France

Author: | Published: 10 Oct 2001
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In an article published in the IFLR Securitization Yearbook 2000, the authors explained why, in their view, France is a country where a favourable legal framework exists for securitizations. As a result of continuing pressure applied by the securitization industry on the French legislators, over the past years a constant stream of amendments has brought more and more flexibility to the existing legislation. France can now be favourably compared to most other European jurisdictions.

This article provides a brief summary of the legal scene before examining in detail some recent landmark transactions.

FRENCH LEGAL FRAMEWORK: SUMMARY

From the core principles...

Securitizations were officially launched in France when Law No 88-1201 of December 23 1988 on securitizations (the Law) and Decree No 89-158 of March 9 1989 (the Decree) were brought into effect by the French Parliament. Initially solely tailored to meet the needs of financial establishments, the Law's remit has progressively been widened to meet the demands of both originators and arrangers.

The core creation of the Law was an entity known as a fonds commun de créances (FCC). An FCC is not a company, but a joint ownership (copropriété), whose sole legal purpose is to acquire receivables (créances) which can either be originated by banking institutions (créances bancaires) or by commercial entities (créances commerciales). These banking and trade receivables, which may be denominated in French francs, euro or any other foreign currency, can be originated by sellers located either in France or a foreign country.

FCCs may also purchase (subject to certain restrictions) receivables relating to real property assets as well as bad debts and receivables that are subject to litigation. The purchase of future receivables is also expressly permitted, but this can still give rise to legal and tax issues (eg the proceeds corresponding to the assigned receivables are taxable at the originator's level).

Unlike limited liability companies, FCCs do not have capital represented by shares (actions). Instead, they issue units (parts) representing the underlying receivables (the units). These units consist of securities (valeurs mobilières) which can carry different rights as to capital and interest. Usually, FCCs issue two types of units: senior and subordinated. In certain cases, a small amount of residual units representing any proceeds likely to remain following an FCC's liquidation are subscribed to by the originator and/or the arrangers. The placement of units is subject to the control of the management company and the French stock market supervising authority (the COB).

... to more detail

A constant stream of amendments to the Law was necessary to allow the French legal market to keep pace with changes in the financial markets as well as the needs of originators:

  • FCCs' reloading ability – successive transfers of receivables may be made to FCCs during their lifetime;
  • transfer of receivables – FCCs may acquire receivables pursuant to a transfer document (acte de cession de créances), in which the receivables to be transferred to the FCC are listed. From the date on which this document is delivered, the receivables' assignment is perfected and enforceable against third parties. All security interests attached to the receivables are automatically transferred to the FCC and no notification to the assigned debtors is required;
  • granting of loans to FCCs – since November 1998, FCCs have been entitled to borrow funds, should they need to cover a temporary shortage of liquidity; and
  • umbrella FCCs – since June 1999, it has been permissible for FCCs to be divided into two or more sub-funds (compartiments), with each sub-fund issuing its own units representing the underlying receivables assigned to it. As ring-fencing is provided by the Law, there is no risk of having the different categories of receivables co-mingled in a sole fund, should one category of receivables fall into default.

RECENT TRANSACTIONS: OVERVIEW

Despite the uncertainties resulting from the proposed changes to the Basle II Accord, banks have continued to explore ways of optimizing their balance sheets (as well as those of their corporate clients), either by way of 'classic' or synthetic securitization.

'Classic' transactions

In the case of non-synthetic structures, transactions originated by credit institutions can be distinguished from the structures put in place to address the business needs of corporate entities.

