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This Client Alert is one of many Orrick publications designed to provide our clients and contacts with information they can use to more effectively manage their businesses and access Orrick's expertise. Please let us know if you would like information on our other publications. for information on our other publications. You are receiving this communication
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DECEMBER 2004 The French
New Legal and Regulatory Securitisation Framework following the 2003
Amendments and the 24 November 2004 Decree The implementation decree awaited since the
adoption on 1 August 2003 of the Financial and Security Law (amending
the legal framework of securitisation transactions in France) was finally
published on 25 November 2004. The new regime is therefore now
applicable and the main changes are presented below. The French securitisation legal framework relies on a special
securitisation vehicle, the “Fonds Commun de Créances” (FCC), created
by Law 88-1201 of 23 December 1988 (the “1988 Securitisation Law”,
now codified in the Code Monétaire et Financier under
Articles L.214 -5 and L.214-43 to L.214-49). The sole purpose of the FCC
was to purchase receivables and to issue units representing interests in such
receivables. The FCC does not enjoy a separate legal personality. It is a
co-ownership among the unitholders. The 1988 Securitisation Law was completed by an implementation decree
of 9 March 1989 (the “1989 Implementation Decree”). Both the 1988
Securitisation Law and the 1989 Implementation Decree have been constantly
amended with the intent of adapting the legal and regulatory framework to
market practice and requirements. The subsequent 1993, 1996, 1998 and 1999 amendments have globally
extended to commercial companies the right to securitise their assets (which
previously was limited to credit institutions), authorised the purchase of
additional debts by a securitisation vehicle, the issuance of new units after
the initial issuance, the institution of umbrella FCCs with two or more
compartments, and the extension to future receivables. In 2003, in the framework of the Financial and Security Law of
1 August 2003, several amendments to the 1988 Securitisation Law
modernised and liberalised the legal framework of securitisation transactions
in France (the “2003 Amendments”). The 2003 Amendments mainly cover the
following fields: Ø
the right of the FCC to issue debt securities in
addition to units; Ø
the protection of the assets of the compartments
in the case of umbrella FCCs. the right of the FCC to issue debt securities
in addition to units; Ø
the extension of the right of the FCC to enter
into derivatives contracts; Ø
the transfer and enforcement of security
interests; Ø
the effectiveness of the assignment in the course
of international securitisations; Ø
the protection of the monies collected by the
originator; Ø
the conditions to act as custodian; and Ø
the protection of the assets of the compartments
in the case of umbrella FCCs. Although the 2003 Amendments entered into force in August 2003, an
implementation decree (the “New Implementation Decree”), intended to
completely supersede the 1989 Implementation Decree and provide important
details on the composition of the assets of the FCC, the borrowing capacity
of the FCC, new rules on the use
of derivatives transactions by the FCC, and the right of the FCC to sell part
or all of the debts acquired before their maturity, was awaited. The New Implementation Decree was
finally adopted on 24 November 2004 and published on 25 November
2004. 1. Creation of the FCC Despite the 2003 Amendments authorizing the issuance of debt
securities, the FCC remains a co-ownership of unitholders. It is created by a
management company (“société de gestion”) and a custodian (“dépositaire”).
The management company must be a French commercial company licensed by the
French Autorité des Marchés Financiers (the “AMF”). Following the 2003
Amendments and according to the terms of the New Implementation Decree, a new
license will be instituted for management companies who manage FCCs which use
derivative contracts as part of their management strategy or FCCs which
intend to sell part or all of their receivables before maturity, subject to
the conditions fixed by the New Implementation Decree. The AMF is now expected to enact new rules regarding the level of
requirements imposed on management companies depending on the management
strategy of the FCCs they intend to manage. Regarding the custodian, the 2003 Amendments now enable French branches
of European Union credit establishments and non-EU establishments authorised
by the French Minister of Finance to act as FCC custodians. In the past
foreign arrangers found it difficult to appoint custodians for transactions
in which French banks were not involved. In addition to the extension to EU credit establishments whose French
branches may now act as FCC custodians, regarding especially the custody of
the original copies of the agreements relating to the underlying receivables,
the New Implementation Decree has defined the conditions under which certain
duties of the custodian can be performed by the seller or the servicer under
the seller’s or the servicer’s liability. Since 1999, an FCC may be set up as an umbrella FCC with several compartments.
