Structured Finance & Derivatives 2019 Comparisons

Last Updated February 07, 2019

Law and Practice

Authors



Orrick Rambaud Martel has a market-leading practice in the securitisation and structured products areas, working for virtually all the leading underwriters, including Citigroup, Goldman Sachs, JPMorgan Chase and Morgan Stanley. The firm has advised clients on over 570 financings worldwide, with an aggregate value of nearly USD300 billion in the past three years, and is well known for developing pioneering structures that have helped the market to adapt to changing regulatory environments. One example of its innovation was in assisting clients in establishing RMBS platforms in the aftermath of the financial crisis that incorporate enhanced disclosure, dispute resolution procedures and investor rights. The structured finance team are bolstered by cross-practice collaboration with Orrick’s banking and finance, tax and restructuring teams, many of whom routinely work on securitisations. The firm has partners and senior lawyers located in four jurisdictions in the USA (New York, Los Angeles, San Francisco and Washington DC) and collaborate with highly rated partners focused on securitisation in the UK, France and Italy. Key practice areas are CLOs, derivatives, MBSs, credit and charge card securitisation, automobile and aircraft securitisation, esoteric securitisation, online and marketplace (consumer) lending, and tender option bonds. Orrick would like to credit its following partners for their contribution to the article: Janet Barbiere, Butch Cullen, Marty Howard, Nik Mathews, Thomas Mitchell and Al Sawyers.

The main development in the French structured finance market is a major reform implemented in France by the Ordinance n°2017-1432 dated 4 October 2017 which entered into force on 3 January 2018 (the 2018 Reform) (which still needs to be completed by a decree to be finalized this year), whereby certain structured finance vehicles and notably the newly introduced financing vehicles (organismes de financement) will be allowed to grant loans.

In addition, the 2018 Reform also includes some long-awaited provisions aiming at enlarging the legal tools available to French banks for refinancing their loan exposures. Refinancing techniques were limited until now by the French banking monopoly, as the purchasing of outstanding loans is, subject to limited exceptions, viewed as a regulated banking activity in France. The reform will extend these exceptions considerably and, in particular, will allow certain types of non-bank foreign entities to freely acquire such loans on the secondary market

The 2018 Reform will therefore provide new investment opportunities for non-bank entities, such as insurance companies, investment funds and asset managers (which, until now, could not intervene directly in the loan market due to the French banking monopoly), and may thus have a deep impact on the French structured finance and loan industry.

In terms of transaction structures, the double Luxco structures which had been used in acquisition finance and leveraged finance transactions since 2008, and which were aimed at circumventing the constraints linked to French insolvency proceedings, are now only used exceptionally and mostly in a restructuring context.

In terms of finance instruments: acquisition finance and leveraged finance transactions generally combine loans granted by banks and bonds subscribed by debt funds (as due to the French banking monopoly, such funds could grant loans). Following the 2018 Reform and the newly introduced exemption to such monopoly for certain type of structured finance vehicles, this may evolve.

In terms of finance parties, the acquisition finance and leveraged finance transactions have shown, after a significant increase in the role played by debt funds to the detriment of commercial banks, a very recent increase in bank lending and a corresponding decrease in high-yield bond issues.

There is no specific law or regulation governing acquisition finance/leveraged finance transactions in France.

In the last 12 months, transactions have been implemented in a more and more borrower-friendly environment in terms of documentation, with borrowers and sponsors being able to negotiate the documentation very aggressively: stakeholders have seen a growing amount of requests for cov-lite documentation, favouring incurrence covenants over maintenance covenants (ie, loan agreements no longer contain the usual protective financial covenants for the benefit of the lenders).

In acquisition finance/leveraged finance transactions, security is usually taken over: 

  • shares;
  • receivables – intragroup receivables, trade receivables, bank account balance receivables;
  • real estate property;
  • IP rights;
  • movable property; and
  • guarantees.

The concept of a "floating charge" does not exist under French law and separate agreements must usually be entered into in relation to each type of asset, with the exception of pledges over ongoing business (nantissements de fonds de commerce) which encompass several types of assets, such as lease rights, commercial name and logo, customer relationship.

Shares

Depending on the type of the company, the form of the security interest will vary: if the securities are issued by a société anonyme or société par actions simplifiée, the security will take the form of a securities account pledge (nantissement de compte-titres); if the shares are issued by a société à responsabilité limitée, a société en nom collectif or a société civile, the security will take the form of a pledge over shares (nantissement de parts sociales).

Whatever the type of company, a security trust (fiducie-sûreté) could also be granted over its shares. It involves a transfer of ownership of the shares to a security trustee (fiduciaire) which maintains them separate from its own estate (dans son patrimoine d’affectation) and acts for the benefit of the secured creditors. To ensure enforceability during insolvency proceedings, the secured creditors usually opt for a form of possessory security trust (fiducie-sûreté avec dépossession) whereby both the shares and the related voting and dividend rights are transferred to the security trustee.

Receivables

Security may be granted over receivables by way of:

  • a pledge over receivables, which can be granted over any kind of receivables and to the benefit of any kind of secured creditor;
  • a Dailly assignment of professional receivables by way of security (cession à titre de garantie), which can be granted over receivables arising in the context of the professional activity of the grantor and only to the benefit of:
    1. French credit institutions (établissements de credit) and French financing companies (sociétés de financement) licensed as such by the Autorité de Contrôle Prudentiel et de Résolution (ACPR);
    2. foreign credit institutions licensed to carry out banking activities in France under the European passport (as set out in Directive 2000/12/EC on the taking up and pursuit of the business of credit institutions); and
    3. since the 2018 Reform, the following French alternative investment entities: specialised professional investment funds (fonds professionnels spécialisés – FPS), professional private equity investment funds (fonds professionnels de capital investissement – FPCI), French limited partnerships (sociétés de libre partenariat – SLP) and financing vehicles (organismes de financement – OF);
  • a pledge over the credit balance of any bank account, which can be granted to the benefit of any kind of secured creditor over the credit balance receivable held by the grantor vis-à-vis the bank acting as account holder of the relevant bank account;
  • a delegation, whereby a debtor of a delegated obligor (délégant), acting as délégué, accepts to pay directly a third party (délégataire); this type of security is often used by a secured creditor to ensure that insurance receivables or vendor warranties are paid directly to them; and
  • a security trust (fiducie-sûreté): whereby the receivables are transferred to a security trustee, who maintains them separately from its own estate.

Real estate property

Security over real estate property may take the form of: (i) a mortgage (hypothèque), (ii) a lenders’ lien (privilège de prêteur de deniers), (iii) a real estate pledge (gage immobilier) or (iv) a security trust (fiducie-sûreté).

The two most common forms of security over real estate asset are the mortgage and the lenders’ lien. Lenders’ lien is generally a preferred option when available as it is a much cheaper security: unlike the mortgage, it is not subject to the land registration tax (taxe de publicité foncière) of 0.715% of the loan amount. However, it can only be granted to secure the obligations of a borrower vis-à-visthe bank providing it with a credit facility to finance the acquisition of the relevant real estate property which is included in the scope of the security interest.

A mortgage can also be combined with a lenders’ lien. In the event that a loan is granted to finance the acquisition of a property and refurbishment works, a lender's lien will be granted for the amount of the loan corresponding to the acquisition price of the property and a mortgage will be granted for the remaining part of the loan financing the refurbishment works.

