Structured finance and securitisation in France: overview

A Q&A guide to structured finance and securitisation law in France.

This Q&A provides an overview of, among others, the markets and legal regimes, issues relating to the SPV and the securities issued, transferring the receivables, dealing with security and risk, cash flow, ratings, tax issues, variations to the securitisation structure and reform proposals.

To compare answers across multiple jurisdictions, visit the Structured finance and securitisation Country Q&A tool.

This Q&A is part of the global guide to structured finance and securitisation. For a full list of contents visit www.practicallaw.com/securitisation-guide.

Hervé Touraine and Olivier Bernard, Orrick Herrington & Sutcliffe (Europe) LLP
Contents

Market and legal regime

1. Please give a brief overview of the securitisation market in your jurisdiction. In particular:
  • How developed is the market and what notable transactions and new structures have emerged recently?

  • What impact have central bank programmes (if any) had on the securitisation market in your jurisdiction?

  • Is securitisation particularly concentrated in certain industry sectors?

Volumes are not back to pre-financial crisis levels, but the French securitisation market remains active and innovative on many fronts. The specific legal framework governing French securitisation vehicles proves to be highly flexible and well adapted to various purposes. These vehicles are recognised as very robust by investors, rating agencies and regulators, and securitisation has gained recognition as a key technique for the financing of the economy in general. This goes beyond permitting banks to refinance themselves, alleviate their balance sheet and originate additional exposures. Securitisation is now widely used by non-bank entities, such as insurance companies, investment funds and asset managers, to bring their financial resources into the French economy.

 
2. Is there a specific legislative regime within which securitisations in your jurisdiction are carried out? In particular:
  • What are the main laws governing securitisations?

  • What is the name of the regulatory authority charged with overseeing securitisation practices and participants in your jurisdiction?

Legal regime

French securitisation is regulated by a legal regime providing clear and protective rules under the supervision of a regulator, and yet gives the parties flexibility to organise their contractual relationships.

Securitisation became part of the French legal system 28 years ago with Law No. 88-1201 dated 23 December 1988 (the Securitisation Law). The Securitisation Law created a specific form of securitisation vehicle called a Fonds Commun de Créances (FCC), which is a collective debt investment fund or common pool of debts.

Since 1988, the Securitisation Law has been improved several times, including by:

  • Authorising FCCs to issue various types of debt securities.

  • Authorising FCCs to enter into credit derivatives.

  • Creating protected receivables collection accounts.

The Securitisation Law has been streamlined and modernised by a:

  • Governmental Ordinance of 13 June 2008 (the 2008 Ordinance).

  • Governmental Decree dated 17 July 2008 (the 2008 Decree).

The 2008 Ordinance allowed the introduction of securitisation companies (sociétés de titrisation or SDTs) and regulates the securitisation of insurance risks.

FCCs are now called fonds commun de titrisation, or FCTs.

Provisions applying to FCTs and SDTs are mainly codified in Articles L. 214-168 to L. 214-186 4 of the Code monétaire et financier (Monetary and Financial Code).

Regulatory authority

The Financial Markets Authority (Autorité des Marchés Financiers) (AMF) approves and supervises the FCT's management company, which must follow certain rules of conduct set out in the AMF Regulations.

 

Reasons for doing a securitisation

3. What are the main reasons for doing a securitisation in your jurisdiction? How are the reasons for doing a securitisation in your jurisdiction affected by:
  • Accounting practices in your jurisdiction, such as application of the International Financial Reporting Standards (IFRS)?

  • National or supra-national rules concerning capital adequacy?

  • Risk retention requirements?

  • Implementation of the Basel III framework in your jurisdiction?

Usual reasons for securitisation

Cheaper borrowing. Cheaper borrowing is the biggest incentive to securitise in France. This is particularity true for real estate financing and leveraged buyout (LBO) financing, where investors seek yield levels which are lower than those of banks.

Accounting practices and capital adequacy. Securitisation techniques are useful to banks in relation to balance sheet management, provided that the securitisation transactions achieve a true sale of the receivables or, in relation to synthetic securitisations, an effective transfer of risk.

Refinancing. Initially developed for credit institutions, securitisation has extended to the refinancing of debts held by commercial companies (which allows them to reduce their debt portfolio and shift the customer default risk to the securitisation vehicle), with or without an off-balance sheet treatment objective. Securitisation allows an improvement of the:

  • Balance sheet main equilibriums.

  • Key ratios of the assigning company.

  • Diversification of source of financing/investor base.

Disintermediation. Insurance companies, investment funds, asset managers and other alternative capital providers are using securitisation techniques to bring their financial resources into the French economy, and in particular into:

  • Corporate financing (whole business, structured corporate bond, corporate covered bond and other complex secured loans).

  • CMBS issuers/platforms.

  • Debt funds aiming at investing into a variety of asset classes.

