Corporate lending remains the most prevalent source of financing for French corporate borrowers, either through syndication or club deals. Over the past year or so, average loan pricing has progressively declined, which undoubtedly helped increase loan volumes. As an alternative source of funding, French corporates and especially medium-sized to large corporates have used private placements, thus allowing them to access institutional investors and diversify their financing sources.
For syndicated loans, the most widely used precedent remains the French law Multicurrency Term and Revolving Facilities Agreement published by the Loan Market Association.
Historically, private placements by French corporates were carried out by means of foreign instruments such as unrated US private placements or German ‘Schuldscheins', both of which allowed medium or long-term tenors and flexible issue sizes. Since 2012, another form of private placement has emerged on the French market: euro private placements, which are medium or long-term financings granted either in the form of a loan agreement or an issue of listed or unlisted bonds between a company and a small number of investors. In 2014, a model loan agreement and a model subscription agreement (for the issuance of bonds), each drafted in French and English, were published by the Banque de France and the French Treasury for use in the context of Euro Private Placements. In January 2016, the AMAFI2 published a Code of Best Practice for Euro PP Arrangers. Although expected to increase, the volume of trades in 2014 and 2015 has remained stable, and the total volume was, in 2016, around €2.5 billion in September (against €4.3 billion in 2015 at the same period).
Notable recent deals in France include:
- a the recent syndicated loan agreement for a total amount of €8.962 billion for Semyrhamis, the holding of Groupe Familial Arnault;
- b the recent syndicated loan agreement for a total amount of €6 billion for Orange;
- c the recent syndicated loan agreement for a total amount of €1.3 billion for Korian;
- d the recent syndicated loan agreement for a total amount of €650 million for Avril;
- e the issue of bonds by Lagardère for €500 million.
II LEGAL AND REGULATORY DEVELOPMENTS
This section contains a high-level summary of the main recent legal and regulatory developments.
i Reserved banking activities
Pursuant to Article L. 511-5 of the French Monetary and Financial Code (MFC), the ability to carry out credit transactions on a regular basis is, in principle, subject to the monopoly of licensed credit institutions (banks) and finance companies (together with licensed credit institutions, authorised entities)). Finance companies were created in 2013 in France, and may only carry out credit transactions and, subject to exceptions, do not benefit from the European passport. In 2017, 184 finance companies were registered in France.
These restrictions are known as the ‘banking monopoly'. This monopoly also extends to receiving funds from the public and providing banking payment services.
Subject to certain conditions defined by European law, an entity authorised to carry out banking activities (such as carrying out credit transactions) in a European Economic Area (EEA) Member State is entitled, if it chooses, to carry out the same permitted activities in any other EEA Member State by either exercising the right of establishment (through a branch or agents) or providing cross-border services.
Thus, a licence would be required for an entity to carry out what qualifies as credit transactions in France on a regular basis.
Breach of banking monopoly rules constitutes a criminal offence (with penalties of up to three years' imprisonment and a fine of up to €375,000).
A credit transaction is defined by Article L. 313-1 of the MFC as any act whereby a person, acting in exchange for payment (fees, interests or any other kind of payment), provides or promises to provide (1) funds to another person or (2) an undertaking on behalf of another person.
The term ‘credit transaction' is therefore broad in scope and covers many types of transactions.
Exceptions to the banking monopoly
The banking monopoly regime is subject to a number of exceptions set out in the MFC and the French Commercial Code, including the issuance or subscription of bonds, deferred payment terms, vendor loans, intra-group loans (i.e., credit transactions between entities under common control) and loans granted to a company by direct shareholders owning at least 5 per cent of the share capital of the company.
Certain specific entities that are not authorised entities may, in certain circumstances, carry out credit transactions, such as insurance companies, payment services providers, crowdfunding platforms or certain funds.
The Macron law, which was released in August 2015, introduced a new exception to the banking monopoly. Under the new law, limited liability companies can extend loans with a maturity of less than two years to small and medium-sized enterprises with which they have business relationships. A decree released on 24 April 2016 sets out the various business relationships under which enterprises are authorised to extend loans and the maximum annual amount of such loans per borrower and in aggregate, depending on the size and the net cash and cash equivalent of the lending company.
ii Authorised entities and prudential obligations
Banking licences have been granted to credit institutions by the European Central Bank (ECB) since 4 November 2014. However, a filing must be made with the French banking regulator (ACPR), which assesses all applications and forwards draft decisions to the ECB. Moreover, licences for finance companies are still granted by the ACPR.