A real estate pledge is less commonly used because it involves a dispossession by the pledgor of the pledged asset and because the creditor shall assume the maintenance and upkeep of said asset. A leasing agreement can be entered into between the pledgor and the secured creditor in order for the pledgor to retake possession of the pledged asset subject to the payment of rent.

A security trust is also hardly used in France in relation to real estate assets because of the transfer of ownership of the real estate asset to a security trustee (fiduciaire) that it involves. The security trustee maintains the asset separately from its own estate (dans son patrimoine d’affectation) and acts for the benefit of the secured creditors. This security is also very expensive due to the annual fees payable to the security trustee in addition to the registration fees. However, it is very efficient if the settlor were to face insolvency proceedings, subject to the possession of the real estate asset not being re-transferred by a subsequent agreement to the settlor.

IP rights

Security granted over IP rights (trade marks, patents or designs) usually takes the form of a specific pledge using the same regime as a pledge over intangible assets, subject to certain specificities linked to the nature of the IP rights provided under the Intellectual Property Code. 

Security can also be granted through a pledge over ongoing business (nantissement de fonds de commerce), but parties tend to favour a specific pledge in order to be able to benefit from a private foreclosure (which is not possible under a pledge over ongoing business).

Movable property

Under French law, tangible assets are usually pledged under a general non-possessory pledge (gage de meubles corporels sans dépossession). However, creditors may also opt for a general possessory pledge (gage de meubles corporels avec dépossession). Machinery and equipment may also be included within the scope of a pledge over ongoing business (nantissement de fonds de commerce), or subject to complying with certain conditions, within the scope of a special pledge over machinery and equipment (nantissement de l'outillage et du matériel d'équipement). 

A special pledge over machinery and equipment can only be granted in favour of the vendor of the machinery and equipment and the lender having financed the acquisition of such machinery and equipment.

Inventory may also be pledged under a special type of pledge governed by the provisions of the French Commercial Code. Only a borrower (and not a guarantor or a third-party security provider) can act as a grantor for this kind of pledge; this pledge can only be granted in favour of a French-licensed credit institution (établissement de crédit), a French-licensed financing company (société de financement) or a foreign credit institution licensed to carry out banking activities in France under the European passport (as set out in Directive 2000/12/EC).

Guarantees

When the financing involves a group of companies, guarantees are often granted in the form of either: 

  • first-demand guarantees (garanties à première demande) – these are independent from the underlying debt, and can be enforced on demand by the beneficiary of such guarantee without being impacted by the events which may affect the underlying debt; or 
  • cautionnements are related to the underlying debt, and may be either simple (where the beneficiary must have failed to enforce its claim against the debtor before being able to enforce the guarantee and, where several entities act as guarantors, one of the guarantees securing the underlying debt can only be enforced on a pro rata basis), or joint and several (cautionnement solidaire) (where the beneficiary can enforce the guarantee without having tried and failed to enforce its claim against the debtor and, where several entities act as guarantors, the beneficiary can enforce anyone of the guarantees securing the underlying debt for the full amount secured under the guarantee). 

Guarantees can either be downstream, upstream or cross-stream guarantees, subject to complying with the constraints described in 2.4 Restrictions and Limitations, below.

Specificities relating to certain typles of assets used as security

Future assets

A pledge over future assets is permitted under French law provided that such future assets can be determined.

In particular, in relation to a pledge over future receivables, the French Civil Code provides that future receivables may be pledged as long as the relevant pledge agreement enables their individualisation or contains elements enabling such individualisation (like the debtor, the place of payment, the amount of the receivables or their assessment and, as the case may be, their maturity).

Ongoing business

A pledge over an ongoing business (fonds de commerce) may comprise a large scope of pledged assets, such as, notably:

  • intangible elements attached to the ongoing business like the trade name, the sign, the clientele, the goodwill, the licenses and the know-how attached thereto;
  • fixed, movable and rolling equipment and tooling;
  • the right to the lease of premises; and
  • insurance, expropriation and eviction allowances.

However, this security interest is not used very often in practice as it cannot be enforced by way of private foreclosure; additionally, the value of the ongoing business usually decreases significantly during the enforcement procedure because of the length of such procedure and the bad business performances which are usually affecting the grantor during an enforcement context.

Vehicles

Vehicles can be pledged in France under several legal regimes. 

Decree No 53-968, dated 30 September 1953, relating to the credit sale of motor vehicles (vente à credit des véhicules automobiles) is limited to credit-vendors (vendeurs à credit) or money-lenders (prêteurs de deniers) in connection with the purchase of a vehicle being subject to the pledge. 

Moreover, Ordinance No 2006-346, dated 23 March 2006, ("the 2006 Ordinance") introduced two new regimes into the French Civil Code:

  • the general regime regarding pledges of tangible movable assets, which can be possessory pledges or non-possessory pledges; and
  • the special regime related to the pledge over terrestrial motor vehicles and trailers subject to registration (véhicules terrestre à moteurs et remorques immatriculées). 

However, the special pledge regime is not yet in force since it was supposed to enter into effect on a date to be set by a decree (and which could not be later than 1 July 2008) and the said decree has not yet been issued to date. Therefore, in the absence of such decree, only the specific 1953 regime (which is available to some specific creditors only) and the general regime regarding pledges over tangible movable assets are used in practice in France in order to take security over vehicles.

Procedures for granting security: approval, perfection, registration and filing requirements

Shares

Securities account pledge: a securities account pledge is granted by the signing by the grantor of a statement of pledge (déclaration de nantissement de compte de titres financiers) which shall comprise certain mandatory particulars. In addition to this statement of pledge it is standard for the secured creditor to request an acknowledgement of pledge from the securities account holder and cash account holder. Also, since the shares of French companies are dematerialised, a securities account pledge must be registered in the securities transfer register (registre des mouvements de titres) and in the shareholders' accounts (comptes d'actionnaire) of the company which shares are pledged.

Note that, in relation to a security trust covering shares of a société anonyme or a société par actions simplifiée, the transfer of ownership of the shares to the security trustee must also be registered in the securities transfer register (registre des mouvements de titres) and in the shareholders' accounts (comptes d'actionnaire) of the company whose shares are being transferred.

Share pledge: in order for a share pledge to be enforceable against third parties, it shall be registered with the commercial court registry. Additional perfection formalities are required for private companies (sociétés civiles): the pledge shall be notified by bailiff (signifié par huissier) to the company which shares are pledged or accepted by such company in a notarised deed.

Receivables

A pledge over receivables (including a pledge over a credit balance receivable) is enforceable (opposable) against the debtor, on the day on which such debtor is notified of the pledge or on the day of its execution if the debtor is a party to the pledge agreement. It is enforceable against third parties, with no further formality, on the day of its execution. 

As regards a Dailly assignment of receivables, it is binding on the borrower and secured creditor and enforceable against third parties, with no further formality, on the day written down by the secured creditor on the bordereau executed by the borrower (which assigns the receivables) upon receipt. Additionally, upon receipt of a notification from the secured creditor, the assigned debtor may be instructed to pay directly to the secured creditor the assigned receivables. However, this notification is not a requirement for the perfection of the Dailly law assignment.