  • Infrastructure, energy and project loans/bonds.

Risk retention requirements. Since 2010, capital requirements regulations impose on the originator of a securitisation a retention obligation for the purposes of calculating its capital requirements.

On 1 January 2013, a new directive and a regulation (CRR), collectively referred to as CRD IV, replaced the former banking capital adequacy framework and have been supplemented by technical standards. To date, market participants have always found practicable ways to ensure retention. Further risk retention rules have been introduced for alternative investment funds, under section 5 of Chapter III of Regulation (EU) 231/2013 implementing Directive 2011/61/EU on Alternative Investment Fund Managers (AIFMs) and for insurers, under Article 254 of Regulation (EU) 2015/35 supplementing Directive 2009/138/EC on the taking up and pursuit of the business of Insurance and Reinsurance (Solvency II).

Basel III framework. Basel III provides for a substantial strengthening of existing prudential rules, including new capital and liquidity requirements intended to:

  • Reinforce capital standards (with heightened requirements for global systemically important banks).

  • Establish a leverage ratio backstop for financial institutions and certain minimum liquidity standards (referred to as the Liquidity Coverage Ratio and the Net Stable Funding Ratio).

These rules are currently subject to discussions at EU level, and an amendment process is being conducted (see Question 30 ( www.practicallaw.com/4-501-0172) ). These changes and the way they are implemented could impact positively or negatively investors' appetite for securitisation products.

 

The special purpose vehicle (SPV)

Establishing the SPV

4. How is an SPV established in your jurisdiction? Please explain:
  • What form does the SPV usually take and how is it set up?

  • What is the legal status of the SPV?

  • How the SPV is usually owned?

  • Are there any particular regulatory requirements that apply to the SPVs?

Form and setup of the SPV

Since the 2008 Ordinance, two forms of securitisation vehicles (organismes de titrisation, or OTs) are available:

  • The FCT is the main vehicle used for implementing securitisation transactions under French law. Largely derived from the former receivables securitisation fund or FCC, the FCT has a much broader scope of activities ranging from the securitisation of any receivables to the securitisation of insurance risks.

  • The SDT is a new form of securitisation entity which is a specific form of limited liability company. The use of this legal form may bring advantages in transactions where the benefit of international tax treaties is important.

Legal status and ownership

An FCT is a co-ownership (co-propriété) without legal personality. It is a collective debt investment fund set up by a fund manager (société de gestion) and fund custodian (dépositaire). FCTs have no share capital, no shareholders, no board of directors and no employees.

An SDT is a corporation. It is regulated by its constituting documents (that is memorandum and articles of association) and is subject to regulatory requirements.

Fund managers must be portfolio management companies (société de gestion de portefeuilles) regulated by the AMF.

The custodian of the securitisation entity must be either:

  • A French credit institution (or a French branch of a credit institution incorporated in the European Economic Area (EEA)).

  • Any other institution approved by the French minister of the economy.

 
5. Is the SPV usually established in your jurisdiction or offshore? If established offshore, in what jurisdiction(s) are SPVs usually established and why? Are there any particular circumstances when it is advantageous to establish the SPV in your jurisdiction?

The acquisition on a regular basis and for remuneration of non-matured receivables from French entities is a credit activity which only licensed or "passported" credit institutions can carry out. Although OTs are not credit institutions, Article L511-6 of the Monetary and Financial Code allows them to buy non-matured receivables. This is not the case for SPVs established outside of France, and this is why the most straightforward approach is generally to set up a French OT where a transaction involves that type of activity in France.

 

Ensuring the SPV is insolvency remote

6. What steps can be taken to make the SPV as insolvency remote as possible in your jurisdiction? In particular:
  • Has the ability to achieve insolvency remoteness been eroded to any extent in recent years?

  • Will the courts in your jurisdiction give effect to limited recourse and non-petition clauses?

The 2008 Ordinance expressly disapplies Book VI of the Commercial Code, which relates to insolvency proceedings, in so far as regards OTs. Therefore, OTs are bankruptcy remote under French Law.

In addition, the Securitisation Law gives effect to limited recourse clauses, to the extent they are accepted by the relevant OT's creditors.

 

Ensuring the SPV is treated separately from the originator

7. Is there a risk that the courts can treat the assets of the SPV as those of the originator if the originator becomes subject to insolvency proceedings (substantive consolidation)? If so, can this be avoided or minimised?

Separateness

OTs are organised as autonomous entities, that both:

  • Are managed by an independent manager.

  • Have their assets segregated from the transferor's assets.

Therefore, the risk of consolidation of OTs' assets with those of the transferor is remote. Consolidation of assets in a bankruptcy context would only be characterised in specific situations where there is either:

  • Commingling (that is, mixing together) of the assets and liabilities of two corporations.

  • Fictitiousness of one (or both) of the two companies.

