The Lending and Secured Finance Review: France
Corporate lending remains the most prevalent source of financing for French corporate borrowers, through either syndication or club deals. As an alternative source of funding, French corporates and especially medium-sized to large corporates use 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.
A form of private placement has emerged on the French market since 2012: Euro Private Placements (Euro PPs), which are medium or long-term financings granted in the form of either a loan agreement or an issue of listed or unlisted bonds between a company and a small number of investors. The model loan agreement and model subscription agreement (for the issuance of bonds), each drafted in French and English, were published by the Bank of France and the French Treasury for use in the context of Euro PPs and have been updated in October 2019. In January 2016, the AMAFI2 published a Code of Best Practice for Euro PP arrangers. In addition, to render the French bonds market more attractive, the order dated 10 May 2017 modernised French law to simplify the development of bonds issues governed by it. Some amendments have simplified the applicable regime – in particular, by clarifying the obligations of the issuers – and other amendments were made to facilitate the regime where the bonds issued are subscribed by qualified investors. The amount borrowed under syndicated companies in France was around US$151.2 billion in 2019 compared with US$170.8 billion in 2018.3
Notable recent deals in France include: (1) the syndicated loan for a total amount of US$4.96 billion for Accorinvest SAS;4 and (2) the financing of the acquisition by LVMH Moet Hennessy LV SE of Tiffany & Co through a loan of US$17 billion.5
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 and 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 2018, 175 finance companies were registered in France.6
These restrictions are known as the 'banking monopoly'. This monopoly also extends to receiving funds from the public and providing banking payment services, which can only be carried out by credit institutions (notwithstanding the possibility for payment institutions to provide payment services aside the banking monopoly regulations).
Subject to certain conditions defined by EU 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, interest or any other kind of payment), provides or promises to provide funds to another person or 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 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, including in particular those that are recognised as European long-term investment funds and certain alternative investment funds.
The Macron Law, which was adopted 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, the net cash and cash equivalent of the lending company. Law No. 2019-486 of 22 May 2019 on the growth and transformation of business relaxed these rules by allowing more company types to grant this kind of loan and increasing the maximum term from two to three years.
To facilitate cross-border transactions, Order No. 2017-1432 of 4 October 2017 introduced a new exception that allows, since 1 January 2018, certain foreign entities and institutions to acquire professional non-matured loan receivables from French regulated entities. Eligible foreign acquirers must have an activity or corporate purpose similar to those of certain entities authorised to lend in France pursuant to applicable banking monopoly rules.
A new exception was also introduced by Law No. 2018-1021 of 23 November 2018 as regards certain credit operations among entities belonging to a social housing organisation group. As regards intra-group loans, Law No. 2019-486 of 22 May 2019 on the growth and transformation of business broadened the possibility for companies to receive repayable funds from their shareholders and officers by, inter alia, abolishing the requirement for shareholders to hold at least 5 per cent of the companies' capital.
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, whereas 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, a compliance officer or a risk management officer).
iii Impact of Basel III, the Bank Recovery and Resolution Directive, the Capital Requirements Regulation, the Capital Requirements Directive,7 sanctions and anti-corruption laws
The impact of the implementation of global regulatory regulations such as Basel III, the Bank Recovery and Resolution Directive, the Capital Requirements Regulation and the Capital Requirements Directive 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 this respect, a series of four texts adopted on 20 May 2019 could have some impact on the current pricing because they significantly amend the above-mentioned European regulatory framework.
In addition, the increasing range of sanctions and anti-corruption laws implemented around the world (in particular, sanctions imposed by the Office of Foreign Assets Control of the US Treasury Department, the ACPR and the French anti-bribery agency), as well as their significant extraterritorial effect and their consequences in the event of breach (as illustrated by the US fine imposed on BNP Paribas in 2014 or by the French fine imposed on La Banque Postale in 2018), 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.
Credit support and subordination
This section describes current applicable French legal framework that could be modified pursuant to the draft bill described in Section VII.
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 choose to cover several unregistered security interests in one single security agreement).
Below is an overview of certain types of security interests that may be granted over assets located in France.
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 on occasion to maintain the effectiveness and ranking of the security interests.
All registered security interests must be drafted in French to allow registration with the relevant authorities for validity or perfection purposes and 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 where 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 movable property
Pledges over a business
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 intellectual property (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
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, it must be registered with the registrar of the relevant commercial court or the pledgor must effectively transfer possession and control of the pledged assets. The transfer is usually carried by 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 of the commercial law pledge 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) 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.
Case law decided that the use of civil law pledges is only possible in instances where the conditions for creating commercial law pledges are not met. However, the above-mentioned order dated 29 January 2016 has expressly provided that 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
Pledges over machinery and equipment can only be granted to the seller, the credit institution financing the payment of the purchase price or the guarantor guaranteeing 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)
Pledges over securities accounts
Pledges over securities accounts 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 in either 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 the securities account where the securities held in the name of the pledgor are registered, and 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
Pledges over partnership interests are governed by the French Civil Code and are applicable only to shares issued by limited or 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
Pledges over receivables (including pledges over a 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' 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 where the beneficiary of the assignment is a credit institution (see Section II) that has extended the financing secured by the security interest.
To be valid, a Dailly assignment must be drafted in French and contain mandatory provisions and must be perfected on the date specified by the secured creditor in the Dailly assignment.
The debtor of the receivables must be notified if the secured party wants to directly 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, 'Corporate benefit and misuse of corporate assets' and 'Financial assistance'), whereas other forms of credit support are limited.
With respect to guarantees, as of 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 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 these agreements has 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 because there are no published decisions of any French courts on their validity or enforceability.