Credit institutions considered as ‘important' in accordance with Council Regulation (EU) No. 1024/2013 are supervised directly by the ECB, while less important credit institutions and finance companies are directly supervised by the ACPR.
To be licensed as a credit institution or a finance company, an institution must meet certain prudential requirements relating to its share capital and its maintenance of solvency and liquidity ratios. Additional requirements pertaining to the governance and the internal organisation of the credit institution or finance company must be met (e.g., appointment of control officers, of a compliance officer or of a risk management officer).
iii Impact of Basel III, CRR and CRD IV,3 the sanctions and anti-corruption laws
The impact of the implementation of global regulatory regulations such as Basel III, CRR and CRD IV is difficult to assess with respect to corporate lending, even if such measures certainly affect the pricing of loans made by banks.
However, as far as documentation is concerned, these regulations impact the ‘increased-costs' provisions pursuant to which the costs of compliance with the regulations are to be borne by the borrower. These increased-costs clauses are usually heavily negotiated by French corporates.
In addition, the increasing range of sanctions and of anti-corruption laws implemented around the world (in particular sanctions imposed by the Office of Foreign Assets Control of the US Department of the Treasury, and since this year the French anti-bribery agency), as well as their significant extraterritorial effect and their consequences in the event of breach (as illustrated by the fine imposed on BNP Paribas in 2014), has led many lenders to seek specific representations and undertakings from the borrower in relation to these matters. These are not only required in most loan documentation negotiated recently, but also by arrangers and initial purchasers in the context of French law bond issues through representations or due diligence questionnaires.
III TAX CONSIDERATIONS
i Deductibility of interest for borrower
Interest expenses incurred by a company subject to French corporate income tax are generally deductible for tax purposes, subject to the specific limitations or anti-abuse rules described hereinafter, provided that the following criteria are simultaneously met:
- a the debt has been incurred for the direct purpose of the business carried out by the borrowing company;
- b the debt is duly recorded in its balance sheet for accounting purposes;
- c the financial terms and conditions of the debt are set at ‘arm's length'; and
- d the debt service (i.e., repayment of principal and payment of interest charges) does not exceed the financial capabilities of the borrowing company nor deprive it of the necessary funds to meet any reasonable foreseeable investment needs.
Specific limitation rules
Interest expenses deductibility is subject to the following specific limitation rules.
Definition of a ‘related party'
All references to ‘related parties' below mean two companies where either:
- a one company controls (directly or indirectly) the other; or
- b they are controlled directly or indirectly by another company.
A company is considered as controlling another company if either:
- a it holds the majority of the share capital of that company; or
- b it de facto manages that company.
French rules limiting the deductibility of interest expenses paid to shareholders or related parties (including thin capitalisation rules) are:
- a Interest paid by a French company to its shareholders who do not qualify as related entities is only deductible within the limit of the average annual interest rate for certain loans granted by banks (2.025 per cent for fiscal year 2016 coinciding with the calendar year), provided that the borrower's share capital is fully paid up.
- b Interest paid by a French company on loans granted by related entities is only deductible within the limit of the interest rate defined above, or, if higher, the rate that independent financial institutions would have applied under similar circumstances.
- c The ‘anti-hybrid limitation' provides that interest paid by a French company to related entities is only deductible if the borrower can demonstrate that, for the same fiscal year, the lender is subject to income tax on this interest for an amount at least equal to 25 per cent of the French corporate income tax as determined under standard rules.
- e Interest on loans granted by related parties that is deductible under the above-mentioned limitations will only be fully deductible if it does not exceed the following limits:
• the amount of the interest multiplied by one and a half times the company's net equity and divided by the average amount of related parties' indebtedness over the relevant fiscal year;
• 25 per cent of the company's adjusted earnings before tax and exceptional items; and
• the amount of interest received from related parties.
