Developments in the French Securitisation Legal Framework
France is keen to encourage, in a real and tangible way, the development of securitisation. Since its creation in 1988, the fonds commun de créances (FCC) has proved to be an adequate securitisation vehicle and its legal framework has always been adapted to the needs of market participants. In terms of volume, the French market ranks behind a number of its competitors. However, a recent securitisation reform is expected to have a positive impact on the market.
On 24 November 2004, a new securitisation decree implemented significant reforms introduced by the Financial Security Law of 1 August 2003 (the “Securitisation Reform”). The decree results from a wide consultation of all securitisation practitioners organised by the French authorities with a view to capturing market trends, practices and innovations.
The Securitisation Reform is a major one which not only renders the FCC safer and more flexible but also creates new market opportunities for originators, arrangers and investors. Important changes include the possibility for an FCC to enter into synthetic transactions as vendor of protection and to issue new types of debt instruments either in France or in international capital markets.
Using the FCC proves to be the most efficient way of securitising French assets, which is understood to comprise the sale of assets or the transfer of the risks of assets to a dedicated securitisation vehicle which issues debt securities on the capital markets.
By way of background, the purchase of unmatured receivables qualifies in France as a credit activity which, with limited exceptions, can only be performed by credit institutions. The entry into derivative transactions as sale of protection may constitute the provision of financial services, which is also a regulated activity in France. Given that transactions made in violation of these rules can be voided and give rise to criminal sanctions, the FCC offers a safe way of securitising French assets as it is authorised by law to carry out such transactions.
The FCC has been continuously adapted to the trends and needs of the securitisation market. As interest in securitisation increased, French legislation was amended on several occasions, with the effect, for example, of widening the category of eligible originators to include industrial and commercial companies, permitting the creation of umbrella FCC and expanding the field of securitisable receivables. With the Securitisation Reform, the flexibility and simplicity of this securitisation instrument has been restated and completed. The following represent the key benefits:
Recent years have seen an increasing number of pan-European and international securitisation programmes and the Securitisation Reform displays the French authorities’ willingness to ensure that the FCC is a suitable tool for international securitisations.
International assets (non-French assets held by French or foreign originators, and French assets held over foreign debtors) have been successfully securitised through FCC conduits. Although the cross-border nature of a securitisation means that several jurisdictions will be relevant to ensure the perfection of the assets transfer, the FCC legal framework specifically addresses cross-border risks.
In application of general conflict of law rules, French courts have generally held that the enforceability against third parties of an assignment of international receivables is governed by the law of the domicile of the assigned debtors, although some scholars have taken the opposite view that it should be governed by the laws applicable to the assigned receivables.
The Securitisation Reform sets out a specific rule to address conflict of law issues with respect to FCC assignments. It is now clear that the transfer of receivables to an FCC will be enforceable both as against the assigned debtors and as against third parties upon remittance of the transfer act “with no further formalities, regardless of the law governing the transferred receivables and the law of the domicile of the assigned debtor“.
As a result, French courts will automatically recognise that the transfer of receivables is enforceable as against third parties, without referring to the law of the domicile of the debtors, which may require cumbersome enforceability formalities. The reform will also have a positive impact in the context of foreign judicial proceedings, in the event that the relevant foreign jurisdiction, by application of the conflict of laws rules, holds that French law is applicable.
Prior to the Securitisation Reform, the FCC was only authorised to issue units (parts). FCC units represent an undivided co-ownership right in the receivables transferred to the FCC, rather than pure debt or equity. The specific legal nature of FCC units sometimes made their marketing difficult, particularly in respect of foreign investors and regulated institutions such as insurers and collective investment funds. In practice, access by an FCC to the capital markets was achieved by the setting up of “dual” structures under which the FCC issued its units to a special purpose vehicle which in turn issued commercial paper or other debt instruments to investors.
With the Securitisation Reform, the FCC has direct access to the capital markets and is allowed to issue debt securities either in France (such as French obligations and titres de créances négociables) or in international capital markets (such as EMTNs or MTNs). The reform is expected to attract a wider scope of investors on the international capital markets.
To facilitate the integration of the FCC on the international securitisation scene, the Securitisation Reform expressly authorises non-French entities to play an active role in FCC securitisation structures. Non-French entities can freely assign receivables to a French FCC and service the assigned receivables on behalf of the FCC. CMBS transactions, trade and auto loans receivables securitisation transactions give numerous examples of cross-border transactions using the FCC framework. Provided that it has a branch established in France, a credit institution within the EEA can act as custodian of an FCC. Moreover, each of the guarantors, investors, liquidity providers, enhancers and counterparties to derivative transactions may, subject to specific requirements, be non-French entities.
Prior to the Securitisation Reform, the FCC was only entitled to enter into derivatives agreements (instruments financiers à terme) for hedging purposes (to cover its own exposure). Now the FCC is authorised to enter into derivatives agreements as seller of protection and to bear credit risks related to one of more counterparties and reference entities.
To protect investors, the Securitisation Reform provides that derivatives transactions can be entered into by the FCC with limited counterparties such as credit institutions, insurance and reinsurance companies or legal entities guaranteed by such institutions. For the same reason, the Securitisation Reform specifies that, at any time, the net potential loss resulting from all the derivatives agreements entered into by an FCC shall not exceed the value of the assets of the FCC.
The obligations created under derivative arrangements may result in the physical delivery or transfer of receivables, in cash settlement or in the transfer of FCC units or similar units issued by foreign entities, with the exclusion of the FCC’s own units.
As a complementary reform, an FCC is now authorised to enter into repurchase agreements and to assign receivables or debt instruments before their maturity, under specific conditions.
As a result of the Securitisation Reform, the FCC has become a suitable instrument for synthetic securitisation transactions. Management companies willing to enter into this market will be required to adopt specific operating procedures and obtain a specific licence from the Autorité des marchés financiers.
The Securitisation Reform explicitly provides that, in addition to units (parts), the FCC may also issue debt instruments, including foreign debt instruments. The payment of sums due under the units issued by the FCC will be subordinated to the payment of the sums due under the debt instruments issued by the FCC. This subordination brings units closer to equity securities.
As regards the rank of the other FCC liabilities, this will be specified in the FCC regulations. As a general point, for more flexibility, many operational aspects related to the issue of debt instruments and more generally to the management of the FCC assets and liabilities will be determined by the parties on a contractual basis. For example, the Securitisation Reform allows the creation of several categories of parts and debt instruments, but the rights attached to each category of securities will be determined by the FCC regulations.
The Securitisation Reform improves the security of investors by mitigating commingling risk (the risk that the cash flows of the securitised assets received by the collection agent on behalf of the FCC will be commingled with other assets held by the collection agent).
Since the Securitisation Reform, the management company and the custodian of the FCC may agree with the collection agent and an account bank that the cash flows of the securitised assets be credited to a dedicated account (compte d’affectation spéciale). Funds credited to the dedicated account will be for the sole benefit of the FCC and beyond the reach of the creditors of the collection agent, for example if bankruptcy proceedings are opened against the collection agent. The Securitisation Reform provides details of the obligations of the respective parties to the collection account agreement but the operation of the account is meant to be flexible and of contractual nature.
This new mechanism is expected to have a positive impact on the development of securitisation for mid-size companies.