The risk of assets clawback in a transferor's insolvency is also remote (see Question 17).

OTs can be made of several compartments, the assets and liabilities of which are clearly segregated.

Future receivables

From a French law perspective it is possible to assign future receivables, but, without specific legal provisions, receivables which arise after the start of insolvency proceedings against the originator may, despite the assignment, be held to form part of the insolvent originator's estate. This would leave the assignee with an unsecured claim in the originator's insolvency for those amounts. In addition to the validity and effectiveness of the sale, the sale of future receivables can raise certain other challenges, such as the performance and continuation of the underlying contracts by the originator.

In this respect, OTs benefit from a specific legal regime, pursuant to which a transfer of future receivables remains effective despite the start of an insolvency proceeding against the originator (Article L.214- 169, Monetary and Financial Code). Therefore, the risk outlined above should be avoided, subject to the court's interpretation.

As for continuation of the underlying contracts, OTs benefit from a specific protection in so far as relates to leasing and hire purchase receivables securitisation. The Securitisation Law provides that where receivables arising from a leasing or hire purchase contract have been transferred to an OT, the mere opening of insolvency proceedings against the originator does not prevent the continuation of that contract.

A remaining obstacle is performance risk, where active steps are expected from the originator to give rise to the assigned receivables, except where the originator can grant a sufficiently solid and valuable security interest to the OT, to protect it against such risk.

Avoidance of commingling risk

In many securitisations where the originator remains in charge of the collection of the securitised receivables (that is, servicing the receivables), there is a risk that the securitised receivables proceeds are both:

  • Commingled with the assets of the originator.

  • Retained by the bankruptcy administrator after occurrence of a bankruptcy affecting the originator.

Again, OTs benefit from a specific legal regime in this respect. The management company and the entity responsible for servicing the receivables can agree to credit collected sums to a specially dedicated account of the servicer, from which the creditors of the entity responsible for servicing the receivables cannot claim payment (even if the servicer becomes the subject of insolvency proceedings) (Article L.214- 173, Monetary and Financial Code).

 

The securities

Issuing the securities

8. What factors will determine whether to issue the SPV's securities publicly or privately?

A securitisation entity generally finances its activities by issuing debt instruments such as notes (titres de créances négociables or obligations). In addition, an FCT can issue units, and an SDT issue shares. All such instruments can be issued publicly or privately, that is, listed on a regulated exchange, or not. The choice between the two approaches is mainly driven by the transaction size and type, the type of investors targeted, and their demand, appetite and constraints.

To date, there has been a number of listed FCT transactions, but more rarely FCT transactions giving rise to an offer to the public (offre au public) in the strict legal sense.

 
9. If the securities are publicly issued:
  • Are the securities usually listed on a regulated exchange in your jurisdiction or in another jurisdiction?

  • If in your jurisdiction, please identify the main documents required to make an application to list debt securities on the main regulated exchange in your jurisdiction. Are there any share capital requirements?

  • If a particular exchange (domestic or foreign) is usually chosen for listing the securities, please briefly summarise the main reasons for this.

It is possible to list FCT units or notes, and SDT shares or notes, in France, as well as in other jurisdictions, such as Ireland or Luxembourg.

Listing units or notes issued by an FCT, or shares or notes issued by an SDT, in Paris requires the preparation of an AMF-approved prospectus (note d' information). This document takes the form of a reference document (describing the issuer structure) and an operation note (note d' opération) (describing the securities' features). Where an issuer makes only a single issue of securities, the reference document and operation note (are in practice prepared and published as a single information memorandum or prospectus.

Under Article L.214-170 of the Monetary and Financial Code, if an OT issues securities which are the subject of a public offer (offre au public), these securities must be rated, and the rating document must be annexed to the information memorandum (note d' information) and sent to the potential subscribers. Since Ordinance 2013-676 dated 25 July 2013, this rating requirement no longer applies when the securities are merely admitted to trading on a regulated market, without being the subject of a public offer.

For securities that are privately placed and where no information memorandum is required, a rating is not required but may be sought for commercial reasons.

 

Constituting the securities

10. If the trust concept is not recognised in your jurisdiction, what document constitutes the securities issued by the SPV and how are the rights in them held?

The trust concept has been recently introduced in the form of a fiducie. However, securities can be issued without creating a trust or fiducie.

If an OT entity makes multiple issues of units or notes, the OT's constitutive documents must provide for this and explicitly state the relevant mechanisms.

Title to such shares, units and notes can be evidenced by entries in securities accounts kept with a bank or directly by the management company or custodian. Units, shares or notes issued by OTs are generally freely negotiable.

The minimum denomination of an FCT unit is EUR150 or its foreign equivalent. This expressly contemplates FCT units being denominated in currencies other than euros.