- If all the above three limits are exceeded, the portion of interest exceeding the higher of these limits cannot be deducted from the relevant fiscal year's results (unless the portion of interest is lower than €150,000). However, it can be carried forward subject to certain conditions.
- Thin capitalisation rules also apply to loans granted by non-related parties, but guaranteed by related parties, subject to specific exceptions.
- f A general clawback of 25 per cent of all net financial charges borne by French companies, which applies irrespective of thin capitalisation situations when the net financial charges exceed €3 million (threshold assessed at the level of the tax-consolidated group, if any).
- g Anti-abuse rules may apply in specific acquisition scenarios where:
• a French target is acquired and subsequently included in the tax-consolidated group to which the acquirer belongs, if the seller: (1) directly or indirectly controls the head of the tax-consolidated group, or (2) is controlled directly or indirectly by the persons who directly or indirectly control the head of the tax-consolidated group; and
• a French company acquiring a target company cannot demonstrate that it effectively controls the target.
These limitation rules shall apply within the order specified by the law and the French tax authorities in their guidelines, it being specified that particular rules apply within French tax consolidated groups. Furthermore, specific anti-abuse rules may apply in cross-border contexts. Interest paid by French companies to entities located in low-tax jurisdictions is only deductible if the borrower proves that the interest corresponds to real transactions and is not excessive. For interest due to entities located in a non-cooperative state or territory (NCST) (that is, states or territories that do not apply international standards with respect to exchanges of tax information and have not concluded with France and at least 12 other states or territories a convention on administrative assistance allowing the exchange of information necessary for the application of their respective tax laws), the borrower must further demonstrate that the main purpose and effect of the transaction are not to transfer income to the NCST.
On 12 July 2016, the Council adopted the Anti Tax Avoidance Directive (ATAD) (Directive (EU) 2016/1164) laying down rules against tax avoidance practices including an interest limitation rule set out in Article 4. Member States shall, by 31 December 2018, adopt and publish the laws, regulations and administrative provisions necessary to comply with this Directive and shall apply those provisions from 1 January 2019. By way of derogation from Article 4, Member States that have national targeted rules for preventing BEPS risks at 8 August 2016, which are equally effective to the interest limitation rule set out in this Directive, may apply these targeted rules until 1 January 2024 at the latest. It will be interesting to see how France will interpret its interest limitation rules in respect of that derogation and whether or not France will consider that the domestic targeted rules may apply until 1 January 2024. In addition, it is unclear how the interest limitation rule provided by Article 4 will impact the above-mentioned rules (thin capitalisation rules, rules regarding specific acquisition scenarios, etc.).
ii Withholding taxes on payments to lender
Interest paid by French companies to non-residents is not usually subject to any withholding tax, except for interest paid outside France in an NCST, which is subject to a 75 per cent withholding tax, unless the company proves that the main purpose and effect of the transaction are not to transfer income to the NCST.
iii Documentary and transfer taxes
France does not levy any documentary or transfer taxes on loan agreements.
iv Impact of the Foreign Account Tax Compliance Act (FATCA)
FATCA was enacted by the United States in 2010 to combat offshore tax evasion by US persons. On 14 November 2013, the French Minister of Economy and Finance and the US Ambassador to France signed a bilateral intergovernmental agreement intended to implement FATCA. FATCA legislation was implemented in France by Law No. 2014-1098 dated 29 September 2014.
v OECD Common Reporting Standard
The Savings Directive (Directive 2003/48/CE, amended by Directive 2014/48/EU), which provided for the automatic exchange of information between tax authorities of Member States on income from private savings, was repealed on 10 November 2015. The repeal of this Directive aimed to prevent overlap with Council Directive 2011/16/EU, which is directly inspired by the OECD Common Reporting Standard. In December 2014, Directive 2011/16/EU was amended by Directive 2014/107/EU, which entered into force on 1 January 2016, and which extends the scope of exchange of information between Member States to include, notably, interest and dividends.
IV CREDIT SUPPORT AND SUBORDINATION
Security interests over an asset must be granted in accordance with the specific set of rules applying to the category to which the asset belongs. Security packages are therefore most often documented through several separate security documents (although some law firms have recently started covering several unregistered security interests in one single security agreement).
