Contributed By Mayer Brown SELAS
Securitisation is a financial technique whereby foreseeable cash flows generated by a variety of underlying assets, such as receivables, are converted into marketable securities. The cash flow generated by the underlying assets permits payment of principal and interest due on the securities. Most transactions characterised as securitisations involve special-purpose vehicles (SPVs), which are designed to be 'bankruptcy remote' and which purchase the cash-flow generating assets that they finance by issuing securities which may have different rankings.
The return on the securities issued by the SPV depends on factors such as the quality and productivity of the assets (and the cash flow generated by them) or, where the underlying assets are receivables, the payment default rate of the underlying debtors.
A certain number of legal issues must be addressed when structuring a securitisation, such as whether the sale of the underlying asset to the SPV is a 'true sale'.
In French securitisation practice, 'true sale' has at least three different meanings:
the characterisation of a transfer as 'bankruptcy remote' is subject to specific local insolvency laws, but certain factual issues may be instrumental, including the use of a single-purpose entity (an SPV, SPE or QSPV), limitations on authorised indebtedness or expenditures, and the independence of the buyer and seller; and
Where a French seller is subject to a bankruptcy or insolvency proceeding such as safeguard (sauvegarde), judicial reorganisation (redressement judiciaire) or liquidation proceedings (liquidation judiciaire), under French law, assignments of assets by the seller which occurred between the 'payment stop date' (date de cessation des paiements) and the judgment opening the insolvency proceeding may be challenged by the appointed bankruptcy administrator. In most cases, the payment stop date coincides with the date of the opening judgment, but the insolvency court may back-date the payment stop date by up to 18 months. The period between the payment stop date and the date of the opening judgment is called the 'hardening period' (période suspecte).
Article L. 632-1 of the French Commercial Code (Code de commerce) enumerates the transactions which are void per se(nullités de droit) if they occurred during the hardening period. These include:
In addition, payments of debts which are due or transactions for consideration which occur after the payment stop date may potentially be voided (nullités relatives) if the counterparty of the insolvent party was aware of the insolvency at the time of the transaction (Article L. 632-2 of the French Commercial Code).
However, to mitigate such claw-back issues for French securitisation transactions, French securitisation law (as codified in Articles L. 214-169 to L. 214-190 and Articles D. 214-216-1 to D. 214-240 of the French Monetary and Financial Code (Code monétaire et financier, the 'French CMF')) provides for specific exemptions to applicable bankruptcy laws applying to securitisation transactions and therefore offers strong and legally effective protection for the assignment of receivables carried out in the context of a securitisation transaction involving SVs and SFVs (as defined below):
The legal aspects of the concept of 'true sale', including most particularly the legality, validity and enforceability of the transfer of assets and the bankruptcy considerations outlined above, are generally confirmed by a legal opinion issued by the law firm responsible for preparing the contractual documentation of the securitisation transaction.
Under French law, and since the adoption of Ordinance (Ordonnance) 2017-1432 of 4 October 2017 (as implemented by two decrees (décrets) 2018-1004 and 2018-1008, dated 19 November 2018 – referred to below as the 'new legislation'), three types of special purpose vehicles can theoretically be used in a securitisation transaction in France:
The new legislation includes SVs and SFVs into a new generic category called 'financing vehicles' (organismes de financement or FVs), as SVs and SFVs share certain organisational and other features.
Even though SPFs and SFVs are not, strictly speaking, securitisation vehicles, they share a common regime with SVs in many aspects. For instance, all three types of vehicle are allowed to grant loans, as an exception to the French banking monopoly rules under which, traditionally, lending in France is only permitted to EU-passported or French-licensed credit institutions (établissements de credit) or financing companies (sociétés de financement).
The following points relating to SVs and SFVs are particularly noteworthy.
Securitisation Vehicles (SVs)
A specific legal framework for securitisation transactions has existed in France since a law dated 23 December 1988. Several amendments, improvements and additions have followed, the latest of which are included within the new legislation.
SVs are meant to be the ideal tool for securitisation transactions in France or abroad. Their legal regime was significantly revised and improved pursuant to the new legislation and is now codified under Article L. 214-168 et seq of the French CMF.
