The Securitisation Law Review: France
France has an active securitisation market supported by origination from European banking heavyweights, specialised lenders and large corporates. Securitisation continues to play an important role in providing, notably, a diversified and attractive source of financing and asset derecognition solutions.
As elsewhere, the stigma of the global financial crisis can still be somehow perceived, but with a good set of active issuers and investors, the securitisation industry is active. More recently, the impact of the pandemic on the French market was commensurate to what other European jurisdictions have witnessed, with lower generation of assets and a temporary drop in payment rates, in part because of legally2 or contractually awarded payment holidays.
Some of the most active asset classes include auto asset-backed securities (ABS) and other consumer ABS; trade receivables and corporate securitisation; residential mortgage backed securities (RMBS); and synthetic collateralised loan obligations (CLOs). The simple, transparent and standardised (STS) label under the European Securitisation Regulation 2017/24023 (the Securitisation Regulation) has been widely adopted when available and the market is also supported by transactions seeking favourable prudential treatment through a significant risk-transfer approach. One – non-surprising – expectation of a number of market participants is that deteriorated macro-economic conditions will support the growth of the non-performing loan (NPL) segment, which has remained timid so far.
This market would not be witnessing such level of activity absent a solid and favourable legal environment. This environment is primarily provided by the specific provisions of the Monetary and Financial Code (CMF), which regulates securitisation vehicles and provides useful tools to implement securitisation and structured finance transactions. Quite often, these tools are used in transactions with a minimum French nexus but this is not always the case and the flexibility and efficiency of these tools prove to be very useful in a much broader context.
Such legal framework governs, inter alia, the creation of specific securitisation vehicles, how their assets and liabilities may be managed and true sale requirements. This chapter elaborates on the content of such legal and regulatory framework and how it serves the needs of the securitisation market.
i Legal and regulatory framework
The first legislation introducing securitisation dates back to 1988.4 This regime has been amended on a regular basis and codified within the CMF. The latest substantial overhaul of the legal regime took place under the terms of Ordinance of 4 October 20175 (as supplemented by implementing decrees in 2018).6
Initially, and until 2008, the securitisation mutual fund (FCT), formerly known as a receivables mutual fund (FCC), was the only existing vehicle under French law dedicated to securitisation. It was by an Ordinance of 13 June 20087 that the option of setting up a securitisation vehicle in the form of a commercial company (ST) was introduced into French law.8 With the Ordinance of 2017 mentioned above, securitisation vehicles (OTs) (designating the FCT and the ST) were included in the new category of financing vehicles, which also includes the then newly created specialised financing vehicles (OFS).
ii The merits of a specific legal framework
The need for such a legal framework arose to remove certain obstacles that could hinder the implementation of securitisation transactions governed by French law or involving French originators or French assets. Some of the main drivers for an ad hoc regime include:
- a specific vehicle engaged in securitisation or financing transactions must first be authorised to carry on its activity without infringing upon the monopoly of credit institutions (since, in particular, the acquisition of unmatured receivables and the granting of loans, which is authorised to OTs, otherwise falls under the monopoly of credit institutions);9 OTs thus benefit from a derogation10 to carry out those activities;
- it was therefore imperative to have a vehicle that did not expose investors, other creditors and stakeholders to the risk of bankruptcy (as to which see below), and that was sufficiently flexible and secure;
- a specific regime for the assignment of receivables has also proved necessary, both to ensure its flexibility and its effectiveness, including in the event of the assignor's bankruptcy;
- for the risks of a securitisation transaction to be properly managed, a debt recovery regime allowing for the creation of specific rights for the OTs over the amounts collected in the servicer's account by means of the dedicated account mechanism also proved necessary;11 and
- more recently, this regime has made it possible for French securitisation vehicles to satisfy some of the European regulatory requirements (some aspects of which are discussed below).
