in a dispute, this waiver must be certain, express and unequivocal (Cour de Cassation, 9 March 2011, No 09-14.743). On the other hand, immunity from enforcement enables a state to protect its assets from measures of execution, such as seizures. The “Sapin II Act” (9 December 2016) codified the conditions under which a state may effectively waive this immunity. The waiver must essentially be express and, for diplomatic assets, special (French Civil Enforcement Proceedings Code, Article L. 111-1-2). Also, enforcement proceedings may only be implemented on property belonging to a foreign state with the prior authorisation of the judge (French Civil Enforcement Proceedings Code, Article L. 111-1-1).
A foreign judgment or arbitral award will not require a retrial of the merits of the case to be enforceable in France. The rules on the enforcement of a foreign judgment depend on whether the judgment is issued by a member state of the EU (Brussels I recast Regulation will apply) or by another foreign jurisdiction (French Civil Procedure Code will apply). In any case, the foreign decision or the award must comply with French international public policy.
There is no specific matter that might impact a foreign lender’s ability to enforce its rights except when the enforcement of a security interest would result in the crossing of a certain threshold of share capital and/or voting rights or the acquisition of the control of a French company carrying out “sensitive activities” (such as activities likely to affect the interests of national defence, involved in the exercise of public authority) by a foreign investor where a prior approval of the French Minister of the Economy may be required.
French law provides for two types of restructuring proceedings. Firstly, pre-insolvency proceedings which are flexible, voluntary and confidential proceedings and secondly, insolvency proceedings which are formal and public proceedings.
Effects of Restructuring Proceedings on Acceleration
The opening of pre-insolvency and insolvency proceedings (other than liquidation) shall not be a valid cause of acceleration. Notwithstanding any contractual provisions, creditors are prohibited from accelerating a loan by the sole reason of the opening of such proceedings (or of any filing for that purpose). More generally, any contractual provision increasing the debtor’s obligations (or reducing its rights) by that sole same reason is also null and void. However, in theory (it has been recently refused by some jurisdictions) a lender can accelerate for other types of events of default. It should, however be remembered that acceleration will have no impact on the general prohibition to pay pre-filing claims.
In liquidation, all claims become immediately payable when proceedings are opened (unless business activities are expressly continued by the court on a temporary basis to ensure the preparation of a sale plan – in this case, claims become immediately payable when the court approves the sale plan or when the temporary continuation of business ceases).
Effects of Restructuring Proceedings on Enforcement
On one hand, the commencement of pre-insolvency proceedings does not trigger any stay of payment nor enforcement actions. Yet, the debtor can apply for a moratorium (for a maximum of two years) if any creditor attempts to enforce its rights while proceedings are pending or, in conciliation only, if such creditor refuses to grant a standstill for the duration of the proceedings (maximum five months). On the other hand, the commencement of an insolvency proceeding triggers an automatic stay on (i) enforcement of payment obligations incurred prior to the opening of the proceeding and (ii) enforcement on related security over the assets of the debtor (including security interests granted over in guarantee of a third-party’s debt). In addition, any increase in the scope of security interests or retention right is strictly prohibited. In other words, the debtor is prohibited from paying its pre-filing creditors, which are prohibited from enforcing the rights. Nonetheless, there are limited exceptions including the right to set off applicable to:
The distribution of the company’s value follows a predetermined rank order, but the exact recoveries are rather unpredictable ex ante due to the high number of context-sensitive privileges. Nonetheless, the following basic principles apply.
it being specified that security with a retention right allows the beneficiary to benefit from an exclusive right over the proceeds of the isolated sale of the affected assets. Similar exceptions apply to Dailly assignments and trusts (fiducies).
Contractual Ranking contemplates two situations:
Any restructuring process can be divided in two distinct phases as follows:
Prospects of recovery for creditors depend on the nature and outcome of the restructuring proceedings:
French insolvency law offers pre-insolvency proceedings (ad hoc and conciliation proceedings) which are flexible, voluntary and confidential proceedings that aim to facilitate workouts between a distressed company and all or part of its major creditors under the supervision of a court-agent. They are frequently used as a first step to engage financial restructurings. Their attractiveness is also due to their confidentiality.
Ad hoc and conciliation proceedings are very similar and share the following key characteristics:
Three main risks for lenders if the borrower, security provider or guarantor were to become insolvent are (i) the risk of clawback and hardening period, (ii) the risk of liability and (ii) the risk of shadow directorship.