 

Transferring the receivables

Classes of receivables

11. What classes of receivables are usually securitised in your jurisdiction? Are there any new asset classes to have emerged recently or that are expected to emerge in the foreseeable future?

Usual assets securitised through an FCT or SDT are:

  • Mortgage loans.

  • Corporate loans.

  • Commercial or consumer loans.

  • Hire purchase and leasing receivables.

  • Trade receivables.

  • Credit card receivables.

  • Debts of public entities.

The 2008 Ordinance broadens the scope of OTs' activities to any risks including insurance risks. It therefore officially recognises that an FCT or SDT can be used to:

  • Securitise insurance risks.

  • Acquire exposure to insurance risks in compliance with Directive 2005/68/EC on reinsurance (Reinsurance Directive).

OTs can acquire receivables from any person.

Receivables can arise from an existing agreement (acte déjà intervenu) or a future agreement (acte à intervenir). These receivables can be governed by French law or any foreign law, and can be:

  • Non-matured receivables.

  • Future receivables (the amount and maturity of which are not determined on the relevant transfer date).

  • Defaulted receivables (créances immobilisées).

  • Doubtful receivables (créances douteuses).

  • Receivables subject to litigation (créances litigieuses).

  • Debt securities (governed by French law or foreign law) representing a monetary claim against the relevant issuer.

Receivables assigned to a particular OT can be sold by different originators. Therefore, multi-sellers OTs are a practical possibility and have been created many times in the past.

 

Transferring the receivables from the originator to the SPV

12. How are receivables usually transferred from the originator to the SPV? Is perfection of the transfer subject to giving notice of sale to the obligor or subject to any other steps?

The Securitisation Law provides for a specific and simplified method to assign receivables to OTs. Such assignment is made using a special document, called a bordereau, which the originator delivers to the management company of the OT. A bordereau must comply with certain formal conditions, but no notice to the obligor is required (subject to specific contractual requirements). It is a much simpler mechanism than the ordinary methods of assignment required by French law, both in terms of efficiency and cost.

 
13. Are there any types of receivables that it is not possible or not practical to securitise in your jurisdiction (for example, future receivables)?

Most types of receivables can be securitised through an OT (see Question 11), including future receivables (see Question 7).

 
14. How is any security attached to the receivables transferred to the SPV? What are the perfection requirements?

The assignment of receivables to an OT takes effect and becomes enforceable against third parties as of the date of the bordereau (see Question 12). The remittance of the bordereau entails the transfer of any security interest securing the transferred debt and is enforceable against third parties without further formality. This makes the bordereau method of transfer particularly attractive in cases involving mortgage loans. The transfer of mortgage loans using alternative methods of transfer can involve very significant costs, such as registration and notarial fees.

 

Prohibitions or restrictions on transfer

15. Are there any prohibitions or restrictions on transferring the receivables, for example, in relation to consumer data?

Contractual restrictions

Contracts underlying the securitised receivables should be reviewed in advance to identify any provisions requiring other parties' prior consent to or contractual prohibitions on transferring such receivables. If these provisions are present, it may be necessary in certain circumstances, to obtain the debtor's consent before the securitisation.

However, a specific article of the Commercial Code (Code de Commerce) renders null and void clauses of commercial agreements which prohibit the assignment of trade receivables.

Legislative restrictions

Legislative provisions relating to data protection or restrictions on disclosure of information need to be taken into consideration when setting up a securitisation transaction. French provisions on data protection and banking secrecy seek to prevent any communication abuse of personal data. Law No. 78-17 on data protection (Loi informatique et liberté) created a supervisory body responsible for ensuring that personal data is adequately stored and treated.

In addition, where the assignor of the receivables is a credit institution, legal provisions relating to banking secrecy apply (Article L.511-33, Monetary and Financial Code). These rules may generally prohibit banks from transferring any information to third parties without the prior consent of the underlying obligor, although Law No. 2008-776 of 4 August 2008 for modernisation of the economy has introduced an exception to such prohibition, in relation to confidential information to be provided in the context of an assignment of receivables.

 

Avoiding the transfer being re-characterised

16. Is there a risk that a transfer of title to the receivables will be re-characterised as a secured loan? If so:
  • Can this risk be avoided or minimised?

  • Are true sale legal opinions typically delivered in your jurisdiction or does it depend on the asset type and/or provenance of the securitised asset?

It appears that there is no precedent or case law in relation to which a transfer of title to receivables to a French securitisation entity has been re-characterised as a secured loan. On this basis, this is generally not considered as a concern under French Law and true sale opinions are normally delivered irrespective of the type of assets.

 

Ensuring the transfer cannot be unwound if the originator becomes insolvent

17. Can the originator (or a liquidator or other insolvency officer of the originator) unwind the transaction at a later date? If yes, on what grounds can this be done and what is the timescale for doing so? Can this risk be avoided or minimised?

