France Welcomes Foreign and Alternative Capital Providers with Latest Reform of Finance Sector

Long a cornerstone of the French banking system, the "French banking monopoly" largely prevents non-bank entities from lending money to French borrowers. Although French funds have been used as vehicles by alternative capital providers in the past, such transactions could not be structured easily and without the involvement of borrower-facing credit institutions as intermediaries, or complex bond structures.

The reform introduces a new category of vehicles, named organismes de financement (literally, financing vehicles), into French law, encompassing the existing organismes de titrisation (securitization vehicles) and the newly introduced organismes de financement spécialisé (specialized financing vehicles). These two types of vehicles will share a common regime based on the existing features of the French securitization regime, including comprehensive bankruptcy remoteness provisions and the option to select a transparent tax fund structure or a corporate structure subject to corporate tax. Both types of vehicles will further benefit from an unrivaled creditor-friendly legal regime, such as extended protections against the insolvency of the vehicle's counterparties, a lockbox mechanism and protection of future flows. They will also be allowed, depending on their form and characteristics, to:

• directly grant and make available loans to corporate borrowers in France and abroad, without a credit institution intermediary and without being subject to regulatory capital requirements;
• enter into sub-participations;
• own a number of different types of assets, including shares and equity-like instruments;
• benefit from all kinds of guarantees and security, including the so-called "Dailly" assignment (being the most commonly used and bankruptcy-proof type of security in the French lending market and which up to now could only be granted to credit institutions);
• benefit from the "European Long-Term Investment Fund" EU label; and
• be managed by a company incorporated outside of France, if licensed in a EU member state to manage alternative investment funds.

This reform opens a large range of new possibilities for a variety of French and foreign actors, such as insurers, asset managers, investment funds, private equity funds, debt funds, special situation funds or direct lending platforms, in fields as diverse as:

• corporate financing (via direct lending to corporate, including SMEs);
• real estate financing;
• infrastructure financing (with the new funds taking direct part in the origination, structuring and lending process alongside other lenders);
• distressed asset management and restructuring (noting that the new funds will be allowed to grant new money and to hold equity in the restructured entity);
• regulatory capital transactions (as the new funds will be allowed to enter into a variety of risk transfer instruments, no longer limited to credit default swaps, as was the case until now);
• tech and fintech financings (by way of direct lending and market refinancing); and
• classic securitizations for all types of assets, including leasing receivables, nonperforming loans, whole business, project bonds or sovereign exposures.

As a separate important point, this reform also includes some long-awaited provisions aiming at enlarging the legal tools available to French banks for refinancing their loan exposures. Until now, refinancing techniques were limited by the French banking monopoly, as the purchasing of outstanding loans is, subject to limited exceptions, viewed as a regulated banking activity in France. The reform will extend these exceptions considerably and will allow certain types of foreign non-bank entities to freely acquire such loans on the secondary market.

The reform is set forth in an Ordinance, which was executed by President Macron on 4 October 2017, and will come into force in different phases. The first phase, which will make the new French financing vehicles operational, will be finalized in January 2018.

Paris EUROPLACE, which comprises many of the private and public French and international players of the financial markets and whose purpose is to promote the competitiveness and attractiveness of the Paris financial marketplace, played a leading role in drafting the funds reform through a dedicated Committee. Orrick Partners Hervé Touraine, as Chairman, and Olivier Bernard, as a member of this Committee, led the work with the French legal and finance community and the French authorities to establish the reform, which is expected to constitute a major milestone in the development of the French finance sector.

By: Hervé Touraine and Olivier Bernard