Christine Van Gallebaert of Gide Loyrette Nouel
presents the main features of the legal framework which governs
French covered bonds issuers
The concept of covered bonds in France covers two main types
of covered bonds: (i) obligations foncières
issued by specialised credit institutions called
sociétés de crédit foncier (SCFs)
and (ii) obligations de financement de l'habitat
issued by specialised credit institutions called
sociétés de financement de l'habitat
(SFHs).
The SCF was created by Law 99-532 of June 25 1999 relating
to savings and financial security, which implemented the new
legal framework for covered bonds in France in lieu of the
former regime initially defined by the Decree of February 28
1852.
The SFH was created by Law 2010-1249 of October 22 2010 and
Decree 2011-205 of February 23 2011. It provided a legal regime
for the French structured covered bond. These were bonds issued
by special purpose credit institutions that, although not
governed by any French covered bond legislation, were
contractually structured so as to bear all the characteristics
of covered bonds governed by the SCF legal framework. The
French structured covered bonds issuers created from 2006 to
2008 were converted into SFHs in 2011.
Segregation of the cover pool
Under the French covered bonds model, assets composing the
cover pool for covered bonds are segregated in a dedicated
entity, the SCF or SFH, which is also the issuer of the covered
bonds.
SCFs and SFHs are created as a wholly owned affiliate of a
bank, for the purpose of refinancing the banking group to which
it belongs; they are also remote from the bankruptcy of its
parent.
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"SCFs and SFHs
are bankruptcy remote by law"
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SCFs and SFHs have no employees or other resources, and are
usually managed by their parent. To that end, the SCF or SFH
outsources services contracts. As a result, to protect the SCF
or SFH against the bankruptcy of its parent (which acts as
servicer) despite the provisions of the French bankruptcy law,
such outsourcing services agreement may be immediately
terminated upon the opening of bankruptcy proceedings against
the servicer. Further, the servicer must identify the employees
and other resources that are necessary for the recovery of the
cover pool and describe in a preventive recovery plan submitted
to the French banking supervision authority, the modalities of
servicing transfer to a back-up servicer.
Despite any legal provisions to the contrary, and notably
the provisions of the French bankruptcy law, the bankruptcy of
a company holding shares of an SCF or SFH cannot be extended to
the SCF or SFH.
Further, certain hardening-period rules are not applicable
to transactions made with the SCF or SFH.
The segregation of the cover pool within the SCF or SFH is
achieved by the transfer of eligible assets to the SCF or SFH
by the parent (or any other entity of its group). This is
achieved through a true sale, by way of a transfer as security
to a loan granted by the SCF or SFH to the originator or
sponsor (for the SCF, such transfer is only available when the
cover pool is composed of exposures to public entities), by
subscription, under certain conditions, of asset backed
securities issued by a securitisation vehicle whose assets are
composed of eligible assets, or by subscription of mortgage
promissory notes that are secured by a cover pool composed of
eligible mortgage loans.
Status of the issuer
SCFs and SFHs are French specialised credit institutions
licensed by, and under the supervision of, the French banking
supervision authority (the Autorité de
Contrôle Prudentiel et de Résolution
– ACPR). They are credit institutions, but with a
limited legal purpose as specified by their specific legal
framework; they are a sub-category of credit institution in
France.
SCFs and SFHs are subject to prior licensing by the ACPR and
therefore they may not commence their activities before having
obtained such banking licence.
In their capacity as specialised credit institutions, SCFs
and SFHs are governed by different sets of rules:
- the generic rules applicable to all types of French
credit institutions set out under Articles 511-1 of the
French Monetary and Financial Code;
- the provisions of the European Regulation (EU) 575/2013
of the European Parliament and of the Council on prudential
requirements for credit institutions and investment firms
(CRR) adopted on June 26 2013 and entered into force on
January 1 2014; and
- the specific rules of the French legal framework for
covered bonds set out in the French Monetary and Financial
Code, Regulation 99-10 of July 9 1999 issued by the
Comité de la Réglementation Bancaire et
Financière (CRBF) and various instructions from
the ACPR.