Below is an overview of certain types of security interest that may be granted over assets located in France.
It should be noted that:
- a registration always requires the payment of fees (the amount of which represents a percentage of the secured obligations for mortgages and security trusts while registration fees for other registered securities are nominal) and a renewal of the registration from time to time to maintain the effectiveness and ranking of the security interests; and
- b all registered security interests must (1) be drafted in French to allow registration with the relevant authorities for validity or perfection purposes, and (2) cover the relevant mandatory points required by law to be valid.
Security interests over real estate
Mortgages are granted over lands and buildings. To be valid, they must be executed before a public notary. To be perfected, they must be registered with the land registry, which will trigger the payment of various costs including the real estate registration tax.
Security trusts require rights and assets (whether present or future) to be transferred to a trustee acting in favour of the secured creditor. The assets held by the trustee of the security trust are segregated from its own assets. They are generally used in restructuring transactions when the assets of the borrower consist of real estate.
To be valid, security trusts must be registered with the local tax authorities within one month of their execution.
Security interests over tangible moveable property
Pledges over a business are granted over the business and cover at least the trade name, the leasehold rights where the business is operated and the goodwill of the business. If expressly provided and identified in the pledge agreement, the scope of the pledge may extend to fixed assets such as furniture, machinery, equipment and IP rights attached to the business. The secured creditors may also decide to pledge machinery, equipment or IP rights under the specific regimes described below.
To be valid, they must be registered with the tax authorities and then with the registrar of the commercial court within 30 days of execution.
Registration requirements are described below, for situations where the IP rights are included within the scope of the pledges over a business.
Pledges over inventory may be created in accordance with the French Civil Code (civil law pledges) or with the French Commercial Code (commercial law pledges).
To perfect a civil law pledge, the pledgor must effectively transfer possession and control of the pledged assets. The transfer is usually carried out in the hands of a third-party service provider, which then undertakes certain obligations.
Since an order dated 29 January 2016, with respect to contracts entered into after 1 April 2016, the regime has been simplified. However, the availability of a commercial law pledge is still limited as the beneficiary of the pledge can only be the credit institution (see Section II, supra) that has extended the financing secured by the security interest.
To be enforceable against third parties, the pledge must contain mandatory provisions and be registered with the registrar of the relevant commercial court.
Recent case law had decided that the use of civil law pledges was only possible in instances where the conditions for creating commercial law pledges were not met. However, the above-mentioned order dated 29 January 2016 has expressly provided that the parties can freely decide from 1 April 2016 whether to use a civil law pledge or a commercial law pledge.
Pledges over machinery and equipment can only be granted to the seller or the credit institution financing the payment of the purchase price for the identified machinery and equipment, over which the pledge is created to secure the payment. They must be directly granted in the sale agreement or the financing agreement.
To be valid, it must be granted within two months of delivery of the relevant machinery and equipment and be registered with the tax authorities, and then with the registrar of the commercial courts within 15 days of execution.
Security interests over shares and financial instruments (‘securities' under French law)
Pledges over securities account are governed by the MFC and are only relevant where the securities to be pledged are issued by a French limited liability company that is not a limited liability partnership. They apply to the securities account on which the securities and future securities held in the name of the pledgor are registered. The securities account is opened either in a paper format register held by the issuer of the securities, or in an electronic format register by a regulated intermediary authorised by law to hold such accounts (the pledged securities account holder).
These pledges are created by the execution of a statement of pledge drafted in French, containing mandatory provisions and covering both (1) the securities account where the securities held in the name of the pledgor are registered, and (2) the special proceeds account opened in the name of the pledgor in the books of a bank or of the pledged securities account holder, where all dividends pertaining to the securities are transferred.
In practice, the security interest is registered in the securities transfer register and in the security holders' accounts of the French company.
Pledges over partnership interests are governed by the French Civil Code and are applicable only to shares issued by limited and unlimited liability partnerships (which are not limited liability companies). As such partnerships are ‘closed companies', granting such pledges requires the secured creditors to be approved by the shareholders as potential future shareholders.
To be perfected, they must be registered with the registrar of the commercial court.