SVs can take two legal forms, as either a joint ownership (fonds commun de titrisation or FCT) or limited liability commercial company (société de titrisation or ST), the main difference being that STs are distinct legal entities and are subject to general corporate taxation rules. By contrast, FCTs are tax transparent and have no legal personality. It is notable that FCTs may consist of several distinct, ring-fenced compartments or sub-funds.
French law allows SVs to qualify as fonds de prêts à l'économie, as regulated under Article R. 332-14-2 of the French insurance code (Code des assurances), to allow insurers and mutual companies to invest in such types of vehicles and benefit from preferential prudential treatment as a result of an investment in an SV.
SVs are formed and managed by a management company (société de gestion), which manages and represents the SV on a day-to-day basis in accordance with the SV's regulations, and a custodian (dépositaire), which acts as custodian of the SV's assets and supervises the SV generally.
SVs can be established and managed by a 'sponsor' within the meaning of the the Capital Requirements Regulation or CRR (see 4.3 'Credit Risk Retention', below); this sponsor can, in turn, delegate the operation of the SV to the management company.
The management company is required to be licensed as a portfolio management company (société de gestion de portefeuille) under Article L. 532-9 of the French CMF, and the custodian must be an EU-passported or French-licensed credit institution. Specific rules on the duties and liabilities of custodians resulting from the Securitisation Regulation or SR (as defined in 4.3 'Credit Risk Retention', below) and the new legislation, will enter into force on 1 January 2020.
SVs' eligible assets have been significantly widened: SVs may now lend directly, acquire any loan or other receivable, or subscribe to any form of debt instruments or unfunded commitments. They can also take any form of participation in an existing financing transaction or be used in order to securitise insurance risks. An SV may not, however, hold tangible assets other than those arising from the enforcement of security interests to which the SV directly or indirectly benefits from as part of the transaction. However, certain ratios, limitations or additional regulatory filing requirements (including with the French Autorité des marchés financiers, or AMF) may apply in respect of an SV's intention to hold certain of the assets above.
To finance their investments or lending activities, SVs (or any compartment thereof) may:
As well as a preferential tax treatment (see 2 Tax Laws and Issues, below), SVs also benefit from preferential rules in terms of 'true sale' and bankruptcy remoteness (see 1.1 Insolvency Laws, above and 1.3 Transfer of Financial Assets, below).
Specialised Financing Vehicles (SFVs)
The new legislation also created SFVs, a specific debt investment fund dedicated to lending activities and managed by any European AIFMD-regulated management company (as defined in 4.3 'Credit Risk Retention',below).
As is the case with SVs, an SFV can take the form of either a specialised financing fund (fond de financement spécialisé or FFS), which is not a legal entity and whose subscribers hold an undivided interest (copropriété) in the FFS's assets, or a specialised financing company (société de financement spécialisé or SFS), which is a legal entity and may be formed as a corporation (either a société par actions simplifiée or a société anonyme).
The SFV shares many of the features detailed above with the SV. It too may enter into credit transactions and in particular loans, sub-participations and leasing activities. In this respect, SFVs will likely be very active in the receivables financing area. SFVs may, however, create different classes of units, shares or debt granting different rights in capital or interests.
Unlike SVs, SFVs cannot issue different tranches of instruments (notes, bonds, etc) to mitigate the credit risk relating to the transferred assets. However, SFVs can grant loans in the context of the European ELTIF legislation (European regulation on long-term investment funds), and are permitted to hold a wider range of equity/quasi-equity instruments as well as tangible or intangible assets.
Under French law, several means can be used to transfer receivables that are owned by the relevant seller/originator, exist or will exist, and are identified or will be identifiable:
The French CMF imposes very strict formal requirements for the assignment form (bordereau). Failure to comply with such requirements will result in no assignment taking place pursuant to Article L. 313-23 of the French CMF. The assignment form (bordereau) can be in an electronic format.
Should the assignee wish to 'perfect' the relevant assignment, it is required to notify the relevant debtor of the assignment. Prior to this notification, the seller is deemed to act as the agent for the assignee for the collection of receivables and the debtor can continue to validly pay the seller and raise any defences available to it against the seller. Once the debtor is notified of the assignment (to be made under a specific format), the debtor may only validly pay the receivables to the assignee and only defences which are inherent to the claim may be raised, as may set-off rights which arise prior to the notification and connected claims (créances connexes). Parties to the assignment can even go one step further and ask the relevant debtor to 'accept' the assignment. If the debtor accepts the assignment (to be made according to a specific format), it can no longer raise any defences resulting from its individual relationship with the seller, unless the assignee has knowingly acted fraudulently to the detriment of the debtor.