The French legal framework for covered bonds is designed to
satisfy the requirements of Article 52(4) of Council Directive
2009/65/EC of July 13 2009 on the co-ordination of laws,
regulations and administrative provisions relating to
undertakings for collective investment in transferable
securities.
Covered bonds issued by SCFs and SFHs also comply with the
provisions of Article 129 of the CRR and therefore qualify for
the favourable prudential treatment it sets out.
Exclusive legal purpose
The SCF and SFH legal purpose is limited to grant or
purchase assets and hold securities and instruments that comply
with certain legal eligibility criteria (see below).
To finance such activity, the SCF or SFH may issue
obligations foncières or obligations de
financement de l'habitat that benefit from a priority
right of payment (called privilège), raise
other forms of borrowings benefitting or not from the
privilège and issue mortgage promissory
notes.
The SCF or SFH may also enter into hedging agreements that
benefit from the privilège, unless they were
entered for the purpose of hedging liabilities that do not
benefit from the privilège. Under the hedging
agreement, the SCF or SFH does not post collateral and certain
events of default are disapplied.
It may also, under certain conditions, carry out temporary
transfers of securities, pledge a securities account and pledge
or transfer all or part of its assets to raise temporary
funding. Assets used for such transactions drop off from the
cover pool.
Eligible cover pool
The main difference between SCFs and SFHs consists in the
eligible assets composing the cover pool for the covered bonds
they issue.
Eligible core assets
The eligible assets to an SCF may only be: (i) secured
loans, which are secured by a first-ranking mortgage or
guaranteed by a credit institution, a financing company or an
insurance company (that does not belong to the same group as
the relevant SCF and within the limit of 35%). The property
must be located in France or in any other member state of the
EU or EEA or in a state that qualifies for credit quality step
one; (ii) exposures to public entities such as states, central
banks, local authorities or state-owned entities located in a
member state of the EU or within the EEA, in the US,
Switzerland, Japan, Canada, Australia or New Zealand. If not
located in those jurisdictions, such public entities must
comply with specific limits and levels of credit assessment;
(iii) senior units or senior notes issued by French
organismes de titrisation or other similar foreign
vehicles governed by the laws of a member state of the EU or
EEA, the US, Switzerland, Japan, Canada, Australia or New
Zealand. The assets of such should comprise at least 90% of
eligible assets, provided that the units or notes benefit from
a credit quality step one assigned by an external rating agency
and are only eligible within a limit of 10% of the nominal
amount of the covered bonds and other liabilities benefitting
from the privilège. Exceptions to this (until
December 31 2017) are if: loans composing at least 90% of the
assets of the vehicle were transferred by an entity belonging
to the same group of affiliated group of the issuer; and the
subordinated notes or subordinated units of the vehicle are
kept by such an entity; and (vi) under certain limits, mortgage
promissory notes secured by eligible mortgage or guaranteed
loans.
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"SCFs and SFHs
are French specialised credit institutions licensed by
the French banking supervision authority"
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The eligible assets to an SFH may only be: (i) loans granted to
any credit institution and secured by the transfer, the
assignment or the pledge of eligible home loan receivables (as
defined below); (ii) units or notes issued by securitisation
vehicles in the same limits and conditions as an SCF (see
above); (iii) under certain conditions, mortgage promissory
notes secured by eligible home loans; and, (iv) eligible home
loans financing, in whole or in part, residential real property
located in France or another EU or EEA member state or a state
that qualifies for credit quality step one assigned by an
external rating agency and that is secured by a first-ranking
mortgage or a guarantee granted by a credit institution, a
financing company or an insurance company complying with
certain legal requirements.
SCFs and SFHs must keep an up-to-date list of the loans they
have granted or acquired containing information on the nature
and the value of the guarantees.
Eligible substitution assets
Permitted investments are limited to securities, instruments
or deposits which are sufficiently secure and liquid (ie, which
are due or guaranteed by credit institutions or investment
companies that qualify for the credit quality step one or
credit quality step two if the maturity is less than 100
days).
While SCFs may hold exposures to public entities as core
assets, SFHs may invest in debt securities issued or guaranteed
by eligible public sector entities and deposits within the
books of a central bank of an EU member state which complies
with certain eligibility criteria, as substitution assets
only.