Security and guarantees
OTs are defined in the CMF12 as vehicles whose purpose is to be exposed to certain risks,13 which include exposures over receivables or other assets, loans or insurance risks and to fully finance or cover such risks, under the conditions laid down in the CMF, in particular, by issuing units, debt securities, shares, loans or by having recourse to other debt resources or commitments.14
i Legal form
OTs exist either in the form of unincorporated funds (by far the most popular form), in which case they are referred to as securitisation mutual funds (FCT), or in the form of incorporated companies (less common), in which case they are referred to as securitisation companies (ST).15
An OT may comprise different compartments if the articles of association or the regulations of the OT so provide. Each sub-fund then gives rise to the issue of units or shares and, where applicable, debt securities. Unless otherwise provided in the articles of association or the regulations of the OT, the assets of a given sub-fund are liable only for the debts, commitments and obligations and benefit only from the rights and assets relating to that sub-fund.
In each case, an OT is managed by a portfolio management company approved by the AMF and designated in the articles of association or regulations. As an exception, an OT may also be established by a sponsor within the meaning of Article 4 of Regulation (EU) 575/2013 of 26 June 2013 if it delegates the management of its portfolio to a portfolio management company.
The custody of the vehicle's assets is provided by a custodian (this must be a credit institution or need to be otherwise approved for carrying out such activity), which also monitors the legality of the management company's decisions.
ii Variety of OT activities and eligible assets
The articles of association (if the OT is set up as a ST) or the regulations (if the OT is set up as a FCT) of the OT specify the activities and the assets that it may acquire, subscribe for or hold. These can be very varied given the broad purpose of OTs.16
In particular, an OT may acquire, subscribe for or hold receivables, debt securities or other assets, grant loans under certain strict conditions or enter into contracts constituting forward financial instruments or transferring insurance risks, guarantees, security interests, risks or cash sub-participations. The OT is the only vehicle under French law that allows the transfer of insurance risk.
The OT therefore offers the flexibility needed to be used in a wide variety of structures and underlying assets; it is thus the essential vehicle for any securitisation transaction, receivables financing requiring the establishment of a special purpose vehicle, refinancing involving a transfer of loan receivables or debt funds in particular. All categories of securitisation transactions are concerned, including ABS on loans to professionals or consumers, leases with or without a purchase option, credit card receivables, CLO, CMBS or RMBS, trade receivables or synthetic securitisation.
As a matter of principle, the creation of an OT is not subject to any authorisation or approval, unless its purpose is to bear insurance risks, in which case it must be authorised by the French prudential supervisory and resolution authority (the ACPR).17
A FCT has no legal personality and is described as a co-ownership entity by the CMF; it is represented by its management company for the purpose of its activities.
The ST is created by its founding partners as for any other company. It may take the form of a public limited company (SA) or a simplified joint-stock company (SAS). If the ST is incorporated as an SA, some of the organisational constraints provided for by the French Commercial Code do not apply to it.18
The FTC has the advantage of not requiring a minimum capital (apart from the issue of a minimum of two units with a nominal value of €150 each) and offers great flexibility in its organisation and operation. The company form, however, makes it possible to offer a vehicle with legal personality.
iv Regulatory status of the OT
An OT constitutes a securitisation special purpose entity (SSPE) within the meaning of the Securitisation Regulation if it participates in a securitisation transaction and is structured to meet the other requirements of Article 2.2 of the Securitisation Regulation, which includes in the definition of SSPE any:
...entity, other than an originator or sponsor, established for the purpose of carrying out one or more securitisations, the activities of which are limited to those appropriate to accomplishing that objective, the structure of which is intended to isolate the obligations of the SSPE from those of the originator.
The requirement imposed on the SSPE to have an activity limited to the completion of a securitisation is satisfied by the legal and contractual limitation (in the regulations or articles of association, as applicable) of the purpose of the OT. The isolation of the obligations of the OT from those of the originator is ensured by specific provisions protecting the 'true sale' and isolating the vehicle from the risk of insolvency.19
Managers of OTs who enter into securitisation transactions under the meaning of the Securitisation Regulation will not be subject to the AIFM Directive.20 For other types of transactions, the question of the extent to which the manager of the OT should be subject to the AIFM Directive is otherwise relatively complex and is the subject of detailed provisions of the CMF,21 which distinguishes between OT for which the manager benefits from a derogation from the AIFM Directive and those subject to the provisions of the AIFM Directive, as transposed into French law.