IP rights

In order for a pledge over IP rights to be enforceable against third parties, it shall be registered with the relevant IP registry:

  • the Institut National de la Propriété Industrielle in France at a national level;
  • the European Union Intellectual Property Office for trademarks and designs and the Office Européen des Brevets for patents at a European level;
  • the World Intellectual Property Organization at an international level.

Real estate property

Agreements containing mortgages, lenders’ liens and real estate pledges must be executed before a notary public and registered with the competent Land Registry (Service de la publicité foncière). The registration is effective until one year after the maturity of the corresponding loan agreement.

Ongoing business

The agreement pursuant to which a pledge over ongoing business is granted shall be either notarised or registered with the tax administration. In addition, it shall be registered with the registrar of the relevant commercial court within 30 days of its execution.

Security trust

Whatever the type of assets transferred to the security trustee, in order for the security trust agreement to be valid, it shall be registered with the tax authorities within one month from its execution.

Enforcement of a security

In order for a French law governing security interest to be enforceable, it is necessary that at least part of the secured liabilities be due and payable. Accordingly, the occurrence of any event of default (other than a payment default) will not be sufficient, unless the secured loans have been accelerated following the occurrence of such event.

French law governing security interests may be enforced through judicial foreclosure, public auction or private foreclosure (pacte commissoire). Enforcement is most commonly implemented through private foreclosure as it is takes less time and it is more efficient. However, enforcement through private foreclosure is not permitted for a pledge over ongoing business.

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Corporate benefit

As a general principle, French companies (whatever their type) shall act according to their corporate benefit (intérêt social), including when granting a security interest or a guarantee.

In a context of a group of companies, it is generally admitted that security interests or guarantees granted by a group member to a third party lender to secure the obligations of its subsidiaries comply with the corporate benefit of such holding company. 

When granted to secure the obligations of another company of the group (other than a subsidiary), security interests and guarantees will not be considered as a misuse of corporate assets if the following three conditions are cumulatively met:

  • the company involved belong to the same group and share the same common genuine group strategy;
  • the granting of the security is designed to satisfy an economic, social or financial interest common to all of the members of the group;
  • there is some consideration (not necessarily monetary) involved for the grantor or guarantor, the transaction neither exceeds its financial capacity nor is such company treated unfairly (in terms of the financial burdens imposed on the group members) compared to other members of the group.

Whether or not the above requirements are met in a particular instance is a question of fact, in respect of which a commercial view has to be taken by the management, on the basis of the existing circumstances.

In practice, upstream and cross-stream security interests or guarantees granted by a company in order to secure the obligations of its holding or sister companies are generally limited to a secured amount equal to the amount on-lent to the grantor or guarantor out of the loan proceeds made available to its holding or sister company so as to justify a corporate benefit in this respect.

Financial assistance

Under French law, a stock company (ie, sociétés anonymes, sociétés par actions simplifiée and sociétés en commandite par actions) shall not advance funds, grant loans or give any type of security with a view to the subscription or purchase of its own shares by a third party. As a consequence, it is prohibited for a “target company” to finance the acquisition of its shares by another company (acting as purchaser), or to give security to a lender in order to secure a loan granted to the purchaser for the purpose of that acquisition.

Any infringement of this rule carries both civil and criminal sanctions.

Thin-capitalisation

Article 212 of the French Tax Code provides for a limitation of the deductibility of interest called thin-capitalisation limitation, which applies to interest payable by a French borrower to: related parties (parties liées), or third parties with respect to loans secured/guaranteed by related parties, provided that financings guaranteed exclusively by a pledge over the borrower's shares or the receivables towards the borrower, or the shares of the entity owning, directly or indirectly, the borrower, if both the borrower and such entity belong to the same French tax consolidated group, do not fall within the scope of these rules.

The deductibility of the interest paid to related parties is limited under the thin-capitalisation limitation if all of the three following thresholds are simultaneously exceeded: 

  • the debt-to-equity ratio exceeds 1.5x; 
  • the aggregate amount of interest paid by the borrower to related parties exceeds 25% of its profit before tax; and 
  • the amount of interest paid by the borrower to related parties exceeds the amount of interest received by the borrower from related parties. 

Where the three aforementioned ratios are exceeded, the portion of interest exceeding the highest of such ratios is not deductible for corporate income tax purposes (unless the amount of interest paid represents less than EUR150,000). The non-deductible portion of interest may, however, be carried forward with no limitation subject to certain conditions.

Pursuant to Article L650-1 of the French Commercial Code, when bankruptcy proceedings (safeguard, sauvegarde), bankruptcy administration (redressement judiciaire) or liquidation (liquidation judiciaire) proceedings) are open against a debtor, a creditor may be held liable towards such debtor if the credit granted by it to such debtor entailed a damage and the security interest securing such credit is disproportionate (disproportionné) compared to that credit. In such case, such security interest can be declared null and void or reduced by judgment.

Debt purchase transactions by financial sponsors may be authorised under the documentation for French transactions, usually along the lines of the English law Loan Market Association (LMA) model. They are usually limited by disenfranchisement provisions as also suggested in the English law LMA model (providing, notably, that the financial sponsor which has acquired debt shall not be taken into account when determining if the agreement of the majority lenders has been obtained and, unless the agent agrees otherwise, shall not receive the reports or documents prepared upon request, or instruction of, the agent or any lender(s)).

However, debt purchase transactions by the borrower fall under the French law concept of “confusion” pursuant to which the union of the qualities of creditor and debtor of an obligation in the same person creates a confusion which suspends the enforcement of said obligation, or if the confusion is definitive, extinguishes the obligation and all rights that are ancillary to such obligation, subject to any rights acquired by or against third parties.

Debt is actively traded in France on the secondary market. The customary documentation for recording secondary market trading is usually based on a receivables assignment but risk participations may be used when legal, contractual or tax constraints prevent the assignment of the receivables

Certain funds provisions are traditionally seen in acquisition finance documentation, to reduce the uncertainty in the implementation of the financing: lenders undertake not to refuse to participate in the financing and not to cancel their commitment, exercise any right of rescission or accelerate the loan subject to certain major representations and undertakings being complied with and certain major events of default not having occurred.

Major representations typically include: status, powers and authority, legal validity/binding obligations and non-conflict. Major undertakings depend on the transaction but may include mergers, disposals, negative pledge and financial indebtedness. Major events of default typically include non-payment, insolvency and creditors’ process, repudiation or rescission of a finance document, misrepresentation relating to a major representation and breach of any major covenant. Major representations, undertakings and events of default are limited to the purchaser (Bidco) and the holding of the purchaser (Holdco/Topco) but do not apply to the target.

Two of the significant financial restructurings in the last year are:

  • the USD2 billion restructuring of the oil service company CGG Group – under the deal, bondholders will swap nearly USD2 billion in debt for most of the equity in a reorganised CGG; this is one of the largest restructurings since Eurotunnel;
  • the second restructuring of the Vivarte Group, a group specialised in fashion, shoes and leather products, which notably enabled the shareholders and the 170 creditors to capitalise EUR800 million of the debt of the group.