The total amount of such substitution assets may not exceed
15% of the liabilities benefitting from the
privilège, subject to some limited legal
exemptions.
Prohibition
SCFs and SFHs are not allowed to hold equity participations
or other forms of equity interest issued by other
companies.
Reinforced prudential obligations
General prudential rules
Like all other credit institutions, the SCF or SFH must
comply with the general prudential ratios such as the solvency
ratio, the liquidity ratio, the large exposure limit, and the
new liquidity coverage ratio (LCR) and the net stable funding
ratio (NSFR) created by CRR.
In addition, the SCF or SFH must comply with specific
prudential rules provided in the French legal framework for
covered bonds.
Cover ratio
The SCF or SFH must at all times maintain a minimum legal
cover ratio between its assets and its liabilities benefitting
from the privilège. This minimum cover ratio is
at the time of writing at least 105%.
The ratio's denominator is comprised of the covered bonds,
as well as any other resources benefitting from the
privilège, ancillary costs, sums due to the
servicer under the servicing contract set out in Article L
513-15 of the French Monetary and Financial Code and the sums
due under the hedging agreements benefitting from the
privilège.
The ratio's numerator is made up of the all the assets of
the SCF or SFH for their applicable weighting percentage.
Coverage of liquidity needs
The SCF or SFH must ensure, at all times, the coverage of
its liquidity needs for the next 180 days, taking into account
expected inflows under their assets and net flows under hedging
agreements. The liquidity needs must be covered by eligible
substitution assets or by assets that are eligible as
collateral to credit transactions with the Banque de
France in accordance with the monetary policy and
intra-day credit operations rules of the Eurosystem.
To mitigate liquidity risk between its assets and its
liabilities, the SCF or SFH must ensure that the average life
of its cover pool, up to the minimum amount required to comply
with the cover ratio, does not exceed the average life of its
liabilities benefitting from the privilège by
more than 18 months.
If the SCF or SFH is not able to cover its cash needs with
other means available to it, it may also subscribe for its own
covered bonds. This must be for the sole purpose of granting
them as collateral security to credit transactions with the
Banque de France in accordance with its monetary and
intraday credit policy,
For the calculation of the cover ratio and liquidity needs,
when the assets of the SCF or SFH comprise loans secured by
eligible assets, the SCF or SFH must take into account the
assets received as collateral rather than the secured
receivables (look-through).
Special public supervision
Supervision by the French banking
authority
The ACPR is in charge of the licensing and oversight of SCFs
and SFHs. It monitors the compliance by SCFs and SFHs of their
prudential and reporting obligations. It exercises
administrative police authority, disciplinary authority and has
broad powers regarding resolution measures.
SCFs and SFHs must submit to the ACPR various reports
(annually and quarterly) on the quality of its assets. They
must also provide a statement (to be sent on March 31, June 30,
September 30 and December 31 of each year on their cover ratio)
showing their liquidity needs, spread between the average life
of its assets and liabilities and other elements relating to
the assets and liabilities in accordance with Regulation 99-10
of the CRBF.
Certain reports are publicly available in the Bulletin
des announces légales obligatoires, or are
published elsewhere (websites for instance).
Special supervision by a specific
controller
The SCF or SFH must appoint a specific controller from the
list of registered auditors, with prior approval of the ACPR
for a four-year period.
The controller must be independent: it cannot be the auditor
of the SCF or SFH, of any company controlling the SCF or SFH,
or of a company controlled directly or indirectly by another
company controlling the SCF or SFH.
The tasks of the controller mainly consist in ensuring that
the SCF or SFH conducts its activities in accordance with the
French legal framework for covered bonds. In particular, it
must verify the eligibility of the assets composing the cover
pool, compliance with the cover ratio and adequacy of rate and
maturity matching level between the assets and the
liabilities.
The controller certifies, on a quarterly basis, compliance
with the cover ratio in connection with the issuance programme
and for any issue of covered bonds (or other funding which
benefits from the privilège) for more than
€500 million ($685 million).
The controller reports annually to the directors and board
of directors of the SCF or SFH, a copy of which must be
provided to the ACPR and informs the ACPR of any facts or
decisions which could threaten the conditions or continuity of
the SCF or SFH's business.