Despite a slight slowdown in activity at the beginning of 2023 due, in particular, to rising interest rates and high inflation, the French project finance market has remained active, driven in particular by the environmental transition, mobility and transport sectors. In addition to the consistently large number of projects in France to finance photovoltaic plants and wind farms (onshore or offshore), the last couple of years have witnessed the emergence of new assets supported by project finance, such as battery manufacturing plants for electric vehicles, charging stations for electric vehicles, hydrogen production sites, etc.
Two types of public-private partnership are mainly used in France. Firstly, the concession agreement, which is an administrative contract pursuant to which the public entity entrusts to a private partner the execution of works and/or the operation of a service in exchange for the right to operate the works or service.
Secondly, the partnership contract, which is an administrative contract pursuant to which the public entity entrusts to a private partner the global mission of construction, transformation, renovation, dismantling or destruction of works, equipment or intangible assets required for a public service or the exercise of a mission of general interest and, as the case may be, the operation and maintenance of the public infrastructure.
The main difference is that under a concession agreement, the compensation of the concessionaire will mainly arise from payments made by users of the service (meaning that the private partner bears an operating risk, which is the main characteristic of a concession agreement under French law) whilst under a partnership contract, the public entity will pay a rent to the private partner in exchange of the performance of the mission. In particular, under a partnership contract, the public entity pays to the private partner an investment rent in exchange for the completion of the investments.
The legal framework for partnership contracts requires the public entity to carry out a prior assessment and a study of budgetary sustainability before using a partnership contract. For this reason, most of the public-private partnership transactions are now structured in the form of a concession agreement.
Under French law, there is no restriction on the project documents being governed by a law other than the French law. The choice of the law applicable to the contract is governed by a principle of freedom for the parties. Gradually accepted and then clarified by French case law, this principle was enshrined in Rome I Regulation but remains subject to mandatory provisions and policy rules under French law.
Furthermore, under French law there is no restriction on the parties to the project documents (assuming that these contracts are entered into in the course of their professional activity) to submit the settlement of disputes arising from the performance of the contract to the courts of a country other than France to international arbitration.
Under French Law, foreign investment control regulation applies when the following three conditions are met (unless specific exceptions apply): (i) the carrying out of an investment transaction (ii) by a foreign investor, (iii) in a sensitive activity. Any investment that falls within the scope of the French foreign investment regulation is subject to the prior authorisation of the French Ministry of Economy.
For instance, activities considered as sensitive will be those likely to affect the interests of national defence, involved in the exercise of public authority or likely to affect public order and public safety, when they relate to infrastructure, goods or services essential to guarantee the integrity, security or continuity of water supply.
One of the main features of project finance is that the project is carried out by a dedicated vehicle which raises external financing to (partially) fund the design, construction and operation of the project without any recourse against the sponsors (above their equity commitments), the lenders being repaid by the income generated by the project.
The first issue to be considered by the sponsors is the choice of the legal form of the project company. The sponsors can choose to enter into a joint venture or consortium (unincorporated association), a partnership, a limited partnership, or an incorporated entity such as a simplified joint stock company (société par actions simplifiée), that is the most commonly used given the limited liability (up to the equity contributions) of the shareholders and the flexibility of operation and management of this type of company under French law. The second issue to be considered by sponsors relates to their respective roles in the project (including in the funding), in the management bodies of the project company and the conditions pursuant to which a sponsor will be able to transfer its participation in the share capital of the project company.
Due to the absence of recourse against the shareholders, the main issue to be considered by the lenders when structuring the deal is the risk allocation between the project parties (EPC contractor, operator, offtaker, etc) and the residual risks remaining at the project company’s level. The structuring of the security package is also key for the bankability of the project, enabling lenders, in a worst case scenario, to have access to the project assets (mortgage, pledge over movable assets, pledge over receivables, etc) and to the shares of the project company, it being specified that the structuring of the security package will depend on the level on which the external financing is raised. Typically, the structuring of the security package will differ depending on whether the external financing is raised directly by the assetco or by a holdco (the incorporation of a holdco to raise the external financing could be the case for instance in case of financing a portfolio of projects).
From the outset and irrespective of the nature of the external financing raised by the project company, the debt providers usually require the sponsor a minimum level of equity, to a greater or lesser extent depending on the nature of the project and the risks identified.