Securitisation assignments may take the form of an assignment by way of a simplified transfer deed (bordereau de cession) exchanged between the seller and the SV pursuant to Article L. 214-169-V-1° of the French CMF.
Note that assignments of receivables to SVs can be made by any other means of assignment governed by French law (such as Dailly assignments or collateral assignments, if the conditions relating to them are met) or by or any accepted means of transfer under foreign law.
If the simplified transfer deed (bordereau de cession) is used, it must identify the receivables or provide information necessary for the identification of such receivables. The transfer mode is further simplified in that the identification or individualisation of the assigned receivables can be made in electronic form.
French law further provides that the transfer of receivables to an SV through a simplified transfer deed (bordereau de cession) becomes valid between the parties and enforceable against third parties as from the date indicated on the simplified transfer deed (bordereau de cession) without any further formalities, irrespective of the law applicable to the receivables, the law of the state of residence of the debtors or the fact that a bankruptcy (whether under French or foreign law) has been initiated against the originator after the transfer. The assignment is effective notwithstanding any claw-back affecting the relevant seller (see 1.1 Insolvency Laws, above).
In addition, the delivery of the simplified transfer deed (bordereau de cession) entails the automatic and immediate transfer to the SV of all related security and ancillary rights attached to the receivables at the date of the assignment deed, including real estate mortgages (hypothèques) or receivables already transferred to the originator under a Dailly assignment, for instance, without any further formalities.
Aside from the simplified transfer deed (bordereau de cession), a debtor acceptance mechanism (similar to the one existing for Dailly assignments) also exists in relation to securitisation assignments.
See 1.1 Insolvency Laws, above, for details of the construction of bankruptcy remote transactions.
Assignment of receivables
Under French tax law, assignments of receivables:
It is also notable that the sale of receivables at a discount, or where a portion of the price is payable upon collection of the receivable, is considered to be a financial expense deductible from the seller's taxable result.
Payments by debtors
No withholding tax applies to payments of interest or other income made by debtors (under trade receivables owned by them) established or domiciled in France, unless such payments are made in a non-co-operative state or territory ('NCST'), in which case they are subject to a 75% withholding tax.
NCSTs are defined under Article 238-0 A of the French Tax Code (Code général des impôts), as being jurisdictions which have not ratified a treaty with France (or 12 other jurisdictions) providing for the exchange of tax-related information, are not member states of the EU, and are under scrutiny by the OECD Global Forum on Transparency and Exchange of Information. A list of NCSTs is updated yearly by the French Government, and currently includes Panama, Brunei, Nauru, Niue, the Marshall Islands, Guatemala and Botswana.
It should, however, be noted that interest paid to a NCST may still be exempt from withholding tax if:
Pursuant to Article 261-C-1°-c of the French Tax Code (Code général des impôts), services in relation to receivables are, in principle, exempt from French VAT.
Moreover, if it can be demonstrated that any servicing fee payable to the relevant seller is a fee in consideration of a financing transaction (in itself exempt from VAT in France), based on the official guidance from the French tax administration as currently in force (guidance BOI-TVA-SECT-50-10-10, paragraph 110, dated 12 September 2012), such a fee should be considered ancillary to a financial activity and be subject to the same tax treatment as the underlying factoring transaction, and should therefore be considered VAT-exempt.
However, as an exception to the foregoing, services in relation to the collection of receivables (debt recovery services) are subject to VAT.
Under French tax law, the situation of SVs differs depending on whether they have been formed as FCTs or STs (see 1.2 Special-Purpose Entities, above):
Tax considerations relating to the matters mentioned above are generally covered in the legal and tax opinions delivered for the purpose of securitisation transactions occurring in France.