The risk of clawback (that is, where the transfer of the debts by the originator to the FCT becomes void after the transferor's bankruptcy) is remote. The Securitisation Law provides expressly that a transfer of receivables to an OT remains valid despite the opening of insolvency proceedings against the originator.

The Insolvency Law provides for two situations that can still be relevant to receivable transfers, although they are not regarded as a particular concern in the context of securitisation:

  • The automatic avoidance of a contract in which the insolvent party's obligations are manifestly greater than those of the other party to the contract.

  • The potential avoidance (subject to a court decision) of a transaction entered into for value if, at the time of entering into the contract, one party knew of the other party's insolvency or inability to pay its debts.

These provisions apply to transactions entered into during the suspect period (période suspecte), which is fixed by the court at a maximum of 18 months before the judgment marking the start of the insolvency proceedings.

 

Establishing the applicable law

18. Are choice of law clauses in contracts usually recognised and enforced in your jurisdiction? If yes, is a particular law usually chosen to govern the transaction documents? Are there any circumstances when local law will override a choice of law?

Choice of law clauses in contracts are usually recognised and enforced on the basis of Regulation (EC) No 593/2008 on the law applicable to contractual obligations (Rome I). Rome I embodies the principles of French private international law applicable to the governing law of contracts, including those entered into with non-EU persons. Under Rome I, the assignment of the receivables must be perfected under the laws governing the receivables.

In principle, an assignment agreement of French receivables can be governed by foreign law, provided that this choice of law is not made with a view to avoiding mandatory provisions of French law. However, it may be desirable that French law receivables owed by French debtors be assigned under French law (whether or not the originator is French), as this will facilitate recognition of the transfer by French courts if the matter is disputed.

Since the 2008 Ordinance, the transfer of receivables to an OT can be made under a foreign law selected by the parties. This may facilitate securitisation of non-French receivables through an OT.

 

Security and risk

Creating security

19. Please briefly list the main types of security that can be taken over the various assets of the SPV in your jurisdiction, and the requirements to perfect such security.

The 2008 Ordinance removes the previous prohibition of OTs creating collateral over their assets. They can now provide collateral or grant security interests over their assets they hold to noteholders or any other creditors, provided that these must be governed and created in accordance with Articles L.211-38 et seq. of the Monetary and Financial Code. These articles set out the provisions deriving from the transposition of Directive 2002/47/EC on financial collateral arrangements.

 
20. How is the security granted by the SPV held for the investors? If the trust concept is recognised, are there any particular requirements for setting up a trust (for example, the security trustee providing some form of consideration)? Are foreign trusts recognised in your jurisdiction?

OTs can provide collateral or grant security interests over their assets but only under Article L.211-38 et seq. of the Monetary and Financial Code (see Question 19). Typically, however, no security or collateral is granted in favour of the investors, as they are protected by the specific nature and bankruptcy remoteness of the OT.

 

Credit enhancement

21. What methods of credit enhancement are commonly used in your jurisdiction? Are there any variations or specific issues that apply to the credit enhancement techniques set out in the Guide to a standard securitisation (Guide)?

The following credit enhancement techniques are commonly used by French OTs:

  • Guarantees provided by the originator, an affiliate of the originator, a credit establishment, an insurance company or the Caisse des Dépôts et Consignations.

  • Issuance of subordinated units or notes.

  • Subordinated loans.

  • Over-collateralisation.

  • Deferred purchase price.

  • Discounted purchase price.

  • Pre-existing guarantees or security attached to the debts acquired by a OT.

This list is not exhaustive, allowing for other credit enhancement techniques such as cash reserve funds. For further information, see Guide to a standard securitisation, Credit enhancement ( www.practicallaw.com/2-501-2997) .

 

Risk management and liquidity support

22. What methods of liquidity support or cash reservation are commonly used in your jurisdiction? Are there any variations or specific issues that apply to the provision of liquidity support as set out in the Guide?

Liquidity support is generally provided through subordinated credit lines and cash reserves (see Guide to a standard securitisation, Risk management and liquidity support ( www.practicallaw.com/2-501-2997) ).

Credit facilities can only be provided by credit institutions and other institutions authorised to do so under the Monetary and Financial Code. Commercial companies are generally not allowed to extend credit.

 

Cash flow in the structure

Distribution of funds

23. Please explain any variations to the cash flow index accompanying Diagram 9 of the Guide that apply in your jurisdiction. In particular, will the courts in your jurisdiction give effect to "flip clauses" (that is, clauses that allow for termination payments to swap counterparties who are in default under the swap agreement, to be paid further down the cash flow waterfall than would otherwise have been the case)?

The cash flow index accompanying Diagram 9 of the Guide mostly applies in France (see Guide to a standard securitisation, Diagram 9 ( www.practicallaw.com/2-501-2997) and box, Cash flow index ( www.practicallaw.com/2-501-2997) ), subject to the following variations:

  • The paying agent can be in charge of payments to unitholders and noteholders, but does not handle allocation of funds to other parties according to the waterfall. The management company does this.