Security interests over contractual rights, receivables and intangibles
Pledges over receivables (including pledges over bank account) are governed by the French Civil Code and must properly identify the pledged receivables and the relevant debtor or debtors.
With respect to a pledge over a bank account, the pledged receivables will correspond to the amount of credit in the bank account at the time the pledge over the bank account is enforced, after taking into account debits and credits previously initiated but not yet completed.
As between the parties and towards third parties, the pledge is perfected as soon as it is executed, whereas a notification is required to perfect the pledge towards the debtor of the receivables.
‘Dailly law' assignments are security interests where a company makes an outright transfer of any claims it may have over identifiable receivables arising out of its professional activity. They are only available when the beneficiary of the assignment is a credit institution (see Section II, supra) that has extended the financing secured by the security interest.
To be valid, a Dailly deed must be drafted in French and contain mandatory provisions, and must be perfected on the date specified by the secured creditor in the Dailly deed.
The debtor of the receivables must be notified if the secured party wants to receive all payments pertaining to the receivables.
Cash collateral is created by transferring cash to the credit of a bank account belonging to the secured creditor.
Pledges over IP rights
Pledges may be granted over all kinds of IP rights such as patents, trademarks or designs. To be perfected, they must be registered with the French Trademark and Patent Office and published in the Official Bulletin of Industrial Property.
ii Guarantees and other forms of credit support
Guarantees are commonly used in France and granted by the parent company as well as significant subsidiaries of the group (see Section V, infra: restrictions for corporate benefit rules), whereas other forms of credit support are limited.
With respect to guarantees, since 2006, guarantees have been governed by one chapter of the French Civil Code and may take three forms: joint and several guarantees, autonomous guarantees and letters of intent.
iii Priorities and subordination
As in other jurisdictions, financial indebtedness can be subordinated in two ways: through structural subordination and contractual subordination.
Structural subordination, where senior debt is made directly available to operational companies whereas mezzanine and junior debt is only made available to the acquisition vehicle, cannot be effected in respect of corporate lending for a single borrower and, therefore, is usually only seen in acquisition finance contexts.
Contractual subordination through subordination agreements is commonly used, and the effectiveness of such agreements has recently been recognised by Article L. 626-30-2 of the French Commercial Code in the context of safeguard proceedings. However, the effectiveness of contractual intercreditor arrangements is not free from doubt since there are no published decisions of any French courts on their validity or enforceability.
V LEGAL RESERVATIONS AND OPINIONS PRACTICE
i Legal reservations
Corporate benefit and misuse of corporate assets
The relevant entity must consider its corporate benefit and review its articles of association before guarantees or security interests are granted. Pursuant to an order dated 10 February 2016, which came into force on 1 October 2016, the contracts that are concluded by a company and that do not fall within its corporate purpose are voidable since it would constitute a lack of capacity under new Article 1147 of the French Civil Code, therefore, casting a doubt on case law applicable before such reform. Some authors and practitioners consider that the change introduced under new Article 1147 of the French Civil Code is not applicable to limited liability companies (SARL and sociétés par actions), but there is no certainty that courts would follow their approach. With respect to corporate benefit, this concept is not clearly defined by French law, and French courts will assess, after the event, whether the decisions taken by the directors of the company were in fact prejudicial to the company.
Failure to act in a company's corporate interest puts the relevant directors at risk of becoming:
- a liable for damages on the basis of their alleged mismanagement; and
- b criminally liable on the basis of misuse of a company's assets or credit. For individuals, the penalties are five years' imprisonment and a fine of up to €375,000.
As boundaries of the concept of ‘group-wide corporate benefit' remain rather vague under French law, current market practice has designed (in relation to upstream or cross-stream guarantees) guarantee limitation clauses ensuring that a French guarantor's liability under its guarantee is limited to the financing proceeds directly or indirectly lent on to the French guarantor.
Under French law, it is prohibited for French limited liability companies that are not limited liability partnerships that are being acquired and for their subsidiaries, including foreign subsidiaries (e.g., if the foreign subsidiary has French assets over which security is to be created), to give any guarantees or grant security interests over their assets to secure the amounts used to acquire them.