Challenges from a legal perspective

In France, financial restructuring have to face a lot of legal challenges, among which we can mention the following:

  • because the deadline to close the restructuring is always extremely tight, lawyers (as lenders’ counsel or as debtors’ counsel) have to be reasonable and draft well-balanced financing documentation (even for the first drafts of documentation) to be able to close in time and not lose too much time trying to propose a pro-debtor documentation;
  • lenders and debtors have to agree on a well-balanced security package: while the lenders need more comfort than in a standard financing because of the greater risk they are taking, the debtors usually need more flexibility to be able to continue their business and to save it;
  • lender’s counsel have to find a balance again in the rights that they obtain for their client: while the lenders would like to benefit from as many rights as possible to get more comfort in case of compounded difficulty of the debtor, they want to avoid being considered as interfering in the management – and being de facto manager (dirigeant de fait) – because otherwise they would risk being liable in case of insolvency proceeding opened against the debtor.

Apart from the 2018 Reform mentioned above, there is no major pending reform in France that will have an impact on acquisition finance/leveraged finance transactions.

Laws and regulations

Securitisation was introduced into the French legal system 28 years ago with Law No 88-1201, dated 23 December 1988, (the Securitisation Law). The Securitisation Law created a specific form of securitisation vehicle called a fonds commun de créances (FCC), which is a collective debt investment fund or common pool of debts.

Since 1988, the Securitisation Law has been improved several times, including by:

  • authorising FCCs to issue various types of debt securities;
  • authorising FCCs to enter into credit derivatives; and
  • creating protected receivables collection accounts.

The Securitisation Law has been streamlined and modernised by (i) Governmental Ordinance of 13 June 2008 (the 2008 Ordinance), and (ii) Governmental Decree dated 17 July 2008 (the 2008 Decree). 

The 2008 Ordinance saw the introduction of the organismes de titrisation (OTs), comprising the fonds commun de titrisation (FCTs, replacing the late FCCs) and securitisation companies (sociétés de titrisationor, SDTs). 

With the above-mentioned 2018 Reform, a new category of vehicles, named organismes de financement (financing vehicles or OFs), has been introduced into French law; OFs encompass the existing OTs and the newly introduced organismes de financement spécialisé or OFSs.

These two types of vehicles share a common regime based on the existing features of the French securitisation vehicles regime, including comprehensive bankruptcy remoteness provisions and the possibility to opt for a tax-transparent fund structure or a corporate structure subject to corporate tax. They will also be allowed to:

  • directly grant and make available loans to corporate borrowers in France and abroad, without the intermediation of a credit institution and without being subject to regulatory capital requirements, and issue all types of guarantees;
  • enter into sub-participations;
  • own a number of different types of assets, including shares and equity-like instruments;
  • benefit from all kind of guarantees and security interest, including the so-called “Dailly” assignment (being the most commonly used and bankruptcy-proof security interest in the French lending market and which up to now could only be granted to the benefit of credit institutions).

This reform opens a large range of new possibilities for a variety of French and foreign actors, such as insurers, asset managers, investment funds, private equity funds, debt funds, special situations funds or direct lending platforms.

Assets frequently involved in securitisation transactions

The usual assets securitised through a French securitisation vehicles are:

  • mortgage loans;
  • corporate loans;
  • commercial or consumer loans;
  • hire purchase and leasing receivables;
  • trade receivables;
  • credit card receivables; and
  • debts of public entities.

French securitisation vehicles can also be used to:

  • securitise insurance risks; 
  • acquire exposure to insurance risks in compliance with Directive 2005/68/EC on reinsurance (Reinsurance Directive).

French securitisation vehicles can acquire receivables from any person.

Receivables can:

  • arise from an existing agreement (acte déjà intervenu) or a future agreement (acte à intervenir);
  • be governed by French law or any foreign law; and
  • be performing or non-performing.

Risk-retention requirements

EU risk retention rules provided by Article 405 of the Capital Requirements Regulation, Article 51 of the AIFM Regulation and Article 254 of the Solvency II Regulation apply to securitisation transactions in France. Pursuant to those risk retention rules, the originator, the sponsor or the original lender must undertake to retain, on an ongoing basis during the entire life of the securitisation transaction, a material net economic interest which, in any event, shall not be less than 5%.

Usually these requirements are complied with by the retention of the first loss tranche or by holding on balance sheet a random sample of exposures, by retaining at least 5% of each exposure or by subscribing to at least 5% of each class of notes issued under the transaction.

Legal transfer of receivables

The transfer of receivables to a French securitisation vehicle is governed by the provisions of Article L214–169 of the French Monetary and Financial Code. Pursuant to this article, the assignment of the receivables is performed either by way of a transfer deed (acte de cession de créances) complying with the mandatory provisions of Article D214-227 of the French Monetary and Financial Code and exchanged between the seller and the purchaser or by any other means of acquisition, assignment or transfer whether or not governed by French law.

When the assignment is performed through the remittance by the seller to the purchaser of a transfer deed complying with the mandatory provisions of Article D 214-227 of the French Monetary and Financial Code, such assignment becomes effective between the seller and the purchaser and enforceable against third parties (including the debtors) as from the date affixed on such transfer deed, irrespective of the date on which the receivables come into existence or the date on which the receivables are payable and without any further formalities, regardless of the law governing the receivables and the law of residence of the relevant debtors.

There are many advantages in using the transfer deed mentioned in Articles L214–169 and D214-227 of the French Monetary and Financial Code, including the fact that all related security interests in connection with the purchased receivables are automatically transferred to the French securitisation vehicle without any further formalities.

Notification

When the assignment of the receivables is performed through the remittance by the seller to the purchaser of a transfer deed complying with the mandatory provisions of Article D214-227 of the French Monetary and Financial Code, the underlying debtors do not need to be notified at the time of the assignment (provided that until they are so notified, they may validly discharge their debt in the hands of the seller, and continue to raise – vis-à-vis the securitisation vehicle – those defences that arise from its relationship with the seller).

Consumer protection

Under French law, there is no specific requirements or obstacles in relation to the sale and transfer of receivables that are subject to applicable consumer protection legislation. However, consumer protection law, such as specific enforcement provisions, will continue to apply.

Relevant data protection legislation

French provisions on data protection seek to protect the rights of individuals, including consumer debtors, and to prevent any communication abuse of personal data. Under Loi Informatique et Liberté, dated 6 January 1978 (as amended), the application of such regulation is placed under the control of the Commission Nationale Informatique et Liberté (CNIL). As such, the CNIL is responsible for ensuring that personal data is adequately stored and treated.

In addition, where the originator of the receivables is a credit institution, the provisions of the French Monetary and Financial Code relating to banking secrecy apply. These rules would generally prohibit banks from transferring any information to third parties without the prior consent of the underlying obligor, although the French Monetary and Financial Code provides for an exception to such prohibition in relation to confidential information to be provided in the context of an assignment of receivables.

These provisions have to be taken into consideration when setting up a securitisation transaction. In practice, there have been a number of solutions implemented in order to accommodate the application of the relevant regulation within the context of securitisation transactions, such as transferring only partial information or codified information.

Finally, Regulation (EU) 2016/679 of the European Parliament and of the Council of 27 April 2016 on the protection of natural persons with regard to the processing of personal data and on the free movement of such data entered into force in France on 25 May 2018 and this will lead to current practices being reconsidered.