  • Extraction of surplus amounts held by the securitisation entity is generally made by way of specific subordinated notes or units combined with an adapted waterfall.

  • Flip clauses have not yet been tested in courts in France.

 

Profit extraction

24. What methods of profit extraction are commonly used in your jurisdiction? Are there any variations or specific issues that apply to the profit extraction techniques set out in the Guide?

Issuing specific categories of units or notes is the most common form of profit extraction technique. The rights of each category of units or notes are defined in the securitisation entity's regulations.

 

The role of the rating agencies

25. What is the sovereign rating of your jurisdiction? What factors impact on this and are there any specific factors in your jurisdiction that affect the rating of the securities issued by the SPV (for example, legal certainty or political issues)? How are such risks usually managed?

The sovereign debt issued by France is currently rated AA by Standard & Poor's, AA+ by Fitch, and Aa2 by Moody's.

The rating of securities issued by OTs can be affected by certain defects or weaknesses affecting the underlying securitised receivables. To date, there are no major problems or defects relating to the French securitisation legal framework that would be detrimental to their rating.

 

Tax issues

26. What tax issues arise in securitisations in your jurisdiction? In particular:
  • What transfer taxes may apply to the transfer of the receivables? Please give the applicable tax rates and explain how transfer taxes are usually dealt with.

  • Is withholding tax payable in certain circumstances? Please give the applicable tax rates and explain how withholding taxes are usually dealt with.

  • Are there any other tax issues that apply to securitisations in your jurisdiction?

  • Does your jurisdiction's government have an inter-governmental agreement in place with the US in relation to FATCA compliance, and will this benefit locally-domiciled SPVs?

Transfer and documentary taxes

No transfer tax, stamp duty or other documentary taxes apply on the assignment of receivables to an FCT, unless the assignment is registered with the French tax authorities, in which case a nominal tax amount of EUR125 is payable.

Withholding tax

Usually, no withholding tax applies to payments in relation to trade receivables.

In relation to interest, no withholding tax applies on interest payments made by debtors established in France, unless where such interest payments are made outside France in a non-cooperative state or territory (NCST) within the meaning of Article 238-0 A of the French tax code (FTC), in which case such payments are subject to a 75% withholding tax.

The list of NCSTs is updated annually by the French government and, as at 1 January 2016, includes Brunei, Botswana, Guatemala, the Marshall Islands, Nauru, Niue and Panama.

The 75% withholding tax does not apply if the debtor can prove that the "main purpose and effect" of the transaction from which the payments originate is not to "locate" income in a NCST. Under the published guidelines of the French tax authorities, an issue of debt securities benefits from this exception without the issuer having to provide any proof of the purpose and effect of the issue, if the debt instruments are any of the following:

  • Offered by means of a public offer, within the meaning of Article L. 411-1 of the Monetary and Financial Code, or under an equivalent offer in a state other than a NCST (that is, any offer requiring the registration or submission of an offer document by or with a foreign securities market authority).

  • Admitted to trading on a French or foreign regulated market or multilateral securities trading system, provided that:

    • the market or system is not located in a NCST; and

    • the operation of the market is carried out by a market operator, an investment services provider, or a similar foreign entity, provided further that such market operator, investment services provider or entity is not located in a NCST.

  • Admitted, at the time of their issue, to the clearing operations of either:

    • a central depositary or a securities clearing, delivery and payment systems operator within the meaning of Article L. 561-2 of the Monetary and Financial Code; or

    • one or more similar foreign depositaries or operators, provided that such depositary or operator is not located in a NCST.

The rule set out above in relation to withholding tax is subject to applicable reliefs under a double tax agreement between France and the relevant jurisdiction.

Other tax issues

FCTs benefit from specific tax treatment as they are specifically designed to be tax neutral (that is, they are outside the scope of French corporate income tax). No similar exemption is provided under the law in relation to SDTs, but it is understood that a small number of SDTs have been established on the basis of private letter tax rulings.

FATCA compliance

A reciprocal "Model 1" inter-governmental agreement was signed on 14 November 2013 between France and the US, and is in force since 14 October 2014.

The agreement benefits SPVs established in France, as they only have to report information to the French tax authorities which will in turn exchange that information with the US authorities.

 

Recent developments affecting securitisations

27. Please give brief details of any legal developments in your jurisdiction (arising from case law, statute or otherwise) that have had, or are likely to have, a significant impact on securitisation practices, structures or participants.

OTs are one of the main instruments used to set up debt funds in France and, as such, play a key part in a new wave of disintermediation, as the most appropriate connection between:

  • Cash rich insurance companies or investment funds, looking to play a lender's role, but unable to do so directly due to the French banking monopoly.