In addition to equity financing, the main financing source used in France for project financing remains bank financing within the form of loans. Bonds are not commonly used, as such financing is more complex to implement where the funds are made available as the work progresses and as the rules governing the bondholders’ representation and voting rights are less flexible (even if Ordinance No 2017-970 of 10 May 2017 has simplified the rules for bonds issuances reserved for qualified investors). Bond financing mainly concerns projects where sponsors have to broaden the pool of debt providers to entities which, as a result of the banking monopoly, are not allowed to make available funds in the form of loan. In this respect, it should however be noted that the rules governing the banking monopoly have recently been relaxed (Ordinance No 2017-1432 of 4 October 2017, modernising the legal framework for asset management and debt financing), allowing certain investment funds to grant financing in the form of loans (direct lending). Depending on the nature of the project, the sponsors may also obtain financing from institutional lenders such as for instance, EIB, Bpifrance, CDC or AFD or obtain subsidies from public institutions or territorial entities.
Bridge financings made available by certain investment funds are used more often, allowing sponsors to raise external financing during the project development phase (such bridge financing being refinanced by a traditional long-term bank financing raised once the project has reached the ready-to-build phase). This is particularly the case for renewable energy projects, for which the availability of bank financing is usually contingent upon delivery of the required administrative authorisations and securing land rights, thus preventing the project company from raising external financing during the development phase of the project.
This is not an area covered by the authors.
French environmental law aims to prevent industrial risks, manage waste, water and polluted soil, prevent adverse environmental impacts and protect biodiversity. Depending on the nature of the project, prior authorisation must be delivered by the state services to build and/or operate the project in accordance with the environmental laws. These projects mainly concern installations, activities, works or projects likely to present inconveniences or dangers for health and the various interests protected by the French Environmental Code.
In order to simplify administrative procedures and improve visibility for project developers, a single environmental authorisation was created by Ordinance No 2017-80 of 26 January 2017, bringing together the various procedures and decisions required for installations classified for environmental protection (ICPE) and installations, works, and activities subject to water law (IOTA), subject to authorisation.
Installations subject to environmental authorisation are also subject to inspection and monitoring by the state services in charge of environmental protection (Direction régionale de l’environnement, de l’aménagement et du logement - DREAL). Depending on breaches of environmental law that may have been observed, the DREAL may impose additional requirements, apply financial penalties or even withdraw the environmental authorisation.
French labour law contains several rules designed to protect the health and safety of employees. On construction sites in particular, inspections are carried out by the state services of the Ministry of Labour to ensure that construction companies comply with labour law and health and safety regulations applicable to their employees and to their subcontractors.
The French debt market over the past 12 months has been relatively quiet for several reasons, the obvious ones being the interest rate hikes, the high inflation that has heavily impacted certain industries, a low M&A activity and finally the fact that banks have been tightening loan standards, even before the SVB failure – the largest bank failure since the 2008 financial crisis – which affected debt availability. Although inflation is set to become less of a concern, markets are now anticipating a risk of recession, which is becoming more likely, considering an environment where central banks are done, or nearly done with tightening, and close to peaking, according to a shared vision of relevant markets.
In this particular macroeconomic context, refinancing has become an issue compounded by the so-called wall of refinancing. Market analysis shows that a substantial amount of outstanding loans matures in the next three years, whilst debt availability is lower than the volume of maturing loans. In other words, loan maturities are facing a funding gap. This situation has led to two main trends in the French debt market which should continue in the coming year. On one hand, a different distribution of loans between various types of lenders to address the funding gap and, where refinancing reaches a dead end, a large number of “amend and extend” (A&E) transactions on the other hand.
Landscape of Active Lenders
Overview of the main categories of lenders
Lenders can schematically be divided into four categories, (i) commercial banks, (ii) investment banks, (iii) insurance companies and (iv) private debt funds. Each category is subject to its own regulatory framework, a specific economic approach and consequently different objectives. An analysis highlights that lender appetite is dependent on capital source.
On the one hand, commercial banks and investment banks were both impacted by higher rates and higher cost of funds as well as tighter lending conditions due to liquidity and credit risk considerations (including forbearance/backstop considerations – see below the discussion on key A&E parameters and considerations), thus affecting debt availability on a larger scale. Consequently, banks tend to be more selective for new situations and naturally focus on managing their book, hence creating opportunities for proactive management. This is particularly true in jurisdictions like France where banks entertain longstanding relationships with their clients compared to in the UK or US.
On the other hand, if insurance companies still have plenty of capital to deploy, since they aim towards a long-term liability matching, they take longer tenors and select lower risk investment, thus reducing the scope of their potential investments.
Last, private debt funds are seeking higher returns to match their investors’ expectations and therefore can bear higher risk. In the former low-rate environment, private debt funds were ipso facto less competitive whereas the current environment offers growth opportunities to players more willing to underwrite inherent risk and able to provide liquidity.