Deferred purchase price, etc

Deferred purchase price, discounted purchase price, issuance of subordinated securities or cash reserve are commonly used as part of transactions involving French securitisation vehicles, in particular trade receivables securitisation transactions.

"True sale"

The assignment of receivables to a French securitisation vehicle is characterised as a “true sale” under French law.

French securitisation transactions do not involve a trust or SPV other than an FCT or an SDT.

When the French securitisation vehicle takes the form of an SDT (ie, a French securitisation company), and is incorporated as a société anonyme, the French Monetary and Financial Code provide that the share capital of the SDT shall amount to, at least, EUR37,000.

Capitalisation requirements are irrelevant for French securitisation vehicles which are co-owned without legal personality. Nevertheless, units issued by an FCT shall have a nominal value of at least EUR150 at the time of their issuance.

French securitisation vehicles which take the form of an SDT shall be incorporated as a société anonyme or a société par actions simplifiées.

French securitisation vehicles can be made of several compartments, the assets and liabilities of which are clearly segregated. French securitisation regulation gives the parties flexibility to organise their contractual relationships. As a result, vehicles may be replenished and issue securities after their setting-up if they are allowed to do so by the contractual documentation applicable to them.

French law does not provide for the consolidation of the assets of the French securitisation vehicles with those of the originator.

The provisions of the French Commercial Code relating to insolvency proceedings are not applicable to French securitisation vehicles. Therefore, French securitisation vehicles are bankruptcy remote under French law.

The French Monetary and Financial Code expressly provides that the effects of an assignment of receivables to the benefit of a French securitisation vehicle are maintained even in case of cessation of payments of the seller at the time of the assignment, or of the subsequent bankruptcy of the seller.

Major reforms that are being implemented and have or may have an impact on securitisation are CRD IV, Basel III, EMIR, CRA3 and STS Regulation.

In addition, to date, it is as yet unclear what impact the UK's exit from the EU (Brexit) will have on the ability of French originators, sponsors and investors to participate in UK securitisations and vice versa.

Law and regulation governing transfer/sale of assets in connection with a factoring transaction

Factoring has been defined by a ministerial order, dated 29 November 1973, relating to economic and financial terminology as a transaction or financial management technique by which a factoring firm manages the client accounts of certain companies by acquiring their client receivables, collecting said receivables for its own account and bearing any loss due to insolvent debtors. 

There is no specific French law governing the transfer of receivables in connection with a factoring transaction. Essentially, it is the case law that has clarified this type of transaction and that has regulated the practice in order to protect the parties to a factoring transaction. 

Traditionally, the transfer of receivables in a factoring transaction is carried out through a subrogation mechanism (now governed by the provisions of Articles 1346 et seqof the French Civil Code) pursuant to which the factor is subrogated to the rights of its client (referred to as the adhérent). Case law has always recognised the validity of this mechanism as the legal basis for factoring transactions. 

The legislator, by introducing the Dailly transfer of receivables, tried to provide a legal framework for factoring. However, the practice has not fundamentally changed since then and remains focused on the transfer by subrogation, even if some case law related to the use of the Dailly transfer of receivables in factoring transactions has appeared.

Furthermore, since when acquiring a receivable from its client, the factor forthwith provides funds to its client (even though the receivable is not due and payable), the factor is considered by the French courts as performing a credit transaction (opération de crédit) within the meaning of Article L313-1 of the French Monetary and Financial Code and is subject to the constraints of the French banking monopoly. Accordingly, factoring companies shall be licensed as credit institutions and the obligation to mention an effective global rate in the factoring framework agreement shall apply. In this respect, it is worth noting that the effective global rate shall only take into account the fee paid to the factor to remunerate the advance made by it to its client and not the fee paid to remunerate the other services provided by the factor (eg, collecting the receivables).

Main features of factoring transactions

All the debts of the same debtor must be handed over to the factor. The factor has a right of approval of each debtor of its client and bears the risk of non-recovery only for pre-approved receivables. The factoring agreement is generally an open-term contract. The debtor may oppose to the factor any inherent exception to the debt that he would be entitled to oppose to his creditor. For instance, the debtor may oppose to the factor the exception for non-performance.

Various types of factoring transactions

Factoring firms offer on-demand services to meet the needs of companies. Classical factoring – also known as "full factoring" – consists in offering the client a financing facility, a credit insurance and a debt recovery service.

In most cases, the factor bears the risk of non-payment of the debts at maturity – ie, in the event where the debtor is insolvent, the factor has no recourse vis-à-visits client (the adhérent) (save in case of non-existent receivables): the factoring transaction is a "non-recourse factoring". However, this is not compulsory – in a "factoring with recourse", the factor manages and finances the receivables but has a recourse against the client in case of non-recovery of the assigned receivables. In other words, the factor will not bear the risk of non-payment of the receivables at maturity, which means that factoring with recourse excludes the guarantee option. The choice between non-recourse factoring and recourse factoring depends on the intention of the contracting parties. Non-recourse factoring is obviously more expensive since the factor accepts greater risk. 

Under an "advance factoring"arrangement, the company transfers its invoices to a factoring firm. The latter will advance a certain percentage of the transferred receivables. When the factor reaches 95% of the assigned invoices, it is called "factoring window dressing". In exchange for the advance payment made to its client, the factor will collect an agreed interest rate. Advance factoring can be with or without recourse. "Maturity factoring", also known as "collection factoring", is a type of factoring in which the factor collects the receivables and manages the accounts of its client but does not provide a financing. The factor pays the client for such receivables either on the date of maturity or at any other date after maturity agreed upon by the factor and its client. 

"Home service" is a form of factoring that allows the factoring firm to receive the client’s receivables in exchange for financing. However, the management of the accounts receivables remains the responsibility of the company. In other words, the factoring firm will only have to deal with the financing, and its client will still have to manage its receivables, the recovery and the receipts. The main interest for a company in choosing home service is the complete preservation of the business relationship with its client. The difference with "invoice discounting" is that the third party to the factoring contract is informed that the invoice has been handed over to a factor.

Documentation and formalities

A factoring transaction is almost always based on a framework contract which details the rights and obligations of each of the parties and lists the services that will be provided by the factor and its billing policy. 

As indicated above, the transfer of receivables in a factoring transaction has been traditionally achieved through the use of the subrogation mechanism which requires two formalities: 

  • an express manifestation of the subrogating creditor’s will (the client) – the client shows that it is willing to perform a transfer by subrogation by delivering a subrogation receipt (quittance subrogative) in addition to the invoices and the signed summary slip (bordereau récapitulatif) describing the transferred receivables (each delivered within a delay and a frequency determined in the factoring framework agreement); and
  • a concomitant payment from the subrogated party (the factor), unless the subrogating creditor (the client) had expressly indicated that it was willing to perform a transfer by subrogation concomitantly with the subrogation payment in a previous document.

In addition, a company may only transfer to the factor debts that are certain.

Enforceability of the assignment of receivables and notification

Subrogation is enforceable against third parties to the factoring contract without any formalities (and notably any disclosure requirements) from the day of the subrogation payment (Article 1346-5 of the French Civil Code). 

Nevertheless, according to (i) Article 1342-3 of the French Civil Code, the payment in good faith to the person in possession of the receivable is valid, and (ii) Article 1346-5 of the French Civil Code, subrogation is only enforceable against the debtor which has been notified of the subrogation or which has acknowledged it. In other words, the debtor can be discharged by paying its original creditor, if it has not been notified of or has not acknowledged the existence of the factoring arrangement before making its payment and it is acting in good faith. 