Financial assistance issues must also be considered when merging the acquisition vehicle and the target or when implementing debt pushdowns (in particular where the target group draws further new facilities, the proceeds of which are to be used as a dividend allowing the acquisition vehicle to repay the initial acquisition indebtedness).
Breaching Article L. 225-216 of the French Commercial Code is a criminal offence that exposes the directors of the company to a fine of up to €150,000. Moreover, French commentators consider that transactions not complying with Article L. 225-216 could be voided by French courts.
Insolvency, security interests and suspect period
The onset of court-driven proceedings (i.e., liquidation proceedings, reorganisation proceedings and several types of safeguard proceedings) triggers a general stay of certain claims (predating the proceedings) including:
- a a stay of claims for payment having arisen prior to the judgment opening the relevant proceedings; and
- b a stay of all enforcement action in respect of security interests.
French insolvency law provides for a ‘suspect period', extending backward in time from the date of the judgment opening recovery or liquidation proceedings to the time when a company becomes unable to settle its liabilities as and when they fall due with its available assets. This time may be backdated to the date falling 18 months prior to the opening judgment.
Certain transactions entered into during the suspect period are automatically void. In particular, French law provides for the automatic nullification of the granting of pledges and mortgages that have been constituted during the suspect period to secure pre-existing indebtedness.
Some other transactions are voidable at the court's discretion, particularly if the court determines that the creditor knew of the debtor's suspension of payments at the time of the relevant transaction (including repayment of debts that are due and payable and transfers of assets for consideration).
ii Legal opinion practice
Characteristics of French legal opinions
There is sufficient consensus on issues relating to French legal practice for French legal opinions to be relatively standardised.
Capacity legal opinions (covering due incorporation, due corporate action and due authority of the relevant signatories) are usually delivered by counsel to the borrower whereas French law validity legal opinions (covering validity and enforceability of French-law governed documentation) are usually delivered by the legal adviser of the lenders or the bonds' initial purchasers. There are exceptions to these principles in the context of the issuance of high-yield bonds or where US parties are involved, in which case French practice is increasingly that legal advisers of the issuer and the bonds' subscribers both provide validity opinions as to the security package on the transaction.
Addressees of legal opinions usually include the security agent or trustee (where applicable), the arrangers, the initial purchasers (for bond transactions) or the facility agent and the initial lenders (for loan transactions). The provision of copies of legal opinions (without reliance) is usually permitted in respect of the affiliates, auditors and advisers of the addressees, as well as courts, regulatory authorities and potential assignees or transferees.
French legal opinions usually contain standard qualifications relating to the use of a security agent, lower-ranking security interests, the effectiveness of ‘parallel debt' structures and as to the effectiveness of any pledges of future receivables that are not identifiable or properly identified.
iii Choice of foreign governing law
In accordance with Regulation (EC) No. 593/2008 dated 17 June 2008, the choice of foreign law to govern a financing is a valid choice of law that would be upheld under French law unless such a choice is tainted with fraud or if it conflicts with French international public policy or French mandatory provisions, and provided that the relevant provisions of foreign law are produced in evidence before the French courts.
iv Recognition of foreign judgments
Decisions by European courts against a debtor are normally enforceable before French courts in accordance with Council Regulation (EC) No. 44/2001, dated 22 December 2000.
For non-European countries and in the absence of a bilateral agreement between France and the country where the judicial decision has been rendered, recognition is subject to the conditions required for exequatur:4 the foreign court must have jurisdiction over the case in accordance with French rules of private international law; the decision must not contravene French international public policy rules, must not be tainted with fraud and must not conflict with any proceedings or decisions having the same subject matter as a French judgment.
VI LOAN TRADING
Transfers of existing loan participations between existing and new lenders are mostly effected through assignments of receivables or through sub-participations. Before 1 October 2016, an assignment of receivables had to be formally notified by bailiff to the borrower. Following an order dated 10 February 2016, which came into force on 1 October 2016, this requirement no longer applies and a simple notification is sufficient. The assignment must be in writing, or it will be declared void. The securities provided by the assignor will remain enforceable.