In case of bankruptcy of the SCF or SFH, the controller will
be responsible for filing claims on behalf of the holders of
the covered bonds, and other creditors benefitting from the
privilège.
The controller attends all shareholder meetings and, on his
request, may be heard by the board of directors of the SCF or
SFH. It is liable for any error or negligence committed in the
exercise of its functions.
For the performance of its duties, the controller has access
to all information from management, internal control data, and
internal audit data. The specific controller is entitled to
undertake, at any time, any necessary control that it deems
appropriate and to review the SCF or SFH's books and
records.
Privilège
Under the French legal framework for covered bonds, any sums
due under the covered bonds benefit from a
privilège.
Such privilège consists in the following
rules, despite any legal provisions to the contrary (including
French Bankruptcy law):
- all amounts payable to the SCF or SFH for the cover pool
and the replacement assets and forward financial instruments
entered into by the SCF or SFH, after any applicable set-off
and available cash are allocated with priority over the
payment of any sums due in respect of the covered bonds and
other resources benefitting from the
privilège; and
- in the event of conciliation (conciliation),
safeguard (sauvegarde), judicial reorganisation
(redressement judiciaire) or judicial liquidation
(liquidation judiciaire) of the SCF or SFH, all
amounts due regularly under the covered bonds and other
resources benefitting from the privilège,
will continue to be paid on their contractual due date, and
with priority over all other debts, whether or not preferred,
including interest resulting from agreements whatever their
duration. Accordingly, as long as the creditors (including
the covered bonds holders) benefitting from the
privilège have not been fully paid, no other
creditor of the SCF or SFH may exercise any right over their
assets and rights; and
- the judicial liquidation of the SCF or SFH does not
trigger the acceleration of payment of the covered bonds and
other resources benefitting from the
privilège.
The aim of the French legislator was to ensure continuity of
payment to covered bonds despite the bankruptcy of the SCF or
SFH.
It should be noted that such privilège also
benefits pari passu with covered bonds to claims over
the SCF or SFH: (i) under any other resources raised, the
issuance or subscription agreement of which mentions the
benefit of the privilège; (ii) under forward
financial instruments entered into by the SCF or SFH to hedge
its interest rate and currency risks on its assets or
liabilities (other than liabilities under any resources that do
not benefit from the privilège), after the
set-off as applicable; (iii) under any sums due under the
servicing and recovery contract provided for in Article L
513-15 of the French Monetary and Financial Code; and (iv)
under any ancillary costs defined in Article R 515-9 of the
French Monetary and Financial Code.
Designed to protect investors
The French legal framework for covered bonds is designed to
protect investors. Since covered bonds are usually rated, SCFs
and SFHs also comply with the rating agencies' requirements for
counterparty risks, which lead the SCFs and SFHs to put in
place contractual arrangements and undertakings to procure
additional credit enhancement for investors.
Christine
Van Gallebaert |
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Gide Loyrette Nouel
Partner, Paris
T: +33 (0)1 40 75 36 80
E: vangallebaert@gide.com
Christine Van Gallebaert specialises in
securitisation transactions, covered bonds and more
generally asset-backed financings over any type of
financial assets, including public receivables arising
from infrastructure projects, trade receivables,
residential mortgage loans or commercial mortgage loans
(RMBS and CMBS), consumer loans, revolving credits and
doubtful receivables.
She was involved in the establishment of several
French covered bonds issuers (Société
de Crédit Foncier and
Société de Financement de
l'Habitat) for French and foreign banking or
corporate groups and on the securitisation of various
financial assets. She has also regularly advised
sponsors or banks in Public-Private-Partnership
financings, most of which being refinanced through the
issue of covered bonds. More recently, she was involved
in the establishment of loans funds investing in SME
financings.
Van Gallebaert has been a partner at Gide Loyrette
Nouel Partner since January 2010. She joined the firm
in 1999 and was admitted to the Paris Bar in January
1999. She gained a post-graduate degree (DEA) in
private law from the university of Paris II
(Panthéon Assas) in 1997, and a masters
degree in private law from the university of Paris-II
(Panthéon Assas) in 1996.
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