Legal reservations and opinions practice
i Legal reservations
Corporate benefit and misuse of corporate assets
The relevant entity must consider its corporate benefit before guarantees or security interests are granted. The concept of corporate benefit 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 as follows:
- liable for damages on the basis of their alleged mismanagement; and
- 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, based on the mandatory status of this provision, transactions not complying with Article L. 225-216 could be voided by French courts.
Insolvency, security interests and the 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 stay of claims for payment having arisen prior to the judgment opening the relevant proceedings and 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. Addressees are recently and quasi-systematically asking to include rating agencies in the list of non-reliance recipients (mainly for loan transactions).
French legal opinions usually contain standard qualifications relating to:
- the use of a security agent if no security agent is appointed pursuant to Article 2488-6 et seq. of the French Civil Code;
- lower-ranking security interests;
- the effectiveness of 'parallel debt' structures if no security agent is appointed pursuant to Article 2488-6 et seq. of the French Civil Code; and
- 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 the choice is tainted with fraud, or 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:21 the foreign court must have jurisdiction over the case in accordance with French rules of private international law; and the decision must not contravene French international public policy rules or be tainted with fraud, and must not conflict with any proceedings or decisions having the same subject matter as a French judgment.
Outlook and conclusions
i Significant legal and regulatory developments
The past few years have witnessed an incremental erosion of the banking monopoly regime.
A bill authorising the government to legislate by issuing an order to simplify and update the French legal framework of guarantees and security interests is currently being debated in Parliament. It contemplates modernising guarantees, pledges over movable and intangible assets and security interests over real estate regimes and creating new legal instruments to grant a French law-governed assignment over receivables as distinct from Dailly assignments. Such reform is expected to be adopted by May 2021 at the latest.
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 competitiveness of corporate lending by credit institutions has continued owing to a friendly interest rate environment.
It is also likely that the French corporate lending market will witness some changes given the impact of Brexit, the reference rates reform and the development of green loans.
iii Covid-19 crisis
This article does not take into account the impacts caused by the covid-19 crisis on the French lending market, as it is too early to assess them. France (like other countries) is facing an unprecedented economic crisis. The French government has unveiled emergency packages in various sectors to mitigate the economic impacts on companies resulting from the quarantine measures implemented to fight covid-19, including in the financing sector.
In particular, one of the main financial support measures unveiled by the French government is, under certain strict conditions (notably for large companies or groups of companies), the guarantee from the French state on loans granted between 16 March 2020 and 31 December 2020 by credit institutions and financing companies or crowdfunding intermediaries (together, the PGE Lenders), up to €300 billion, to companies registered in France, other than PGE Lenders, to meet the financial needs of companies whose activity is severely affected because of the covid-19 crisis. As at 26 May 2020 and since its implementation, the amount of such French state-guaranteed loans for large and mid-cap companies is around €15.2 billion out of a total of €82.013 billion for all companies (whatever their size).
1 Karine Sultan and Yves Rutschmann are partners, and Jessica Chartier, Béna Mara and Gaël Rivière are associates at Bredin Prat.
2 Association française des marchés financiers.
3 Global Syndicated Loans Review, Full Year 2019, Reuters.
4 Global Syndicated Loans Review, First Quarter 2020, Reuters.
5 Global Syndicated Loans Review, Full Year 2019, Reuters.
6 2018 ACPR Annual Report.
7 The Capital Requirements Regulation and Directive.
8 Please note that these rules may be amended in the course of 2020 as a result of the covid-19 crisis.
9 For the purpose of the Anti-Hybrid Limitation, 'establishment' should refer in practice to a permanent establishment.
10 Characterised in the case of (1) an arrangement (with an associated enterprise or not) involving a hybrid mismatch where the mismatch outcome is priced into the terms of the arrangement or an arrangement that has been designed to produce a hybrid mismatch outcome, and (2) the taxpayer cannot demonstrate that he, she or an associated enterprise was not aware of the hybrid mismatch and has not benefited from the value of the tax benefit resulting from the hybrid mismatch.
11 The 50 per cent thresholds are reduced to 25 per cent where the hybrid mismatch arises (1) in connection with a hybrid financial instrument or (2) under a deemed payment (x) between the head office and an establishment or (y) between two or more establishments of a same entity.
12 For the purpose of the Anti-Hybrid Limitation, 'residence' should refer to the place where a person has its head office or its residence for tax purposes.
13 For the purposes of this rule, a payment will be considered as included in the taxable result of the beneficiary if the two following conditions are met: (1) the payment does not give rise, pursuant the rules applicable in the state of residence of the beneficiary, to an exemption, a taxation rate reduction, a tax credit or a tax reimbursement (other than a tax credit in relation to a withholding tax) because of the nature of the payment and (2) this inclusion occurs in respect of a fiscal year beginning within 24 months from the end of the fiscal year in respect of which the payment has been deducted. In addition, would not be concerned, under certain conditions, hybrid transfers performed by financial traders (as specifically defined).
14 Any person other than the debtor benefiting from a deduction as a result of the hybrid mismatch.
15 An imported hybrid mismatch may be characterised when a payment to an entity is offset (in whole or in part, directly or indirectly) at its level by expenses relating to a hybrid mismatch through (1) a transaction or a series of transactions between associated enterprises of a same taxpayer or (2) structured arrangements (as defined above).
16 Hybrid transfers may be characterised as any arrangement allowing the transfer of a financial instrument where the underlying return on this instrument is considered, from a tax standpoint, as benefiting simultaneously to several parties to the transaction.
17 The combination of this specific rule with the general rule referred to above is unclear at this stage.
18 The combination of this specific rule with the general rule referred to above is unclear at this stage.
19 Earnings before interest, tax, depreciation and amortisation, as adjusted for the purpose of this limitation.
20 And 7 January 2020 as far as the jurisdiction removed from the list are concerned.
21 '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.