In essence, the AIFM regime will remain inapplicable if the purpose of the OT is not to be exposed for more than 50 per cent of its assets to risks in the form of either financial securities22 or any other asset that does not constitute an exposure to an insurance or credit risk managed on a discretionary basis by the management company or in the form of financial contracts entered into, managed or terminated on a discretionary basis. Also excluded from this regime are, among others, economy financing funds (FPE), SSPE (as mentioned above) and certain commercial paper issuers.
Priority of payments and waterfalls
The securitisation legal regime provides for a number of protections to investors, which include:
- rules governing the funding of the OT;
- rules governing the capital structure and the payment and allocation rules;
- protection against insolvency risk to a very large extent;
- a clear support for flexible governance and decision-making rules; and
- commingling risks protection.
When the OT is set up as an FCT, it issues at least two units that constitute financial securities23 of an initial nominal unit amount of a unit that is at least €150 or its equivalent in the monetary unit of the issue. When an OT is set up as an ST (SA or SAS), it issues shares.
An OT may – and will in a typical public ABS transaction – issue (in addition to units or shares) bonds, negotiable debt securities or debt securities issued based on a foreign law. It may also use other resources, such as borrowings.
As for the shares of a ST, the payment of sums due in respect of units issued by an FCT is subordinated to the payment of sums due under borrowings of the FCT or commitments resulting from contracts constituting forward financial instruments.24
Holders of securities issued by an OT are liable only to the extent of their investment. Holders are therefore not liable for the OT's debts beyond the amounts they have invested.
ii Protection of the capital structure and enforceability of payment and allocation orders
Units or shares and debt securities issued by the securitisation vehicle may give rise to different rights, in particular to capital or interest.25 The regulations or articles of association of the vehicle and any contract entered into by it may provide that the rights of certain classes of unitholders, shareholders, holders of debt securities or certain creditors of the vehicle are subordinated to the rights or interests of other classes of unitholders, shareholders, holders of debt securities or other creditors of the vehicle.
More generally, the articles of association or the regulations of the OT determine the payment orders made by the OT to its creditors and the rules for the allocation of its assets and the amounts received by the OT.
These rules are binding on unitholders, shareholders, holders of debt securities of all classes and other creditors who have accepted these rules – notwithstanding the initiation against them – where applicable, of insolvency or prevention proceedings under Book VI of the French Commercial Code (the Insolvency Law) or equivalent proceedings under foreign law.26 These rules are applicable including in the event of liquidation of the OT.27
These principles are important in that they provide a legal basis for the rules governing the allocation of sums owed by the OT and the resulting ranking of creditors. The preservation of the efficiency of these allocation rules in case of insolvency proceedings against the creditor protects certain important mechanisms, such as 'flip clause' mechanisms by which the ranking of certain payments due to a creditor is downgraded if such creditor is defaulting (including if such default is due to that creditor's insolvency proceeding).
iii A regime largely derogating from bankruptcy law and protecting creditors
In addition to the derogations from bankruptcy law referred to in the preceding paragraphs, OTs and their transactions are substantially exempt from ordinary bankruptcy law.
Indeed, OTs, whether they are set up as FCT or ST, cannot be the subject of any insolvency proceedings, as the Insolvency Law does not apply to them.28 Accordingly, these structures do not generally provide that the OT would secure its obligations towards investors by granting security or otherwise as there is no risk for the investors not to have access to the cash available to the OT (subject always to application cash allocation rules and priority of payments as mentioned above).