  • French commercial parties (ranging from small and medium size corporates, to municipalities, public entities, private equity and infrastructure sponsors), looking for financing that banks are no longer able to provide on the same scale as before the financial crisis.

In relation to insurance companies, this disintermediation trend was strengthened by the introduction of the fonds de prêt à l' économie (FPE) (literally, funds dedicated to lending to the economy) in French insurance regulations, by Decree 2013-717 dated 2 August 2013. That decree originally allowed insurers to invest up to 5% of their regulated undertakings (or such greater percentage as the French Autorité de Contrôle Prudentiel et de Résolution may authorise on a case by case basis) in FPEs. FPEs are very attractive for insurers, as they provide access to more diversified sectors of the French economy and an increased return as compared to other types of assets in which insurers are required to invest massively (typically, sovereign bonds), while receiving a favourable regulatory treatment. The benefit of such regulatory treatment was recently extended to mutuals by the new Decree 2014-1530 dated 17 December 2014. That new decree has also extended the scope of transactions eligible for the FPE label, therefore offering further opportunities. In particular, loans to holding/non-operational companies are now eligible to FPEs.

Several major insurers have already set up FPEs, usually focusing on a particular type of investment (real estate finance, public entities, small and medium sized companies, infrastructure, and so on). Banks usually remain involved in this type of structure, in the context of an exclusive partnership with insurers, or on an investment by investment basis.

 

Other securitisation structures

28. What other structures, including synthetic securitisations, are sometimes used in your jurisdiction?

A number of possible alternative structures allow French originators to transfer the economic risk related to receivables but do not always qualify as securitisation structures under French law. Two of these are outlined below.

Synthetic securitisation

This has made a comeback in France, with some innovative structures being recognised by the Autorité de Contrôle Prudentiel et de Résolution for the purpose of providing regulatory relief.

These structures are based on French autonomous guarantees, governed by Article 2321 of the Civil Code. This approach requires careful drafting of the transaction documentation, but makes the guarantor's commitment particularly strong, and is also helpful to distinguish these risk transfer transactions from transactions falling under the insurance monopoly.

Because the French banking monopoly classifies the granting of a guarantee as a credit transaction, such guarantees cannot be provided by OTs. However, OTs regularly form part of these structures for other purposes, due to their invaluable robustness and flexibility.

Two-tier structure

Another possibility is for the receivables to be assigned to an OT through a bank. An offshore securitisation vehicle then buys all or part of the notes issued by the OT. The particular advantage of this structure is that it combines certain advantages of French securitisation (in particular, the simplicity of the assignment mechanism and the certainty that all security is transferred without further cost or formality) with the flexibility of an offshore vehicle.

 

Reform

29. Please summarise any reform proposals and state whether they are likely to come into force and, if so, when. For example, what structuring trends do you foresee and will they be driven mainly by regulatory changes, risk management, new credit rating methodology, economic necessity, tax or other factors?

Majors reforms that are being implemented and have or may have an impact on securitisation are CRD IV, Basel III (see Question 3), EMIR, and CRA3 (see Question 30).

Ongoing discussions within market associations are considering improving the efficiency of the FCT and ST structures. In particular, OTs could be the most suitable vehicle in France to become an ELTIF (European long term investment fund), as recently introduced by Regulation 2015/760 and. In this context, market consultations are ongoing as to adaptations to be made to the OT regime, in particular as to whether and how to give the possibility to OTs to act as primary lenders (as opposed to acquiring receivables from a lender).

To date, it is yet unclear what impact the UK's exit from the EU (Brexit) will have on the ability of French originators, sponsors and investors to participate in UK securitisations and vice versa.

 
30. Has the nature and extent of global, regional and domestic reforms had a positive or negative affect on revitalising securitisation in your jurisdiction?

The depth and pace of the reforms introduced over the past five years has made matters more complex, and has made the set up of certain types of securitisations, such as listed and rated ABS, more cumbersome. However, market professionals have found acceptable approaches and no major obstacles have emerged or are expected to emerge in relation to those reforms. In addition, OTs, compared to other parties, generally benefit from favourable treatment under the following reforms.

Directive 2011/61/EU on alternative investment fund managers (AIFM Directive) was transposed into French law by an ordinance dated 25 July 2013. Under this ordinance, OTs are regarded as alternative investment funds (AIF) within the meaning of the AIFM Directive, but are expressly exempted from the French provisions resulting from the transposition of the AIFM Directive, subject to anti-abuse provisions set out in a decree.