The question of whether or not a securitisation transaction is subject to on-balance sheet or off-balance sheet treatment, and of whether or not the relevant securitisation vehicle is to be consolidated into the originator's group from an accounting point of view, are addressed by accountant specialists according to the applicable accounting principles. The accounting analysis is made on the basis of the legal 'true sale' analysis, as confirmed by legal counsel in their legal 'true sale' opinion (see 1.1 Insolvency Laws, above).
On this basis, the legal analysis of the 'true sale' nature of a transaction is distinct from the accounting, off-balance sheet, analysis.
See 3.1 Legal Issues with Securitisation Accounting Rules, above.
From a French legal perspective, there is a limited set of specific disclosure requirements applying to securitisation transactions and French SVs:
this document must be appended to the general prospectus required in the case of a public offering (see 4.2 General Disclosure Laws or Regulations, below), and must be sent to the subscribers of the above financial instruments;
Certain other specific disclosure obligations may apply to securitisation transactions in accordance with:
As mentioned above, any offer to the public in France of any financial instrument issued by a SV (or intended admission of such instrument to trading on a regulated market in France) is subject to the publication of a prospectus describing the issuer (ie, the securitisation vehicle), the terms and conditions of the instruments, the financial parameters of the issuance and underlying transaction, and the risks relating thereto.
The terms for such a prospectus, as well as the content and substantive requirements relating thereto, are governed:
If these financial instruments are offered to the public in France (or are to be admitted to trading on a regulated market in France), the relevant prospectus must be submitted to and approved by the AMF prior to their issuance. If the offer is made outside of France, the stock-exchange regulator of the relevant foreign jurisdiction is competent to review and approve the prospectus.
The prospectus requirement does not apply if the offer is private or if there is an applicable public offer exemption (for instance, if the offer remains below certain thresholds – EUR100,000, for instance – under Article 211-2 of the AMF General Regulations).
The issuer of the relevant instruments to be offered takes primary responsibility for all information and data contained in the prospectus. In the case of an SV, the prospectus is prepared:
Any inaccuracy or omission in the prospectus may give rise to civil or regulatory sanctions for the issuer or the persons in charge of drawing up the prospectus. Criminal sanctions may even apply if, as a result of these inaccuracies or omissions, the issuer (or relevant persons in charge of the prospectus) willingly disclosed false or deceiving information in order to manipulate or distort (fausser) the stock exchange price of the relevant financial instrument issued by the SV.
Legal opinions may cover the accuracy of certain legal or tax considerations set forth in a prospectus, as well as matters of consent or approval required (or not required), but they do not extend to the validity of the prospectus.
The EU has implemented credit risk retention rules for existing securitisation transactions, including those located in France.
For securitisation transactions completed up to 31 December 2018, the relevant EU "risk-retention" rules that applied to regulated investors appeared in various different sets of regulations, as follows:
For securitisation transactions completed after 1 January 2019, the Securitisation Regulation or SR (Regulation EU/2017/2401 of 12 December 2017) and the related CRR Amending Regulation, Regulation EU/2017/2402 of 12 December 2017, (the 'CRR Amended Regulation' and, together with the SR, the 'SR Package') seek to harmonise the rules on risk retention, due diligence and disclosure for all different categories of European-regulated investors by replacing the existing disclosure, due diligence and risk retention provisions in the CRR, AIFMD and Solvency II legislation with one corpus of harmonised rules applying to all securitisation transactions involving credit institutions, funds and insurers/reinsurers. In addition, a new framework for simple, transparent and standardised ('STS') securitisation transactions will be introduced.
Applicable grandfathering provisions will govern the transition from the existing rules to the risk retention rules included in the SR Package.
Under the former legislation:
The CRR provides for five different methods of retention:
Under SR, the following main changes apply:
Further technical standards and guidelines are in the process of development and issuance by the European Securities and Markets Authority (ESMA); the scope and extent of these transparency and disclosure requirements are currently being debated with ESMA and the securitisation industry.
Penalties for non-compliance with the above requirements may include the imposition of additional risk weight treatment and fines by the relevant regulator.
Although legal counsel may provide advice on compliance with applicable risk retention requirements in the context of a given transaction, no formal legal opinion is generally delivered in respect of formal compliance with risk retention rules.