In addition, each OT (and each of its sub-funds) is only liable for its debts (including to holders of debt securities) up to the amount of its assets and according to the ranking of its creditors as defined by law or as provided for in its articles of association or regulations or the contracts entered into by it.
iv Flexible and secure decision-making rules
The articles of association or the regulations of the OT or of a sub-fund may provide for rules relating to the decisions of the management company; these rules and the resulting decisions are to be binding on unitholders, shareholders, holders of debt securities of all classes and creditors who have accepted them.29 This means that authority may be given to investors or certain categories of investors (e.g., a controlling class) to adopt certain decisions or to be consulted specifically on certain key matters.
Isolation of assets and bankruptcy remoteness
The protections offered by the provisions of the CMF to achieve bankruptcy remoteness of the structure (beyond those protections that relate to the OT itself as mentioned above) primarily include:
- provisions protecting the true sale of assets to the OT;
- provisions allowing the OT to acquire exposure by extending loans; and
- provisions protecting against commingling risk of the servicer.
i True sale
Under French law, the concept of 'true sale' means, on the one hand, that the transaction whereby the assets are transferred by the assignor does indeed constitute a transfer of ownership of the transferred assets and, on the other hand, that the assignment of the assets to the vehicle, which were initially the property of the assignor, cannot subsequently be called into question even in the event of the latter's bankruptcy.
The acquisition of receivables by an OT can be done in the following ways:30
- by means of a specific transfer form established by the CMF to facilitate such type of transfers;31
- by any other method of acquisition, assignment or transfer under French or foreign law;
- when the assets are financial instruments, in accordance with the specific rules applicable to the transfer of such instruments, where applicable, by the direct subscription of such instruments at the time of their issue; and
- when the assets are professional receivables, by way of another specific regime ('dailly transfer form'), which generally allows the simplified transfer by way of true sale or security of those receivables.32
When carried out by means of a transfer form, the acquisition or assignment of receivables is particularly effective since it takes effect between the parties and becomes enforceable against third parties (including the assigned debtor or debtors and the bodies of any collective proceedings that may be initiated against the assignor) on the date affixed to the transfer form by the management company when it is delivered by the assignor to the management company, irrespective of the creation, maturity or due date of the receivables, without the need for any other formality, and irrespective of the law applicable to the receivables and the law of the debtors' country of residence.
Delivery of transfer forms automatically entails the transfer of the security interests, guarantees and other ancillary rights and commitments attached to the assigned receivables, including mortgage securities and trade receivables that would have been assigned by way of guarantee or pledged under the conditions laid down by Articles L. 313-23 et seq. of the CMF, in addition to the enforceability of this transfer against third parties without the need for any other formality.
The OT also benefits from a favourable regime that exempts its assets from the consequences of the bankruptcy of the assignor or pledgor of the assets transferred or pledged to it.
Indeed, the acquisition or assignment of receivables or the creation of any security interest or guarantee for the benefit of the OT retains its effectiveness notwithstanding the insolvency of the assignor or the pledgor at the time of such acquisition, assignment or creation or the initiation of one of the proceedings referred to in the Insolvency Law or equivalent proceedings under foreign law against the assignor or the pledgor following such acquisition, assignment or creation.33
Neither payments made by the OT (in particular, payment of the purchase price of the receivables), nor acts for valuable consideration performed by or for the benefit of the OT – provided that such contracts or acts are directly related to its object – may be cancelled based on certain claw back provisions provided under the Insolvency Law.34 These rules are important to secure the transactions made by an OT but also to meet the (no severe claw back provisions) requirements set out in the Securitisation Regulation for a transaction to be considered 'STS'.35
Finally, the CMF provides that when the receivables assigned to the OT results from a leasing agreement with or without purchase option (including a financial lease), such agreement may not be discontinued as a result of the initiation of an insolvency proceeding or the transfer of assets subject to that contract within the framework of any such proceeding against the lessor.