The 2016 order mentioned above has introduced, in particular, provisions relating to assignments of debts and assignments of contracts. Assignments of debts will be possible with the approval of the creditor, which can be given in advance. The creditor must also give express consent to free the initial debtor; in the absence of consent and unless otherwise provided, the debtor will still be considered as a joint debtor until full repayment of the debt by the assignee. If the creditor does not free the initial debtor, the securities will remain enforceable. Otherwise, third parties that granted securities must give their consent to maintain the securities, the guarantors will still be liable under their guarantees and the guarantee will be reduced by the amount of the assigned debt. Assignment of contracts follows the same logic as assignment of debts except that the assignment of contracts must be in writing, or it will be declared void.
Novation is rarely used, as the validity and priority over security interests would be affected.
i Loan trading and banking monopoly
The purchase of unmatured debt (i.e., the transfer from a lender of its participation in a facility) constitutes a credit transaction to which the above-mentioned banking monopoly rules apply, and as such can only be carried out by authorised entities (see Section III, supra) if it is deemed to be carried out in France.
The mere holding of a participation or a sub-participation in a loan to a French borrower is generally not considered by practitioners as a credit transaction to the extent that the loan has already been made available to the borrower and that no further drawing will be required from the lenders (i.e., term loans and non-revolving loans).
ii Loan trading and transfer of security interests
The assignment of receivables entails the automatic transfer of all accessory features relating to the receivables (including the benefit of personal guarantees and security interests securing the receivables). Notable exceptions include Dailly law assignments as they may only be provided for the benefit of credit institutions and cash collateral accounts that are the property of the bank to which they were initially granted, although they are subject to a restitution claim for the same amount.
The customary practice under French law documentation had been to grant security for the benefit of all finance parties directly as opposed to a security agent alone since French practitioners did not rely on Article 2328-1 in the French Civil Code, which was introduced in 2007 purportedly to allow French security agents to manage security interests on behalf of the other creditors owing to uncertainties and incompleteness of its regime. Note, however, that an order of 4 May 2017, entering into force on 1 October 2017, has been published to replace, improve and clarify the former legal regime under Articles 2488-6 et seq. of the French Civil Code. This new regime provides in particular that the security agent: (1) is now a beneficiary of the in rem or personal guarantees that are segregated from its own assets; (2) can be appointed in any written agreement; and (3) can take certain legal actions in bankruptcy proceedings without a special power granted by the finance parties.
In the context of cross-border transactions with main documents not governed by French law, parallel debt structures can still be used. Such concept has received only partial recognition by French case law, as it was held (in the very specific context of safeguard proceedings opened in France) that such structures governed by foreign laws were not incompatible with French international public policy rules. It remains to be seen whether such structures will be upheld by the French courts in more general contexts.
VII OUTLOOK AND CONCLUSIONS
i Significant legal and regulatory developments
As mentioned above, an order of 4 May 2017, entering into force on 1 October 2017, on the security agent has been published. As this is a new legislation that has not entered into force, practitioners have not yet used this mechanism, and there is no real insight on its implementation.
A reform in order to simplify the issue of bonds by companies has also been enacted by an order dated 10 May 2017, aiming to modernise French law in order to simplify the development of bonds issues governed by French law. Some amendments have simplified the applicable regime, in particular by clarifying the obligations of the issuers, and some amendments were made to simplify the regime when the bonds issuances are subscribed by qualified investors.
One has witnessed over the past few years an incremental erosion of the banking monopoly regime.
ii Outlook for the lending market
It is likely that the general disintermediation of the French corporate lending market will continue for the time being, along with a further diversification of available funding sources (and further inroads into the banking monopoly regime), to reflect the emergence of new market players and the development of partnerships between traditional banks and investment funds. The recent competitiveness of corporate lending by credit institutions was driven by a friendly interest rate environment.
1 Karine Sultan and Yves Rutschmann are partners, Mathieu Françon and Aurélien Jolly are counsels and Charlotte Bonsch, and Anaïs Pinton are associates at Bredin Prat.
2 Association française des marchés financiers.
3 The Capital Requirements Regulation and Directive.
4 ‘Exequatur' is a concept specific to private international law and refers to a decision by a court authorising the enforcement in that country of a judgment, arbitral reward or court settlement given abroad.