Most of the periodic reporting obligations applying in France (or in relation to securitisation transactions involving France) have already been addressed above, as they relate to specific or general disclosure requirements for French securitisation vehicles (see 4.1 Specific Disclosure Laws or Regulations and 4.2 General Disclosure Laws and Regulations, above), disclosure requirements in respect of credit risk retention rules (see 4.3 'Credit Risk Retention', above) or reporting requirements for RAs (see 4.5 Activities of Rating Agencies, below).
Rating agencies (RAs) are regulated in France by the CRA Regulation (Regulation EC/1060/2009 of 16 September 2009, as amended by Regulation 513/2011 and Regulation 462/2013) and by Articles L. 544-4 and L. 544-5 of the French CMF.
RAs are regulated at European level by the European Securities and Markets Authority (ESMA). Any RA intending to operate in the EU must establish a legal entity within the EU, register it with the ESMA and be subject to its supervision. Generally speaking, rules relating to RAs generally impose requirements for disclosure of their activities, rating parameters and methodologies and related models, as well as the adoption of required measures to prevent conflicts of interest and liability provisions.
There are specific CRA restrictions in respect of the securitisation space, such as the appointment of at least two RAs in respect of rated structured finance instruments (Article 8 quarter of Regulation 462/2013) or specific turnover requirements.
Failure to comply with the relevant regulations on RAs may trigger pecuniary sanctions (and related publication obligations). A specific liability regime applies to RAs acting in France: Article L. 544-5 of the French CMF provides that "credit rating agencies are liable (from a contractual and extra-contractual point of view) vis-à-vis their customers and third parties for the damages caused by any wrongdoing in the implementation of their obligations under Regulation EC/1060/2009," and provides for further conflicts of laws considerations.
The regulatory capital treatment applying to credit institutions in France is based on the Basel III principles, as implemented in the EU (for all EU countries including France) under the CRR and Directive 2013/36/EU of 26 June 2013 (referred to, together with the CRR, as CRD IV).
CRD IV provides the main rules on capital and liquidity requirements for credit institutions and also sets forth certain specific rules and criteria for securitisation transactions.
In terms of capital requirements, the basic principle is that credit institutions shall hold regulatory capital by allocating risk weights to any exposure they hold. In light of the total corresponding risk exposure amount, the institution will be required to provide for the corresponding capital coverage with its own funds.
Any risk-weighted exposure is calculated through either the standardised approach or the institution's own internal ratings-based approach (IRB). The IRB methodology requires prior approval from the relevant national regulator.
More specifically, the CRR addresses securitisation transactions and the treatment of securitisation positions for credit institutions. The 'own funds' requirements to cover securitisation positions will depend on the risk weight calculation method (standard or IRB) used by the institution holding the securitisation exposure. In view of such calculation, any institution originating a traditional securitisation position may exclude the corresponding securitised exposures from its risk-weighted exposure amounts if either of the following conditions is fulfilled:
The exposure's risk weight will depend on a number of factors, including rating, true sale and arm's length considerations.
As for liquidity requirements, CRD IV (notably Article 460 of CRR, together with Delegated Regulation 2015/61 of 10 October 2014) introduced short-term and long-term standards for the funding liquidity of the credit institutions, such standards being composed of a liquidity coverage requirement (LCR), which improves the short-term resilience of credit institutions vis-à-vis liquidity issues, and the net stable funding requirement (NSFR), ensuring that credit institutions have sufficient stable funding to support their medium-term assets and activities.
In an effort to foster securitisation as a means of funding the real economy, the concept of a 'simple, transparent and standardised' securitisation framework was introduced as part of the SR on 26 October 2017. Moreover, as from 1 January 2019, the CRR Amending Regulation introduced preferential regulatory capital requirements for credit institutions or funds holding exposures on STS securitisations and will set out those criteria which must be satisfied in order to benefit from this preferential treatment. The EC is working on adopting the same principles for insurers holding STS securitisation exposures.
Again, further details and guidelines are in the process of development and issuance by ESMA, and the scope and extent of these STS criteria and the corresponding capital treatment, as well as the corresponding grandfathering and extraterritoriality rules, remain to a large extent uncertain and are currently being debated with ESMA and the securitisation industry.