ii Option to grant loans under certain conditions
The reform of 2017 established the option for any OT to grant loans under certain conditions, which are essentially those enacted for another type of vehicle (the specialised professional funds (FPS)).36
Such loans (including leasing agreements, with a purchase option (including financial leases) and the subscription of loan notes) must satisfy the following conditions:
- the beneficiaries may only be (1) sole proprietorships or private legal entities engaged primarily in a commercial, industrial, agricultural, craft or real estate activity, or (2) private legal entities whose sole or main purpose, in addition to carrying out a commercial, industrial, agricultural, craft or real estate activity, is to hold directly or indirectly one or more equity interests in the capital of legal entities referred to in (1) or to finance such legal entities;
- the regulations or articles of association of the OT must specify the date of its liquidation, but may provide for a right of temporary extension of its life, and the conditions for exercising such a right;
- the loans granted may not be made for a term exceeding the remaining life of the OT; and
- receivables arising from loans granted by the OT must be held by the OT until maturity, unless a specific programme of activity of the management company is approved or under certain exceptions (liquidation of the OT, 'clean-up call', the units come to be held by a single shareholder, to meet its obligations under a financial instrument contract, secured loan or sub-participation, in the event of a doubtful or disputed debt or to comply with its investment rules).37
In addition, an OT that engages in lending activity for more than 10 per cent of its net assets38 is subject to additional restrictions, namely:
- it may borrow, but subject to certain limits (notably, in terms of the maximum leverage, borrowing conditions, maturity and repayment or refinancing terms and conditions of which must be consistent with the liquidity profile of the OT and must not exceed the remaining life of the OT, and the proportion of the assets encumbered for such liquidity borrowing that must not exceed the percentage of the OT's net assets at the time of the borrowing);
- it must not use financial contracts other than for the purpose of hedging interest rate and currency risks;
- it may not engage in short selling of financial instruments;
- it may not have recourse, in excess of 10 per cent of its net assets, to techniques and instruments involving eligible financial securities and money market instruments, and in particular repurchase agreements and similar transactions for the temporary purchase or sale of securities; and
- the maximum net loss or commitment made by the OT, valued at any time by taking into account the hedges it benefits from, in respect of drawdowns of a loan granted or the acquisition of receivables arising from drawdowns of loans, forward financial instruments, guarantees or risk sub-participation, may not exceed the value of its assets and, where applicable, the uncalled amount of subscriptions.39
Finally, the management company must comply with certain obligations, such as having a risk analysis system, having a process for obtaining up-to-date information on borrowers, implementing a credit risk selection procedure, complying with anti-money laundering provisions and providing the AMF with quarterly information on the unmatured loans granted.
iii Commingling risk protection: dedicated account mechanism
Sums collected on its own bank account by the servicer may be considered by an administrator or a court-appointed liquidator as part of the assignor's assets in the event of the assignor's bankruptcy. To mitigate this 'commingling' risk, the CMF3940 provides that the OT's management company and the servicer may agree for the bank account in which these sums are collected to be specially dedicated for the benefit of one or more OT or, where applicable, sub-funds.
The specially dedicated nature of this account takes effect upon the signature of an account agreement between the management company, the custodian, the servicer and the account-holding institution, without the need for any further formality.
The protection provided by this dedicated account mechanism includes the following:
- the sums credited to the account are exclusively for the benefit of the OT, and the OT's management company (acting in the name and for the benefit of the latter) may only dispose of these sums under the conditions laid down in the account agreement;
- the creditors of the servicer may not take enforcement actions against this account, even in the event of proceedings initiated against this entity based on the French insolvency regime enacted pursuant to the Insolvency Law or equivalent proceedings under foreign law;41
- the initiation of any insolvency proceedings referred to in the Insolvency Law or of an equivalent proceedings under foreign law against the servicer may not result in either the termination of the dedicated account agreement or the closure of the specially dedicated account; and
- the account-holder is subject to certain obligations or prohibitions, including:
- the obligation to inform any third party that attempts to seize the account that the account is specially dedicated for the benefit of the OT, making the account and the sums held in it unavailable;
- the prohibition on merging the account with another account; and
- the obligation to comply solely with the instructions of the OT's management company, for account debit transactions, unless the account agreement authorises the entity responsible for collecting sums due to or benefiting directly or indirectly the OT to debit the account under conditions defined by it.