Alternative lenders expected to demonstrate growth
While traditional lenders and borrowers are trying to navigate those severe market challenges, higher debt cost and less competition represent opportunities for private funds and alternative funds that go beyond mere mispriced opportunities, thus allowing them to enter the “senior” lending space to fund the liquidity gap without compromising their market-industry IRR requirement or their search for quality risk.
As a consequence, during the last 18 months, alternative lenders capable of underwriting big tickets have been able to provide, in France, senior secured financings that would previously have been typically underwritten by banks and then syndicated or sub-tranched in favour of private debt funds seeking higher returns. Following this trend, an increasing number of private equity funds are turning to private credit and setting up dedicated funds as a way to ensure returns in an environment where buyout transactions have become rarer and less profitable overall.
However, alternative lenders do not usually sacrifice due diligence in favour of higher returns. To the contrary, they appreciate their risk and inherent opportunities further to comprehensive due diligence including, as the case may be, enforcement scenarios, before implementing any given financing.
Key A&E Parameters and Considerations
As a consequence of current market conditions, A&E deals have represented a large part of the lending space as a pragmatic and temporary response to the wave of refinancings hitting a debt market still shaken by fierce headwinds. This continues, to some extent, the trend started during the pandemic when lenders adopted a wait-and-see approach by extending financings and/or suspending covenants. The result of these decisions has been to kick the can down the road and, with renewed uncertainty, a fallout seems inevitable. Pushing out the loan and bond maturity wall should continue to drive activity in the debt market for the next 12 to 18 months, regardless of the type of financing, save for certain industries or asset classes (such as data centres, biotech or telecommunications).
For the first time in more than a decade, sponsors face an uneven playing field: a refinancing offer dried up by the combination of the pause of European leverage finance and high-yield markets since 2022 and banks’ review of lending strategic sectors, with less advantageous financial conditions (eg, financial costs and protection covenants), compared to those of their existing financing, which, for some, are already difficult to sustain.
On the lenders’ side, volatile debt markets and more guarded sector strategy have influenced and will continue to influence borrowing and lending decisions, including changing levels of acceptable credit risk to the existing terms and documentation and coupon/fees for extending. The situation is not easier for CLO investors, as their weighted average tests and/or investment window may, in certain cases, restrict them from rolling debt.
For deals that do not fly off the shelves (eg, existing material deviation of business plan, volatile asset valuations and fears of market corrections), options are really tight and come down to rescue or distressed financings with more onerous bridge loans or, ultimately, a workout situation. This causes asset fire sales to meet redemptions in a market that is itself subject to severe turbulence or adjustments – eg, certain asset classes in the real estate market where some investors plan to find quick solutions to the slow-moving real estate market and troubled situations (eg, increase of vacancy) which makes it difficult to agree an A&E, in particular if they are not willing to put in more equity, leading to foreclosure if investors do not decide to hand back the keys to their creditors.
A year in tumultuous refinancing conditions allows us to highlight key factors of A&E deals so that, as far as possible, they can be a bridge to exit/refinancing and not an endless tunnel!
Anticipation needed to secure the appetite of existing lenders
With tangible options for refinancing effectively limited, borrowers must roll up their sleeves and anticipate a long and complex path to reach an A&E.
Too often, A&E has been chosen at the very end of an initially preferred third-party refinancing process, leaving A&E as the last-chance option, with an overly constrained timeframe. It is advisable to give existing lenders sufficient time to consider an A&E request and, in such a configuration, to identify in the lenders’ club those who would be reluctant and then have the opportunity to replace them with any new lender(s) who may have shown an appetite in the context of a third-party senior refinancing or a junior option, it being recalled that a decision to consent to an A&E is generally taken at the unanimity of the lenders. Similarly, if the proposed A&E imposes recourse to junior debt (mezzanine and/or PIK financing) or preferred equity options to meet a senior deleveraging demand (ie, required paydown at A&E opening), such a structuring and its negotiation are difficult to implement in the last months before maturity, in particular when intercreditor principals and security packages shall be agreed (shared and/or lower ranking collateral).
In any case, sponsors must demonstrate viable business plans to get lenders’ attention and, in particular, their ability to structure the A&E with a viable exit; as regards bridge to disposal option, ability to run a successful disposal process and then to repay at maturity or to significantly deleverage the extended debt during the bridge is parsed by the lenders, as the third-party refinancing option may remain, as of today, uncertain with the impact of macro-economic headwinds on debt markets and anticipated resets for certain sectors.