The use of derivatives in securitisation transactions in France is mainly regulated by EU Regulation 648/2012 of 16 August 2012 (the EMIR), which generally regulates derivatives in the EU. It is notable that there are current proposals for an EMIR II regulation, in order to ensure transparency and sufficient access to clearing for certain counterparties and increase the responsibility of financial actors (including securitisation vehicles that may become financial counterparties).
The EMIR is enforced directly at national level and the French Prudential Supervision and Resolution Authority (ACPR) is the main regulatory body in these matters.
The use of derivatives is explicitly allowed for SVs and is governed by Articles L. 214-169 et seq, L. 214-190-I-VI, R. 214-216-1 et seq and R. 214-224 et seq of the French CMF.
Whether or not a securitisation transaction is to be treated as 'off-balance sheet', or be subject to a 'derecognition' effect, will be determined by accounting specialists on the basis, notably, of the legal true sale nature of the transaction. Such determination will made on the basis of the IAS 39 rules and, as of 1 January 2018, IFRS 9.
Investor protection for securitisation transactions is generally provided by the general regulatory framework applicable to securitisation transactions, and the main terms and conditions of the relevant transaction.
In terms of the regulatory framework applicable to securitization transactions, the following rules aim at providing protection schemes to investors. In particular:
If an SV is used, the following French law protection mechanism will apply to the main terms of the relevant transaction:
Generally speaking, the French ACPR and the French AMF will be the main regulatory bodies for such matters.
See 4.3 Credit Risk Retention to 4.5 Activities of Rating Agencies, above.
France has banking monopoly rules which, in principle, disallow the performance of credit transactions (ie, lending and on-going purchase of French unmatured receivables) in France by anyone other than a French-licensed or EU-passported financial institution, a French FV (including SVs), or any investment fund specifically authorised to lend.
In order to further ease the refinancing (or securitisation) of French lending or receivables financing transactions, and to ensure that French law is now compliant with the European ELTIF regulation, the new legislation introduced the following supplemental exceptions to the French banking monopoly:
In accordance with Articles L. 214-169 of the French CMF, SVs can take the form of FCTs or STs. Such vehicles are formed and managed by a management company (société de gestion) and a custodian (dépositaire). See 1.2 Special-Purpose Entities, above.
If the SV is an FCT, it will be a co-ownership without legal personality. If it is an ST, it will be incorporated as a société anonyme or a société par actions simplifiée. The main driver for choosing between an FCT or an ST may be tax wise, given that STs have legal personality and may benefit from double-tax treaties.
In accordance with Articles L. 214-169 and L. 214-175-1 of the French CMF, the sole purpose of SVs is:
No other activities may be carried out by SVs. The management company and custodian of such vehicles are responsible for monitoring and checking the scope and extent of the activities of the SVs.
In order to provide credit protection against potential losses arising from the portfolio of securitised assets, various means are available to the parties to a transaction (depending on the terms and conditions of the transaction):
These means can alternatively benefit the transaction SPV (in France, SVs) or can be available at the level of the relevant holders of securities issued by the transaction SPV (or SV). Each of them may give rise to specific legal or tax issues and must be envisaged on a case-by-case basis.
The main focus for the participation of French public entities in securitisation transactions is on enhancing the short-term and medium-term financing of small and medium-sized enterprises (SMEs).
Public players active on the French market include the European Investment Bank (either directly or through the European investment fund (EIF)) and Bpifrance, which is a public financial institution jointly owned by the French State and the Caisse des Dépôts focusing on financing the real economy (ie, the development and export activities of French SMEs).
Investors in securitisations primarily include financial institutions, investment funds (including hedge funds and private equity funds), insurance/reinsurance companies and public entities. Each of these investors will have investing capabilities which will differ according to its legal status, regulatory regime and related prudential treatment.
From a French perspective, bankruptcy remote transfers of receivables or assets to a SV will be made pursuant to a sale agreement governed by French law and either by Article L. 214-169 et seq of the French CMF or Article L. 313-23 et seq of the French CMF.
More information is provided in sections 1.1 Insolvency Laws and 1.3 Transfer of Financial Assets, above.
