France is changing its legal framework to make the Paris financial market one of the most attractive ones in Europe.
Bond Issuance Reform
Bond issuances have been simplified by an ordinance of May 10, 2017, which is now effective. Any bonds issued with a nominal amount of at least €100,000, or with a lower nominal amount but saleable by package of at least €100,000, can provide contractually in the issuing agreement the rules applicable for the bondholders’ meeting (i.e., the prior notice to convene the bondholders, the quorum and the majority rules applicable for the decisions made by the bondholders as well as the way the bondholders’ meeting can be held). The purpose of the reform is to allow bondholders of such eligible issuances to have the same flexibility as the banks participating in a syndicated loan facility and to be in the best position to negotiate with the issuer as well as the other creditors’ issuer, including banks.
For instance, if the issuing agreement so provides, a bondholders meeting could be held without mandatory prior notice, by way of a conference call or an internet meeting, and the majority rules could be differentiated depending on the importance of the decision to be taken (simple majority, majority of two-thirds, majority of three-quarters or unanimous consent), whereas until now any modification of the terms and conditions of the issuance required a 15- calendar- day prior notice, a formal bondholders’ meeting and a mandatory majority of two-thirds.
Private Financing Vehicle Reform
The legal environment of the private financing vehicle is going to change significantly. In addition to the reform regarding French debt securitization funds (organismes de titrisation), an ordinance to be enacted prior to Oct. 9, 2017, will create a new vehicle qualifying as an AIFM vehicle: the specialized financing vehicle (organisme de financement spécialisé, or SFV).
First, the SFV will no longer bear a name making reference to “securitization,” which is still today considered in Europe as the devil at the origin of the 2008 financial market crisis and is not easy to market to European institutional investors, such as insurance companies, mutual funds or pension funds.
Second, the SFV will be regulated by the 2011 EU AIFM Directive allowing for a common framework throughout Europe and thus benefitting from the AIFM “placement passport” of the securities issued by the AIFM vehicle within the 28 EU member states (debt securitization vehicles can only be placed in accordance with the EU Prospectus Directive, which will become the EU Prospectus Regulation as of May 2018).
Third, SFV will be entitled to invest into a wide range of assets, including debt instruments (by acquiring debt claims on the secondary market, by subscribing or purchasing bonds and by granting loans directly to corporates), equity instruments, equity-linked instruments (i.e. debt instruments giving access directly or indirectly to the share capital of the issuer, such a convertible bonds, bonds exchangeable for shares, bonds with share warrants, and therefore allowing the SFV to benefit from the increase in the share value of its investment), as well as physical assets (real estate properties, aircrafts, ships, leased assets).
Fourth, the SFV will benefit from provisions which derogate from ordinary law […] in order to best protect the interest of the investors and to have them being exclusively at risk on the underlying financed assets: in particular, SFV will not be subject to bankruptcy proceedings, nor to the nullity of the claw-back period. Its assets cannot be seized by third party creditors and, by statute, the rules of allocation of payments will be binding and enforceable vis-à-vis third parties. The SFV also benefits from a specific means of assignment (applicable with respect to French debt claims) allowing the transfer of the debt claims and the related security interests vis-à-vis third parties as from the date apposed on the transfer deed, with no formality required. This is particularly crucial for mortgage receivables in order to avoid the cumbersome and costly formalities to modify the registration of the mortgages at the land registry.
Fifth, the SFV qualifying as an AIFM vehicle can extend loans in certain jurisdictions in Europe where the bank monopoly rules would prevent a non-credit institution from carrying out credit transactions. A French SFV could grant loans directly to German or Italian debtors, for example.
However, the SFV is not allowed to tranche the credit risk associated with the underlying assets, meaning that the issuance of senior/subordinated classes of securities is not possible. Only French debt securitization funds can issue senior/subordinated classes of securities. It should be kept in mind that the tranching of the credit risk of the underlying assets is the criteria for the definition of a “securitization exposure” under CRR, Solvency II and the AIFM Directive. It implies that investors shall calculate their capital requirement as for a securitization investment and that the originator, the sponsor or the original lender shall retain a 5% material net economic interest in the securitized exposure (on ahorizontal or vertical basis). On the contrary, securities issued by the SFV will be treated by the investors with transparency, by applying the prudential treatment of the underlying assets (i.e., the prudential treatment applicable to the mortgage loans held by the fund), and will not be subject to the 5% risk retention requirement.