The notification of the existence of the factoring contract to the debtor is not sufficient to prove that the latter is aware of the subrogation. Indeed, the factor may refuse certain receivables. Therefore, in practice, factoring agreements often provide for an undertaking of the client to affix on each invoice a specific notice indicating that the payment shall be made to the factor. 

The notice must be legible and understandable for a non-legal expert. It must be unambiguous and sufficiently highlighted to draw the attention of the personnel in charge of paying the bills. The question of whether the notification made to the third party to the factoring contract is sufficiently explicit or not is left to the judge to decide.

True sale

Given that the transfer of receivables in a factoring transaction is carried out in France through a subrogation mechanism, it is therefore not subject to the French legal regime of sale. However, the receivables are transferred within the estate of the factor and the question of whether this transfer is a “true sale” comes down to considering whether the insolvency of the adhérent (the factor’s client) may affect the factor. As for a standard transfer of receivables, this can be the case if the transaction is considered as an unbalanced transaction or if, at the time of the transfer, the factor was aware that its client was in cessation of payment.

Reform

The recent reform of contract law in France has clarified the regime of the subrogation mechanism (Articles 1346 et seq of the French Civil Code) and introduced in the legislation some principles which had been previously established by the case law. There is no new pending or expected reform in France that will have an impact on factoring transactions.

Specific legislation for statutory covered bonds

French law provides for specific legislation for covered bonds. Such legal framework distinguishes two different types of covered bonds issuers: the sociétés de crédit foncier (SCF) and the sociétés de financement de l’habitat (SFH).

Both SCFs and SFHs are companies licensed as specialised credit institutions by the ACPR, allowed to carry out banking activities to the extent of their banking licence and their exclusive legal purpose.

The exclusive purpose of the SCF is to grant or to acquire secured loans, exposures to public entities and securities complying with eligibility criteria provided by French law.

The exclusive purpose of the SFHs is to grant or to finance home loans and to hold securities complying with eligibility criteria provided by French law.

In order to finance their activities, SCFs and SFHs are allowed to issue bonds called, respectively, obligations foncières (OF) and obligations de financement de l’habitat (OFH) which benefit from a legal privilege and to raise other funding benefiting or not from the legal privilege.

Pursuant to the provisions of the French Monetary and Financial Code, both SCFs and SFHs shall at all times maintain a cover ratio of at least 105% between their assets and their liabilities benefiting from the legal privilege.

SCFs and SFHs shall, with the consent of the ACPR, appoint a specific controller whose tasks is to verify that the relevant covered bonds issuer complies with the provisions of the French Monetary and Financial Code applicable to it.

The French legal framework applicable to SCFs and SFHs provides for protection rules benefiting to the holders of OFs, OFHs and other creditors benefiting from the legal privilege and derogating to the French bankruptcy rules. Those derogating measures are further described below.

In addition to the specific rules relating to the legal privilege, the French Monetary and Financial Code provides that:

  • the provisions of the French Commercial Code pursuant to which payments made from the cessation of payments’ date may be cancelled are not applicable to contracts entered into by, or with, an SCF or an SFH, provided that such contracts have been entered into directly in connection with the legal purpose of the SCF or the SFH; and
  • the safeguard proceeding or the judicial reorganisation or liquidation proceeding opened against the parent company of the SCF or the SFH cannot be extended to the SCF or the SFH.

The French Monetary and Financial Code provides for a simplified mean of transfer of the eligible receivable to an SCF or an SFH. The assignment of eligible receivables is performed by way of a transfer deed complying with the mandatory provisions of Article R513-11 of the French Monetary and Financial Code. Notwithstanding the opening of an insolvency proceeding against the seller after the transfer date, such assignment becomes effective between the seller and the SCF or the SFH and enforceable against third parties as from the date affixed on the transfer deed, irrespective of the date on which the receivables come into existence or the date on which the receivables are payable and without any further formalities, regardless of the law governing the receivables and the law of residence of the relevant debtors. The remittance of the transfer deed to the SCF or the SFH entails the automatic transfer of all the related security interests in connection with the purchased receivables and its enforceability against third parties without any further formalities.

Issuances of contractual (structured) covered bonds

Further to the adoption of the legal framework applicable to SFHs, all the contractual covered bonds issuers have been converted into SFHs.

Types of assets/loans typically comprised in the cover pool

The receivables that are legally eligible as assets to an SCF comprise:

  • secured loans (prêts garantis) which are loans secured by: (i) a first ranking mortgage or a real estate security conferring at least an equivalent level of security; or (ii) within the limits and conditions determined by French law, and provided that the secured loan is exclusively dedicated to the financing of a real estate property, a guarantee from a credit institution, a financing company or an insurance company which does not fall within the scope of consolidation in which the SCF is integrated;
  • exposures to public entities which are defined as assets, such as loans or off-balance sheet commitments to, or fully guaranteed by, the public entities listed in Article L513-4 of the French Monetary and Financial Code;
  • units or debt securities (other than the subordinated units or notes) issued by French securitisation vehicles or other similar entities governed by the laws of a member state of the EU or the European Economic Area (EEA), the USA, Switzerland, Japan, Canada, Australia or New Zealand, subject to certain conditions being met – in particular, the assets of such vehicles shall comprise at least 90% of secured loans or exposures to public entities or other receivables benefiting from the same level of guarantees; and 
  • French mortgage promissory notes, or loans granted by the SCF and secured to its benefit by the transfer by way of security, the assignment or the pledge of receivables complying with the conditions applicable to the secured loans.

The receivables that are legally eligible as assets to an SFH comprise:

  • home loans (prêts à l’habitat) defined as loans the purpose of which is, in whole or in part, to finance a real estate property located in France or in another member state of the EU or the EEA or in a state benefiting from the highest level of credit assessment as determined by an independent rating agency recognised by the ACPR and secured by (i) a first ranking mortgage or a real estate security conferring at least an equivalent level of security or (ii) a guarantee from a credit institution, a financing company or an insurance company;
  • loans secured by the transfer by way of security, the assignment or the pledge of home loans receivables; and
  • French mortgage promissory notes used to transfer home loans described above.

Investors' recourse to cover pool in the event issuer defaults

The recourse of the investors over the cover pool is ensured though the legal privilege benefiting to the OFs and the OFHs. The provisions governing the legal privilege benefiting to the OFs and the OFHs provide that notwithstanding any legal provisions to the contrary, including those governing French insolvency proceedings:

  • all amounts payable to the SCF or the SFH in respect of their eligible assets are allocated in priority to the payment of any amounts due in respect of the OFs, the OFHs and the other resources benefiting from the legal privilege;
  • if the SCF or the SFH is subject to a safeguard proceeding, a judicial reorganisation or liquidation proceeding or a conciliation proceeding, all payments due to the OFs, the OFHs and the other resources benefiting from the legal privilege are paid on their contractual due date and in priority to all other debts, whether or not preferred – until all holders of privileged debts have been fully paid, no other creditor of the SCF or the SFH may exercise any right over the assets and rights of the SCF or the SFH;
  • the judicial liquidation of the SCF or the SFH will not trigger the early redemption of the OF, the OFH and the other debts benefiting from the legal privilege.