In securitisation transactions, the originator of the securitised assets typically provides for a wide range of representations and warranties (R&Ws). These can be categorised as follows:
Failure to comply with the corporate R&Ws could lead to the occurrence of an event of default or an amortisation event (subject to qualifiers and grace periods) and, if relevant, certain contractually agreed indemnities could be triggered as a result. Failure to comply with the asset R&Ws could lead to the occurrence of a repurchase event and, if exceeding certain thresholds, the occurrence of an event of default or an amortisation event (subject to qualifiers and grace periods) and certain contractually agreed indemnities, if relevant.
The transaction parties in the securitisation transaction typically provide corporate R&Ws to the other parties.
Under French law, any assignment of receivables pursuant to Article L. 214-169 et seq of the CMF or Article L. 313-23 et seq of the CMF, performed by way of a duly completed and signed simplified transfer form (bordereau) and exchanged between the originator and the relevant SV will be effective between the parties and against third parties (including debtors) as from the date set on the transfer form, without any other formality. Assignment to the relevant debtor is not a requirement for the validity and enforceability of the assignment. See also 1.3 Transfer of Financial Assets, above.
Notifying the relevant debtors will be necessary, however, to allow the relevant SV holding the relevant assets to instruct the debtors to pay any outstanding amount directly to the vehicle and to freeze certain set-off rights of the debtors against the vehicle. Moreover, according to recent case law in the Coeur Défense litigation, it is even valid to notify the relevant debtors after the initiation of bankruptcy proceedings against the originator.
In light of the above principles, securitisations are often confidential to the underlying debtors, and it is generally provided in securitisation transactions that title to the assets to the relevant SV may only be perfected upon the occurrence of certain defined 'perfection' or 'servicer termination' events (see 1.3 Transfer of Financial Assets, above).
Once a 'perfection' or 'servicer termination' event has occurred and is continuing, the SV will be entitled to take the following actions (subject to relevant contractual documentation):
In securitisation transactions, the originator of the securitised assets typically provides for a wide range of undertakings and covenants. These can be categorised as follows:
Failure to comply with these covenants and undertakings could lead to the occurrence of an event of default or an amortisation event (subject to qualifiers and grace periods) and, if relevant, to the triggering of certain contractually agreed indemnities.
As usual in securitisation transactions, the servicer of the securitised assets is often the originator of the assets, as appointed under specific servicing arrangements entered into between the originator and the SV under the securitisation transaction documents. The servicer's obligations are generally as follows:
The servicer may receive a fee for these services from the issuer (to be paid under the waterfall provisions).
Failure by the servicer to comply with its servicing and other obligations under the servicing agreement may lead to:
Specific servicing provisions apply in the context of securitisation transactions involving SVs. In particular, Article L. 214-172 of the French CMF provides that collection and servicing of the securitised assets may be handled by:
Certain specific regulations, such as those relating to the amicable recovery of receivables by third parties (recouvrement amiable pour le compte de tiers) or paying services (services de paiement), are excluded from the scope of these servicing activities.
Further clarifications are expected to be adopted soon in order to allow duly appointed third-party servicers to act on behalf of management companies of SVs in the context of judicial, bankruptcy or other proceedings, without any restrictions, and to make it clear that such management companies can still act in the name and on behalf of the SVs, without cancelling any power of attorney granted to the third party servicer or informing any third party to that effect.
Typical events of default or amortisation events in a securitisation transaction include, notably:
Subject to any agreed grace periods and/or materiality qualifiers, the occurrence of an event of default which is continuing could lead to acceleration of the transaction (whereby the instruments issued become immediately due and payable) and, if relevant, to the initiation of the amortisation phase and enforcement of related security.
The scope of indemnities to be set forth in a securitisation transaction will be negotiated and agreed upon on a case-by-case basis, depending on the features of the transaction and quality of the portfolio of securitised assets.
In general terms, the SV is expected to receive indemnities from the originator for certain losses (in respect of the sold assets) and/or from any servicer in case of losses resulting from servicing deficiencies. In certain cases, the benefit of such indemnities may be transferred to the investors pursuant to stipulation pour autrui schemes.
No response provided.
The enforcement of securitisation transactions in France is subject to many structural factors, which may or may not prevent the relevant SV (acting through its management company) from enforcing its rights under the structure, including:
In addition, enforcement will also be dependent on the level of defaults in the structure as well as the defensive conduct of the originator in the process.
No response provided.
For French transactions, the issuer will be a SV – either an FCT or an ST (see 1.2 Special-Purpose Entities, above).