Banking originators

The inclusion of new technical features in commonly used structures is a means for bankers to demonstrate their skills and also increases the efficiency of securitizations. In this respect, the following transactions are noteworthy:

(i) consumer credit-based asset-backed securities (ABS) – consumer credit originators have long been convinced of the charms of securitization. In October 1998, Cetelem established the FCC Masternoria, which now has four sub-funds, each holding its own/separate pool of receivables and issuing its own classes of units. Other consumer credit institutions such as Cofidis (originator of 70,000 unsecured consumer revolving credits backing the euro170 million FCC Libravou FL-1 issue in November 2000) and CIC Group (originator of 50,000 unsecured consumer loans backing the euro320 million FCC CIC Conso-I issue in April 2001) are also active in the market; and
(ii) car loan-based ABS – car loan receivables nowadays constitute a popular class of asset, not only in Germany (ABT 4 Limited) and Japan (Oracle Delta Funding), but also in France. For example, in June 2001, a transaction involving two credit entities of Group Peugeot Citroen (Banques Din and Sofi) successfully completed, with the receivables relating to a portfolio of approximately 200,000 amortizing car loans. The first sub-fund of the umbrella FCC Auto ABS issued two classes of units aggregating euro1 billion. The subordinated units represented 5% of the total issuance volume of the units and a reserve fund was also put into place.

Corporate originators

French corporates view securitization favourably, as a potential means of diversifying their sources of financing and reducing their refinancing costs. Assigning trade or future receivables to an FCC can be an effective way of achieving those objectives.

Securitizing trade receivables

A constant deal flow has enabled professionals to design a structure that can now be considered as almost standard. As regards the structure chart below, the roles of the mentioned entities can be summarized as follows:

  • assigned debtors – as per the terms of the Law, no notification is delivered to them. Since the originator still acts as servicer, these debtors will make their payments directly to it. In the case of a pan-European securitization involving an FCC as the pivotal entity, the legislation applicable to the assigned debtors located outside of France has to be considered as well as the law governing the assigned receivables;
  • originator – as consideration for the receivables assigned to the FCC, the originator receives a purchase price, which takes into account a discount applied for overcollateralization purposes;
  • depositary – a credit institution is responsible for keeping, as custodian, the legal title representing all receivables assigned to the FCC;
  • management company – this pivotal entity acts on behalf of the FCC and manages all of the transaction's stages, from the acquisition of the receivables through to termination of the FCC. Its legal capacity and activities are strictly regulated and supervised;
  • settlement bank – a rated credit institution is required for the establishment of the bank account through which all payments made by the assigned debtors may flow, en route to the FCC;
  • liquidity bank – this entity's role is to make available a swingline facility to the refinancing vehicle so that any funds shortage can be covered; and
  • insurer – a monoline insurer, possessing a highly rated balance sheet, issues a first demand guarantee to cover any funds shortage at the FCC level. The rating of the units is consequently enhanced.

Securitizing future receivables

Despite the uncertainty created by the legal treatment of securitized future receivables in an insolvency situation affecting the originator, innovative transactions have recently paved the way for the development of this technique:

the Titriwatt Series was a groundbreaking transaction for the European market. As a result of the assignment to an SPV of receivables corresponding to future electricity bills to be paid over the forthcoming months by certain of its corporate and local governmental clients, EDF (the French power producer) enhanced its balance sheet and accelerated its cash-flow streams; and

the Cruise Ship Finance Ltd deal, completed in June 2000, enabled Chantiers de l'Atlantique (a French ship manufacturer) to securitize the $600 million future receivables relating to sale contracts entered into with RCCL Ltd for the construction of three cruise vessels. An FCC acquired these receivables and issued units backing the notes placed in the market by a Jersey-located refinancing vehicle. Despite the fact that this first transaction amortized earlier than planned, a Cruise Ship Finance II transaction was launched with a similar structure and closed in March 2001. The euro324 million floating rate secured notes, with Baa2 rating, were backed by a $290 million final receivable payable by RCCL for the construction by Chantiers of a new cruise vessel.

Synthetic transactions

The following public transactions provide a flavour of recent activity in France on the synthetic side of the market.

A CLO/CBO and SPV-less transaction: the IGLOO transaction

The IGLOO (investment grade loan-backed obligations) deal was structured as a CBO/CLO and SPV-less transaction in which Natexis Banques Populaires (NBP) simultaneously acted as originator, arranger and issuer. NBP created a reference portfolio for a notional amount of euro2 billion. This NBP-owned portfolio comprised both loans and bonds, and complied with various criteria of diversity and creditworthiness. NBP directly issued three classes of credit linked notes (CLNs) related to the portfolio, resulting in the holders of the CLNs taking a direct exposure to NBP. A credit default swap (CDS) was put into place as credit protection.