As regards real estate financing, a defining factor will be the quality of the underlying assets. Lenders are more focused on financing assets they believe will meet occupiers’ changing needs, as well as more stringent sustainability standards.
Key drivers underpinning A&E transactions
In a nutshell, A&E deals offer a mix of higher margin, improved covenant packages, equity injections undertakings and debt paydowns in return for extending maturity runways.
In most cases, sponsors will face a paydown demand forcing them to put additional equity into the transaction; a compromise may consist of negotiating funding of the paydown in several instalments during the life of the bridge provided that no adverse event has occurred (eg, breach of “soft” financial covenant, material deviation of the business plan). Failing to reach an agreement on paydown will undermine any chance of consensual A&E solution and, in some cases, may lead the borrower to seek the assistance of a court-agent in the framework of a pre-insolvency proceeding requested from the president of the commercial court (mandat ad hoc/procédure de conciliation).
Monitoring of the business plan
Beyond demonstrating a viable business plan to get an A&E, a monitoring of the “opening” business plan will often be required by the lenders to anticipate any situation of material deviation, shortfall or cost overruns; in certain circumstances, lenders and borrowers will have to agree the terms of a “material deviation” and related baskets/caps, the occurrence of which may require capital commitments from sponsors (secured under personal guarantee) and/or specific deleveraging.
Sacralisation of cash
If lenders are giving relief on financial covenants, they are being more stringent over cash traps and other credit enhancements to provide additional credit support; lenders routinely require a full cash trap subject to specific security as cash collateral or a lenders’ controlled account and, as the case may be, a cash-sweep mechanism on agreed milestones or a part thereof, as a new amortisation profile.
Pause of M&A transactions and other capex
In the most complex situations, in the framework of the A&E agreement, lenders may require the restriction or even total suspension of external growth transactions and all non-essential capex to be undertaken by the borrower during the term of the bridge, and then allocate cash for debt service only. This restrictive approach raises a number of questions for groups that have committed, or are due to commit, to decarbonising their assets and complying with the environmental transition, and therefore to financing the corresponding costs.
Hedging strategy to secure the financial costs during the bridge
Lenders require conservative interest risk coverage (tenor matching the maturity of the bridge and notional corresponding to the outstanding loan amount) whilst sponsors are reluctant to pay high premiums to finance risk-free hedging on a short-term bridge and not necessarily in a position to subscribe hedging including a counterparty risk, either because none of their assets is free from collateral or because their existing secured creditors are not willing to enter into an intercreditor agreement with new hedge counterparties.
Key practical tools available for lenders for administering A&E agreements
A&E agreements usually provide for enhanced and assisted monitoring, including, in particular, a more frequent update of the business plan/operating budget and recourse to a third-party agent – ie, project monitor to assist the lenders in order to parse the satisfaction of each milestone, such as review of the business plan assumptions and forecasts (cash balance, potential cost-overruns, impact on supply chain, etc), valuations of the main assets, and review of the sale process and, if any, the relevant offers (letter of intent, memorandum of understanding, etc). A&E agreements also tend to anticipate the exit process (M&A exit, bridge to disposal or new refi process) and therefore include all or part of the following:
A&E deals continue to impact terms and documentation
With covenant protections and/or additional credit support demands from lenders, sponsors are keen to be more flexible and accept tighter documents to get A&E, and as a consequence, cov-lite structures tend to dwindle. As regards a collateral package, and beyond obtaining a confirmation from security providers/guarantors that their original transaction security/guarantee obligations extend to the amended debt (as inserted into the amendment and restated agreement or issued by bilateral agreements), lower ranking security over existing collateral may be required when financial conditions of the existing debt are materially increased (considering that the existing secured obligations do not include the effects of these amendments) or personal guarantees may be required in order to secure payment of financial costs and/or void costs during the bridge term.
Impact of forbearance classification for non-performing loans and further prudential backstop – a crucial blip on the lenders’ radar
The so-called forbearance classification may result from an amendment to a facility agreement consented when the borrower faces financial difficulties (covenant holiday, postponement of instalments, payment default, etc); as from this amendment, any further difficulty (new default situation or restructuring) triggers increasing capital requirement coverage for the lender (up to 100% of its commitment) from a prudential perspective for that facility which turns as non-performing. The lender’s analysis of the A&E request can also be challenging when trying to estimate the impact of the prudential backstop on capital, considering the risk profile of the borrower.