'Sponsors' are generally regarded as entities that initiate and monitor securitisation transactions. Sponsors tend to be financial institutions, large corporates or investment funds.
The notion of 'sponsor' is currently addressed in the CRR and SR, which provide certain rules. In particular, sponsors are and will be subject to the risk retention requirement (see 4.3 'Credit Risk Retention', above).
Pursuant to Article 4 of the SR, a 'sponsor' is defined as a credit institution, whether located in the EU or not, or an investment firm (other than an originator) that establishes and manages an asset-backed commercial paper programme or other securitisation that purchases exposures from third-party entities, or establishes an asset-backed commercial paper programme or other securitisation that purchases exposures from third-party entities and delegates the day-to-day active portfolio management involved in that securitisation to an entity authorised to perform such an activity in accordance with EU regulations. This concept therefore includes non-EU entities.
Consistent with this approach, Article L. 214-175-1-IV of the French CMF provides that a 'sponsor' within the meaning of the CRR can form and manage an SV provided that the regulations or by-laws of the SV explicitly allow for it, the sponsor delegates the management of the SV to a duly licensed portfolio management company, and the sponsor is named in these regulations or by-laws. Moreover, Article L. 214-175-3 of the French CMF provides that sponsors are subject to certain rules designed to avoid conflicts of interest.
Underwriting entities and placement agents in securitisation transactions are usually financial institutions or entities affiliated to financial institutions.
See 5.5 Principal Servicing Provisions, above.
See 4.14 Participation of Government Sponsored Entities, above.
French law does not recognise the role of 'trustees' as such for the holding of security or representation of noteholders.
That said, under French law:
Synthetic securitisations are distinctive in the sense that only the credit or default risk of the underlying assets is transferred to the securitisation SPV; the legal ownership of the assets remains with the originator. The assets, therefore, remain on the originator's balance sheet. The risk transfer to the securitisation SPV is achieved by using a combination of credit derivatives such as (portfolio) credit default swaps and credit-linked notes.
Originators who are mainly looking for (re)financing and wish to profit from the better rating of the securities issued by the securitisation SPV (as compared to their own rating) tend to choose true-sale transactions. A synthetic structure can be used, on the other hand, to improve the originator's balance sheet situation, eg, by increasing the (regulatory) equity capital ratio (if the risk transferred to the SPV is 'significant') or reducing the credit risk of the respective asset portfolio. An advantage of synthetic transactions is higher flexibility and the fact that they can usually be implemented faster than true-sale transactions.
Synthetic securitisations are permitted in France and can be implemented under via FVs (either through SVs or SFVs), and most commonly via FCTs (see 1.2 Special-Purpose Entities, above). Indeed, the use of derivatives is explicitly allowed for SVs and is governed by Articles L. 214-169 et seq, L. 214-190-1-VI, R. 214-216-1 et seq and R. 214-224 et seq of the French CMF. Specific rules apply to SVs if such hedging agreements are entered into in the context of the securitisation of insurance risks (Article R. 214-237 of the French CMF).
French SVs are allowed to enter into derivatives agreements (as sellers of protection) and to bear credit risks related to one of more counterparties and reference entities under the conditions specified in their regulations (Article R. 214-224 et seq of the French CMF). The French CMF makes it clear that in such a case, the SV's maximum net loss that may result from the aggregate of all hedging agreements entered into by it, as valued the hedging agreements to which it benefits from, may not exceed the value of its assets.
French SVs can also enter into repo transactions pursuant to Article R. 214-225 of the French CMF, provided that the SV's regulations allow for it (and describe the SV's objectives in that respect), and subject to the following conditions:
There again, the SV is required to comply with its main investment rule (règle d'engagement), in the sense that its maximum net loss that may result from the aggregate of all repo transactions entered into by it, as valued against the repo transactions to which it benefits from, may not exceed the value of its assets.
Securitisation transactions in France have involved a wide range of asset classes, such as trade receivables, performing or non-performing loans, CMBS, auto assets, insurance risks, etc. That said, mobile phone and whole-business securitisations are less frequent due to adverse transfer tax considerations or because of specific consumer protection regulations.
See 1.2 Special-Purpose Entities, above.