An innovative synthetic CDO: the EuroLiberté Plc example

The structure of this balance sheet CDO (described by Moody's as "an innovative transaction") can be summarized as follows:

  • depositary a newly formed Irish SPV with limited liability issued five distinct classes of notes (from Class A notes bearing an AAA rating through to non-rated Class E notes);
  • depositary the proceeds of the notes were invested in Aaa-rated European-government bonds pursuant to a repurchase agreement entered into between EuroLiberté Plc (ELP) and BNP Paribas;
  • depositary the bond portfolio constitutes collateral for a Junior CDS concluded between ELP and BNP Paribas, its market value being higher than 105% of the outstanding principal of the Class A to D notes;
  • depositary this Junior CDS relates to a euro3.25 billion reference portfolio held by BNP Paribas consisting of bonds and loans outstanding from European reference entities. This portfolio had to meet certain criteria of diversity and credit worthiness. Should a credit event occur (ie a restructuring of a reference entity) and give rise to losses, ELP will be obliged to pay, pursuant to the Junior CDS, a credit protection to BNP Paribas up to the initial outstanding amount of the notes; and
  • depositary an additional protection with an amortizing profile consisting of a euro2.62 billion Senior CDS was entered into between BNP Paribas and an OECD financial institution so that all credit protections exceeding the initial outstanding amount of the notes can be paid by that institution instead of ELP.
French FCC Structure

WHAT'S NEXT

Professionals point to the entry of new classes of assets into the securitization field, many of which are already being securitized in foreign jurisdictions, as a primary factor that will lead to an acceleration in growth of the local market as well as the creation of new business opportunities.

LBO refinancing: a promising solution

The ability to use securitization as a refinancing tool for acquisition financing is presently limited by the inclusion of strict covenants in credit documentation. Notwithstanding this approach, which is still prevailing in the market, BSN Glasspack (BSN), a French glass manufacturer, demonstrated that an LBO financing can be efficiently refinanced with a French-type securitization. Further to its acquisition by Cinven by way of an LBO, BSN decided to create a subsidiary dedicated to the centralized management of its clients' accounts. Once a sufficient volume of trade receivables was available at that level, a receivables portfolio was assigned to the new and dedicated BSN Glasspack sub-fund of the umbrella FCC Securifact against a consideration paid in cash.

The initial funds applied by FCC Securifact to the acquisition of the receivables came from the issuance of AAA-rated units subscribed by Phebus Finance (a French conduit), which funded itself on the market by way of commercial paper (billets de trésorerie) bearing an A1/P1 rating. Thanks to the proceeds of the receivables assignment, BSN refinanced, with a resulting 110 basis points gain, a euro150 million facility put in place for its original LBO financing.

Arbitrage CDOs: on hold

In France, balance sheet CDOs still represent the lion's share of the CBO market, but an increasing interest in arbitrage CDOs can be observed due to the demand of asset managers for new instruments. The Duchess I CDO, set up in May 2001, provides a good example of what can be achieved in this respect. However, the present uncertainties created by the slowdown of the economies in the OECD as well as technical difficulties (such as the absence of standardized documentation) may limit the expected market growth, at least until the 2001 year-end. The possibility of further downgrades of CDOs is also to be feared. For example, a securitization issuance was downgraded in May 2001, representing a first in France: defaults in the reference portfolio obliged Fitch to reduce the ratings granted to notes issued by the Olan II CDO.

NEW CLASSES OF ASSETS

There is a wide range of assets still eligible for securitization, either individually or globally, and which will be used for securitization through more and more innovative structures which can be received by the French legal environment.

CONCLUSION

The development of the French structured finance market appears to be more closely dependant upon the condition of the global economy and the regulatory treatment of securitization products than the legal framework itself. Indeed, flexible legislation is available in France and no significant obstacles to innovative transactions remain. The fact that leading international arrangers are presently further investigating the French market may well mean that the transaction flow will recover and indeed gain new impetus over the coming months.


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