Required aspects of SPV

SCFs and SFHs being licensed as specialised credit institutions by the ACPR, all the requirements applicable to credit institutions in terms of legal form, capitalisation requirements and governance are also applicable to SCFs and SFHs. In addition, the by-laws of the SCF or the SFH shall limit the purpose of the company to the legal purpose as defined in the French Monetary and Financial Code.

Pending reform/proposal

As of today, there is no pending reform that will have an impact on covered bond transactions. Nevertheless, it shall be noted that as part of the capital markets union action plan, the European Commission has published a proposal for a directive on covered bonds and a proposal for a regulation amending the Capital Requirements Regulation (EU) No 575/2013. The proposal of the European Commission aims at harmonising the European covered bonds rules and, upon adoption, will have an impact on the French legal framework applicable to the SCF and the SFH.

As a matter of principle, under French law the issuance of bonds can be secured by security interests granted over the assets of the issuer. Such a scheme was used by contractual covered bonds issuers. Since the introduction of the legal framework applicable to SFH and the conversion of the contractual covered bonds issuers into legal covered bonds issuers (ie, SFH), such type of bonds issuance are less commonly used as part of securitisation or monetisation transactions. However, bonds issuances secured by security interests over the assets of the issuer can be used in restructuring transactions.

In the context of restructuring transactions, issuers are commercial companies.

Security interests granted to secure bonds issuances mainly consist in pledge over securities accounts, pledge of bank accounts, pledge of receivables or guarantee from the parent company. Security interests can be granted by the issuer prior to or at the time of the bonds issuance to the benefit of the mass of bondholders. The acceptance of the bondholders shall result from the subscription of the bonds. When the security interests are granted prior to the bonds issuance, the representatives of the mass may be party to the security interests agreement(s) on behalf of the mass to be constituted after the bonds issuance. Security interests can be also granted by the issuer after the bonds issuance to the benefit of the mass of bondholders; in that case, security interests are accepted by the representatives of the mass.

Credit-linked notes may either be issued on a standalone basis or out of EMTN programmes. Such notes may take the form of English law governed notes, French law governed obligations and/or French law governed NEU MTN (Titres Négociables à Moyen Terme).

Some credit institutions also have a vehicle dedicated to the issuance of that kind of structured debt instrument.

Typically, investors would be investment funds or asset managers looking for increased return. Issuers would be investment banks.

Issuance of credit-linked notes can occur out of SPVs, which can either be set up for the purpose of a given transaction, or be the structured issuance vehicle of a credit institution.

The credit risk can be transferred to the SPV via a credit derivative entered into with the originator, but, due to mark-to-market and regulatory constraints the market has seen the development of alternative structures, especially in the fields of synthetic securitisation.

These structures are based on the use of French autonomous guarantees governed by Article 2321 of the Civil Code, as credit risk transfer instruments. The guarantor’s payment obligations are collateralised by a deposit, which is reduced as and when a credit event occurs on the underlying reference obligations. Because the French banking monopoly classifies the granting of a guarantee as a credit transaction, until recently such guarantees could not be provided directly by a French securitisation vehicle but had to be issued by a credit institution, or by a member of the same group as the beneficiary of the guarantee. Since the October 2017 reform of French securitisation vehicles, guarantees can be issued directly out of that kind of vehicle, thus simplifying the structure.

CLN transactions have been implemented in France on a variety of reference obligations. Credit-linked notes can relate to a single name or a portfolio of underlying reference obligations.

This is in particular the case where credit-linked notes are used as part of a synthetic securitisation. The most commonly seen reference obligations are large cap corporate loans, as the information on small and medium-sized entities is not always sufficient or lacks the consistency required for reporting obligations. Transactions can also be backed by a single loan – for instance, a commercial mortgage loan dedicated to a specific asset. 

In the context of CLNs sold to asset managers and life insurers, reference obligations are typically public indices such as Euro Stoxx 50.

CLN transactions can be used by banks to obtain beneficial regulatory treatment where:

  • they are used as a credit protection technique within the meaning and in compliance with the requirements of Chapter 4 of Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 (the CRR), provided that in such case the CLNs would only be taken into account as a credit protection to the extent of their cash funding;
  • they are used as part of a synthetic securitisation complying with the requirements for a significant risk transfer pursuant to Chapter 5 of the CRR.

As to whether CLNs are normally privately placed of publicly offered, both circumstances can be seen. However, in case of a tranched issuance, the lower tranches would rather be subject to a private placement.

Where the CLNs are admitted to trading on a regulated market, they will be subject to the requirements of Directive 2003/71/EC of the European Parliament and of the Council of 4 November 2003 (the Prospectus Directive).

Since the 2018 Reform of French securitisation vehicles, guarantees can be issued directly out of that kind of vehicle, meaning that they could become more widely and more easily used in the context of CLN transactions. An implementation decree is due to be published shortly, but some market players have already started the preparation of transactions based on this new possibility.

Beyond credit-linked notes, French players issue a variety of structured products. These include: (i) warrants and certificates indexed mainly on public indices; (ii) structured funds (taking the form of a fonds à formules).

The French market is dominated on the buy side by (i) the collective management industry where structured funds use structured notes/derivatives to enhance performance or to replicate a defined performance, usually based on proprietary or public indices, and (ii) life insurers who include structured products to enhance the performance of life insurance contracts denominated in units (unités de comptes).

Issuers of structured products are typically international investment banks which operate on the French markets from London under – for the time being, and subject to the future impact of Brexit – free provision of services (libre prestation de services).

Distributors of such products are a mix of credit institutions, placement agents (Conseillers en Investissements Financiers or CIF) and funds distribution platforms such as Axeltis/MFEX.

The relevant framework for the structured product issuance and offering in France is as follows:

  • positions issued by the French Autorité des Marchés Financiers (AMF), such as AMF position No 2010–05 on 15 October 2010 (as amended), AMF position No 2011-24 (as amended) and AMF position No 2013-13, for rules applicable to the marketing and the documentation of such products;
  • public offering rules and prohibition of advertising for complex products to retail investors, introduced by law No 2016-1691 of 9 December 2016 (the so-called "Sapin 2" law);
  • rules applicable to specific types of product rules, such as Article L213-3 and seq of the French Monetary and Financial Code for NEU MTN (titres négociables à moyen terme), L213-5 and seq of the French Monetary and Financial Code and L228-38 and seqof the French Commercial Code for notes (obligations);
  • rules arising from the Prospectus Directive; and                                                                           
  • rules arising from Directive No 2014/65/EU (the MiFiD II) as to the suitability and appropriateness of the investment and determination of the target market.

Structured products can be wrapped up as notes, bonds, certificates, warrants, funds or derivatives – however, the most common documentation is EMTN documentation under French and English law.

Distribution agreements are required in France pursuant to AMF position No 2014-05 and Ordinance No 2008-1271 of 5 December 2008.

Minimum required content includes authorisation by the issuer/producer of the promotional documentation prepared by the distributor and regulatory information to be provided by the distributor to the client (eg, KID, general terms, prospectus, subscription agreement). However, distribution agreements typically contain all rights and obligations of the distributor (see below) and the client, terms and conditions of the securities sold, liabilities of the parties, fees, duration, amendment and termination, partial invalidity, assignment of the distribution agreement and applicable law and competent jurisdiction in relation therewith.