Regulation (EU) No 648/2012 on OTC derivatives, central counterparties and trade repositories dated 4 July 2012 (EMIR) establishes certain requirements for OTC derivatives contracts, including mandatory clearing obligations, bilateral risk-management requirements and reporting requirements. An OT qualifies as a non-financial counterparty for the purposes of EMIR, which means that, subject to remaining under certain thresholds and subject to specific cases, the entering into a swap transaction should not trigger the full scale of EMIR requirements on the OT. However, EMIR still imposes a minimum set of obligations on the OT, including obligations to report swap transactions to a trade repository or ESMA. The approach taken in respect of those obligations can vary. Usually, the swap provider of the OT undertakes that it will ensure that the details of the swap transaction will be reported to a traded depository on its own behalf and on behalf of the OT.

Regulation (EU) No 462/2013 amending the CRA Regulation (CRA3) became effective on 20 June 2013. CRA3 provides for certain additional disclosure requirements which apply to issuers, originators and sponsors under structured finance transactions. Such disclosures will need to be made through a website to be set up by ESMA. The scope, extent and manner in which such disclosure should be made is detailed in the Regulation (EU) No 2015/3 supplementing the CRA Regulation. This delegated regulation will apply from 1 January 2017 to structured finance instruments issued after the entry into force of the delegated regulation on 26 January 2015. Structured finance instruments issued after the entry into force of that delegated regulation but before the date from which it applies will only be subject to the disclosure requirements if they are still outstanding on 1 January 2017. To comply with these, additional reporting obligations may be included in the duties of the originator.

The next key step is the adoption of the so called "securitisation regulation", a draft of which was published on 30 September 2015. This aims at:

  • Imposing direct obligations on originators, sponsors and original lenders.

  • Creating a single set of risk retention rules (for credit institutions, investment firms, insurers, AIFMs but also UCITS).

  • Introducing a new label of "simple, transparent and standardised" (STS) securitisation which would trigger a more favourable regulatory treatment.

 

Online resources

Légifrance

W www.legifrance.gouv.fr

Description. Official website setting out French laws and regulations. It is regularly updated but there can be some delay between publication of the official paper setting out the laws and regulations passed from time to time (journal officiel) and reflection of this on the website. Translations (including into English) when available are for information only, not binding and not necessarily up-to-date.



Contributor profiles

Hervé Touraine, Partner, Head of Finance Europe

Orrick Herrington & Sutcliffe (Europe) LLP

T +33 1 5353 7573
E htouraine@orrick.com
W www.orrick.com

Professional qualifications.Avocat à la Cour.

Areas of practice. Representing French and international financial institutions, corporates, sponsors, investors, insurance companies, asset managers and alternative capital providers on French and cross-border transactions; advises on banking, structured finance, securitisation, and capital markets transactions.

Transactions

  • Numerous complex, strategic and/or innovative transactions (including many firsts in France and Europe) such as international securitisation transactions, covered bonds, corporate structured bonds, project bonds, debt funds and the establishment of dedicated origination and refinancing platforms.

  • Transactions for financing or refinancing purposes (including liquidity), and for off-balance sheet or regulatory capital purposes. As such, he has developed particular skills in handling multi-jurisdictional and multi-practice transactions.

  • Substantial experience in the energy and infrastructure sector in the context of financing and refinancing transactions, using classical bank structures as well as Euro PP, bond and project bond structures, specialised credit institutions and dedicated debt funds.

Languages. French, English.

Professional associations/memberships.

  • General Secretary, Paris Institute of Structured Finance (IFSP).

  • Active participant in drafting securitisation and structured finance legislation and regulations in France.

  • Regularly publishes and speaks in relation to structure finance markets and related point of interest and deals.

Olivier Bernard, Partner

Orrick Herrington & Sutcliffe (Europe) LLP

T +331 5353 7568
E obernard@orrick.com
W www.orrick.com

Professional qualifications. Avocat à la Cour; graduated with honours from the University of Panthéon-Sorbonne (Maîtrise de Droit des affaires) and from HEC (École des Hautes Études Commerciales), specialising in finance.

Areas of practice. Structured finance; advises French and international financial institutions, insurers, funds and other alternative capital providers, as well as borrowers, on structured finance, debt capital markets and securitisation transactions, in relation to a variety of assets, including real estate, transportation fleets and infrastructure; a number of groundbreaking multi-jurisdictional transactions, privately or publicly placed; a particular expertise in RMBS and other ABS, as well as covered bonds.

Languages. French, English.


{ "siteName" : "PLC", "objType" : "PLC_Doc_C", "objID" : "1247311848757", "objName" : "Structured finance and securitisation in France overview", "userID" : "2", "objUrl" : "http://us.practicallaw.com/cs/Satellite/us/resource/4-501-0172?null", "pageType" : "Resource", "academicUserID" : "", "contentAccessed" : "true", "analyticsPermCookie" : "2-62dceab2:15b13e442a1:fdb", "analyticsSessionCookie" : "2-62dceab2:15b13e442a1:fdc", "statisticSensorPath" : "http://analytics.practicallaw.com/sensor/statistic" }