In order to better secure the investors’ rights, the 2003 Amendments clearly
state that the assets of a compartment can only be used to pay the debts of
such compartment and consist only of the assets pertaining to that
compartment. For the same reasons, the New Implementation Decree confirmed
that a reference to the FCC in general shall apply to each compartment of the
FCC. 2. Units and debt
securities issuance Until 2003, the FCC could only issue units representing such
receivables purchased. Even though under French law it is expressly provided
that the units are securities (“valeurs mobilières”), experience has
shown that for local regulatory or market practice reasons, foreign investors
were reluctant to invest in French FCC units. Therefore, sometimes a double
level structure involving foreign SPVs capable of issuing commercial paper or
notes were used. Since the 2003 Amendments, the FCC is authorized to issue debt
securities (“titres de créances”) which is intended to allow the FCCs
to be used for broader categories of asset-backed financings and attract new
types of international and domestic investors. In particular, as a result of the amendments, the FCC is
now able to refinance securitisation transactions through the direct issuance
of French commercial paper (“billet de trésorerie”) on the French
commercial paper market. In addition, according to the New Implementation Decree, the FCC may
now issue debt securities subject to foreign laws, which could be Euro or US
commercial paper or notes or other titres de créance permitted by applicable foreign law. The New Implementation Decree also provides that an FCC (or any
compartment thereof) must be comprised of at least two units in addition to
any debt securities issued. An
important provision is the subordination of payments due to unitholders vis-à-vis
debt security investors. 3. The receivables-
assignment and effectiveness against third parties In accordance with its regulations (“réglement”), an FCC may
purchase all kinds of receivables, existing or future, due to a bank or any
commercial company, subject to French or foreign law. One important clarification made by the New Implementation Decree is
a reference to debt securities
as being among the receivables that an FCC can purchase. Not only can an FCC purchase bonds
and notes, it also provides that an FCC can subscribe directly to debt
securities (including bonds or notes). Subject to the direct subscription to debt securities, receivables are
assigned to an FCC by way of a simple assignment form (“bordereau”)
which must, however, contain a few mandatory provisions. The assignment is
valid and effective between the parties and against third parties from the
date of execution of the assignment and no further formality is required. Although the 1988 Securitisation Law
clearly stated that the security interest and ancillary rights attached to
the receivables are automatically transferred to the FCC on of the execution
of the assignment deed, issues were raised in practice as to the transfer of
certain types of security interests - and as the purpose of the FCC is only
to purchase and own receivables (as opposed to tangible assets), it was
unclear whether the FCC could own secured assets upon enforcement (for
example real property mortgages). For the avoidance of doubt, the 2003 Amendments have expressly
confirmed that of any security interest (including a mortgage) securing the
transferred receivables is automatically transferred with the receivables
without any further formalities. With a view to improving the existing regime regarding international
securitisations, the 2003 Amendments dealt with the effectiveness of the
assignment vis-à-vis foreign assigned debtors. Under French conflicts of law rules, in an international
assignment of receivables, the enforceability of the assignment against third
parties is governed by the law of the location of the debtor. The 1980 Rome Convention dealing with
the law applicable to contractual obligations in Europe provides that the law
of the underlying debt governs the contractual relationship vis-à-vis the
debtor but does not address the effectiveness of the assignment vis-à-vis the
seller’s creditors. Therefore,
according to French international private law, if the law of the debtor
requires notification formalities, the seller’s creditors could challenge
before French courts the effectiveness of the assignment against them. The 2003 Amendments tried to solve this issue by providing that the
assignment to the FCC by way of the “bordereau” is effective
regardless of the law applicable to the assigned receivables or the
geographical location of the underlying debtors. The scope of this amendment may actually be limited, as
French law is not competent to regulate a question of enforcement in foreign
countries. Another issue that needed to be addressed is the commingling risk when
the receivables are collected by the seller. This issue of protecting the FCC’s cash without
interfering with the seller’s collection procedures has been a persistent
weakness of French securitisation.