The French securitisation market has shown its resilience over the past few years and it is expected to continue that way. In particular, with the recent modification of the general regulations of the AMF implementing the last clarifications on the role of the OT's custodian further to the French legislative reform of 2017, French securitisation legal framework now appears stabilised, which most participants expect will help attract issuers and investors and supply new market sectors (such as the refinancing of NPLs). Where transactions take the full benefit of the provisions protecting securitisation transactions, the potential for growth therefore clearly exists.
1 Fabrice Faure-Dauphin is a partner (structured finance & securitisation) and Caroline Marion is counsel (structured finance & securitisation) at Allen & Overy LLP.
2 Ordonnance No. 2020-306 of 25 Mars 2020 (JORF 26 March 2020).
3 Regulation (EU) 2017/2402 of the European Parliament and of the Council of 12 December 2017 laying down a general framework for securitisation and creating a specific framework for simple, transparent and standardised securitisation, and amending Directives 2009/65/EC, 2009/138/EC and 2011/61/EU and Regulations (EC) No. 1060/2009 and (EU) No. 648/2012.
4 Law No. 88-1201 of 23 December 1988 supplemented by a Decree No. 89-158 of 9 March 1989.
5 Ordinance No. 2017-1432 of 4 October 2017.
6 Decree Nos. 2018-1004 and 2018-1008 of 19 November 2018.
7 Ordinance No. 2008-556 of 13 June 2008.
8 This same Ordinance introduced the concept of the securitisation vehicle, bringing together FCT (formerly known as special purpose vehicles (FCC) and renamed securitisation mutual funds (FCT)) and new securitisation companies.
9 Article L. 511-5 of the CMF.
10 Article L. 511-6 of the CMF. This derogation has recently been extended to certain foreign SPVs when the securitised assets are loans granted for business purposes under certain specific conditions.
11 See Section V.iii.
12 Article L. 214-168 of the CMF.
13 Article L. 214-168 of the CMF.
14 Article R214-223 of the CMF.
15 Article L. 214-168 of the CMF.
16 Article L. 214-175-1, I. of the CMF.
17 Article L. 214-189 of the CMF.
18 Article L. 214-179 of the CMF, in particular as regards its share capital, rules on quorum at general meetings and concurrent holding of corporate offices, among others.
19 See Section V.i.
20 Directive 2011/61/EU of the European Parliament and of the Council of 8 June 2011 on Alternative Investment Fund Managers and amending Directives 2003/41/EC and 2009/65/EC and Regulations (EC) No. 1060/2009 and (EU) No. 1095/2010.
21 Article L. 214-167-I of the CMF.
22 Debt securities subscribed directly with issuers are not taken into account in calculating the 50 per cent proportion in accordance with Article D. 214-232-2-4° of the CMF.
23 Within the meaning of Article L. 211-1 of the CMF.
24 Article R. 214-235 of the CMF.
25 Article L. 214-175-1 of the CMF.
26 Article L. 214-169, II. of the CMF.
27 Article L. 214-169, II. of the CMF.
28 Article L. 214-175, III. of the CMF.
29 Article L. 214-169, II of the CMF.
30 Article L. 214-169, V of the CMF.
31 The wording and form of which are set forth in Article D. 214-227 of the CMF.
32 Articles L. 313-23 et seq. of the CMF.
33 Article L. 214-167, V., 4° of the CMF.
34 Article L. 632-2 of the Commercial Code.
35 Articles 20.2 and 24.2 of the Securitisation Regulation.
36 Article L. 214-175-1, V. of the CMF.
37 Article R. 214-234 of the CMF.
38 Article R. 214-203-7 of the CMF.
39 Article L. 214-175-1, VI of the CMF.
40 Articles L. 214-173 and D. 214-228 of the CMF.
41 Article L. 214-173 of the CMF.