The duties of the distributor comprise:

  • categorising the client and ensuring the cohesiveness for the securities sold between the target market and the client under the MiFiD II;
  • informing the client of the selling restrictions and risk factors applicable to the securities sold;
  • providing the client with regulatory documentation (eg, KID, prospectus, final terms, subscription agreement, etc);
  • providing the issuer/producer with the promotional documentation for approval prior to their distribution to the client; and
  • being licensed as an investment services provider.

Distributors receive a placement commission from the issuer which must be entirely refunded to the client.

Structured products can be subject to listing on a regulated stock exchange, and would then be subject to the requirement to issue a prospectus approved by the AMF in accordance with the Prospectus Directive and of the ACPR and AMF positions on obligations complexes.

Three types of liability regimes and sanctions could apply in connection with a prospectus:

  • a civil law liability based on Article 1240 of the French Civil Code (tortious liability) or on Article 1137 and following of the French Civil Code (contractual liability);
  • an administrative liability of the issuer and its legal representatives signing the responsibility statement (engagement de responsabilité) for the whole information contained in the prospectus. In principle, the authority competent for sanctioning breaches detected in the contents of the prospectus is the AMF. For breaches of the Prospective Directive, the sanctions could be, among others:
    1. fines – maximum set at EUR100 million or ten times the profits that may have been made;
    2. for individuals acting under the authority or on behalf of investment services providers, maximum set at EUR15 million for market abuse or ten times the profit that have been made; and/or
    3. publication of the sanction (nominative or anonymous);
  • a criminal liability. Under Article L465-3-2 of the FMFC, criminal sanctions apply to any person that publishes false or deceptive information. It is sanctioned by a term of five years’ imprisonment and a fine of EUR100 million, which amount may be increased to a figure representing up to ten times the amount of any profit made, and where the fine shall not be less than the amount of that same profit. Forgery and the use of forged documents are punishable by three years’ imprisonment and a fine of EUR45,000 (Article 441-1 of the French Criminal Code).

AMF is currently consulting market players on the new provisions of the Prospectus Directive to become effective on 21 July 2018 – notably the EUR8 million threshold applicable for prospectus exemption.

Dealing with any financial instruments (which includes the OTC derivatives) is an investment service pursuant to Article D321-1 of the FMFC and requires, in principle, to be licensed or passported as an investment services provider pursuant to Article L532-1 of the FMFC, including where an entity carries out such dealing for its own account. However, in the latter case, the relevant entity would be exempted from the requirements to have such licenses if it carries out no other investment service other than dealing in financial instruments, and such financial instruments do not consist in OTC derivatives over commodities.

It is advisable to analyse the capacity of an entity to enter into OTC derivatives on a case-by-case basis, based also on restrictions that may apply owing to their constitutive documents or management strategy.

In France, parties would typically use one of the following standard agreements:

  • for transactions on forward financial instruments or credit derivatives, the master agreement relating to transactions, which is the master agreement prepared by the FBF (Fédération bancaire française);
  • for repurchase transactions, either the master agreement prepared by the FBF, or the master agreement prepared by the AFTB (Association Française des Trésoriers de Banque);
  • for securities lending transactions, the master agreement prepared by the AFTI (Association Française du Titre).

Depending on the context, legal opinions can be requested on the enforceability of such agreements. The material conclusions would generally be that such agreements (including their netting provisions) would be enforceable as a matter of French law, subject to assumptions and qualifications usually similar to that which would be found, for instance, in the French law opinion relating to the 1992 ISDA Master Agreement and the 2002 ISDA Master Agreement.

Electing for automatic early termination in the case of bankruptcy is possible, as well as not opting for such automatic termination. Indeed, the transaction could also be terminated upon notice, including following a bankruptcy event. In both cases, this would be subject, as regard credit institution and investment firms, to the possible impacts of the Directive 2014/59/EU of 15 May 2014 establishing a framework for the recovery and resolution of credit institutions and investment firms (the BRRD).

There are opinions as to the enforceability of the netting and close-out provisions available as a matter of French law, accessible on the ISDA website. The main qualifications of these opinions are as follows:

  • the benefit of the French law close-out netting regime is subject to either (i) both parties falling into the requisite category of Article L211-36 of the FMFC or (ii) at least one of the parties falling into such category and the relevant transaction qualifying as a “transaction on financial instruments” (opération sur instrument financiers) within the meaning of that article – a criteria which need to be considered carefully on a case-by-case basis;
  • enforcement in France may be limited by the discretion given to a French court to increase or decrease any indemnity amount, grant a grace period of up to two years, or reduce the interest rate applicable to deferred payment;
  • the possible impacts of the BRRD.

Article 55 of the BRRD – requiring EU credit institutions and other in-scope entities to include a contractual recognition of bail-in clauses in a wide range of non-EU law governed contracts – has been transposed into French law in Article L613-55-13.-I. of the FMFC. There is no similar legal provision regarding the acknowledgment of the stay powers of the ACPR deriving from the BRRD.

The stay powers of the ACPR deriving from the transposition of the BRRD can be invoked as part of a resolution procedure pursuant to Article L613-49 of the FMFC. Such resolution procedure could be opened against a French credit institution in-scope entities firm if:

  • the relevant entity is failing or is likely to fail;
  • having regard to timing and other relevant circumstances, there is no reasonable prospect of any alternative private sector measures;
  • a resolution action is necessary for the purposes of the resolution procedure.

Pursuant to such stay power, the ACPR could – in particular, but without limitation – decide the suspension of close-out netting rights in relation to any contracts entered into by the relevant entity until 0:00 (midnight) at the latest on the business day following the day of publication of the decision of the ACPR.

Orrick Rambaud Martel

31 Avenue Pierre 1er de Serbie
75116 Paris
France

+33 1 5353 7500

+33 1 5353 7501

obernard@orrick.com www.orrick.com
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Law and Practice

Authors



Orrick Rambaud Martel has a market-leading practice in the securitisation and structured products areas, working for virtually all the leading underwriters, including Citigroup, Goldman Sachs, JPMorgan Chase and Morgan Stanley. The firm has advised clients on over 570 financings worldwide, with an aggregate value of nearly USD300 billion in the past three years, and is well known for developing pioneering structures that have helped the market to adapt to changing regulatory environments. One example of its innovation was in assisting clients in establishing RMBS platforms in the aftermath of the financial crisis that incorporate enhanced disclosure, dispute resolution procedures and investor rights. The structured finance team are bolstered by cross-practice collaboration with Orrick’s banking and finance, tax and restructuring teams, many of whom routinely work on securitisations. The firm has partners and senior lawyers located in four jurisdictions in the USA (New York, Los Angeles, San Francisco and Washington DC) and collaborate with highly rated partners focused on securitisation in the UK, France and Italy. Key practice areas are CLOs, derivatives, MBSs, credit and charge card securitisation, automobile and aircraft securitisation, esoteric securitisation, online and marketplace (consumer) lending, and tender option bonds. Orrick would like to credit its following partners for their contribution to the article: Janet Barbiere, Butch Cullen, Marty Howard, Nik Mathews, Thomas Mitchell and Al Sawyers.

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