In practice, based on case law, sub-accounts earmarked to the benefit
of the FCC were created and were intended to survive the seller’s collector’s
insolvency. The 2003 Amendments
have officially recognized the third party beneficiary account system (“compte
d’affectation spéciale”).
All sums collected by the seller on behalf of the FCC may be credited
to an account specifically designated to the FCC (or the relevant compartment
of the FCC in case of umbrella FCCs) on which the seller’s creditors may not
take enforcement measures, including in the event of the seller’s insolvency. The New Implementation Decree confirms the flexibility assigned to the
third party beneficiary account system.
The account (which can be an existing account) can be debited upon
instruction either from the management company or from the seller or the
servicer, subject to the terms of the account agreement concluded between the
management company, the custodian, the seller (or the servicer) and the accountholder. It should be noted that the account
can be opened in the books of a credit institution (établissement de
crédit) established in an OECD member country, and not necessarily
established in France. 4. Resale of the
receivables before maturity Until 2003, the conditions under which the FCC could sell the purchased
receivables (not yet due) were quite strict and, in any event, when the
conditions were satisfied, all the receivables in the FCC or in the relevant
compartment had to have been sold at the same time. The principle that such strict rules can be made more flexible was
raised in the 2003 Amendments.
The modalities are now defined in the New Implementation Decree. In view of any possible adverse or
favourable evolution of the risks borne by the FCC in connection with certain
receivables not yet due and payable, the FCC may sell such receivables in
parts or several lots. The FCC
can also do so if market conditions justify a change in the composition of
the assets of the FCC, provided however that such transactions are limited to
an annual volume of sale agreed in the FCC regulations and not exceeding 30%
of the FCC’s assets. 5. Use of
Derivatives/Synthetic securitisations Until 2003, the FCC was entitled to enter into credit default swaps
only to cover its own credit risk exposure. To date, the vast majority of
CDOs with French exposure have been conducted outside of France. The 2003
Amendments enable FCCs to enter into credit derivatives subject to certain
conditions specified in the New Implementation Decree. The New Implementation Decree has defined the following cumulative
conditions and limitations subject to which the FCC may enter into forward
financial instruments (“instruments financiers à terme”): A A
the derivatives contracts must be concluded
with either: Ø
a credit establishment licensed in an OECD country
or an investment enterprise based in the European Union or a European
Economic Space (EES) country or a French or a foreign legal entity whose
obligations under the derivatives contracts are guaranteed by a financial
institution belonging to the category referred to above; or Ø
an insurance or reinsurance company regulated by
the French insurance code or which enjoys similar license in an EC country or
an EES or OECD country; B B the settlement obligations under the
derivatives consist of either: Ø
the delivery or transfer of the receivables
purchased by the FCC; Ø
settlement in cash; or Ø
the transfer of FCC units (except the relevant
FCC’s own units) or units issued by similar foreign entities; and C the net potential loss resulting from the
derivatives contracts: All outstanding derivatives contracts concluded by the FCC, determined
at any time by taking into account the guarantees that can be enforced, must
not exceed the value of its assets. 6. Provisional measures FCCs created before 25 November 2004 are not required to amend
their regulations if their management strategy has not changed. Also, the licenses granted to management companies before
25 November 2004 are still valid.
However, any existing management company which intends to manage an
FCC that anticipates using derivatives contracts exposing the FCCs to credit
risk or FCCs that anticipate selling their receivables before maturity must
obtain a new license. Please feel free to contact Pascal K. Agboyibor if you have any questions.
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