In short: securitization transactions in France
Consumer finance

In short: securitization transactions in France

Transactional issues

SPV forms

What forms can special purpose vehicles take in a securitization transaction?

Since the 2017 reform, securitization transactions can be implemented through two types of Funding organizations (OF), which can be structured as a traditional securitization vehicle (OT) or a specialized financing entity (OFS).

Both types of TO can be created as a company or as a joint ownership of securitized receivables.

The most common form of TO used to securitize receivables under French law is the common securitization fund (FCT), which is a joint ownership of securitized receivables. An FCT is created by an independent management company acting as manager of the fund, in accordance with article L214-181 of the Monetary and Financial Code (MFC) and its assets are held by a depositary. It has neither shareholders nor share capital. An FCT can be created with several compartments, the assets and liabilities of which are separated from those of the other compartments of the FCT. French securitization entities can also be created as a company or securitized company (SDT). Such a company is managed by an approved management company and its assets are held through a depositary. A TSD can offer advantages in transactions where the advantages of international tax treaties are sought. Until new directives are issued by the tax administration, its tax regime should be verified with the tax administration.

An OFS is a new type of fund available for securitization operations, it is qualified as an alternative investment fund (AIF) regulated by the Alternative Investment Fund Managers (AIFM) directive. An OFS can be managed by a fund manager complying with the AIFM and can benefit from the European long-term investment regime which allows investments by a wider base of investors interested in long-term financing. An OFS can be created as legally transparent entities or as a company.

SPV training process

What is training for the different types of SPVs in your jurisdiction?

The creation of an OF involves the following steps in terms of schedule, costs and organization:

  • the selection of an approved management company, a depositary and an auditor;
  • the drafting and negotiation of fund regulations or constituting documents, a debt purchase agreement, a management agreement and various ancillary agreements; and
  • the placement with investors of securities issued by the securitization vehicle (through a public or private placement).

Costs include up-front costs and ongoing expenses.

The main advantage of a French OF, compared to a SPV or other similar foreign vehicle, is its regulated status: investors are protected by French legal provisions, which set the main principles applicable to the OF, and by regulations. applicable to the manager. itself and the supervision of the Autorité des marchés financiers (AMF).

Applicable law

Is it possible to specify the law of the jurisdiction applicable to the assignment of receivables to the SPV?

Yes. According to article L214-169 of the MFC, the assignment of receivables to a French securitization entity may be governed by a law other than French law.

This reflects Regulation (EC) No 593/2008 (Rome I), according to which an international contract is governed by the law chosen by the parties. However, if all the elements relevant to the situation at the time of the choice were linked to France alone, such a choice of law would not prejudge the application of mandatory rules in France. In addition, the contract can be qualified as an international contract if it includes a non-French element and the law must not be chosen to escape considerations of French public order.

Acquisition and transfer of assets

Can an SPV acquire new assets or transfer its assets after the issuance of its securities? Under what conditions?

Yes. A French securitization vehicle is authorized to buy new receivables after the initial purchase and to issue additional units under two main conditions:

  • the regulation of the securitization entity should specify the circumstances and conditions under which it can acquire additional receivables; and
  • an additional deed of transfer must be signed to transfer the new assets to the fund.

Registration

What are the registration conditions for a securitization?

There is no registration obligation for the creation of an OF in French law (without special circumstances).

Notification of debtor

Should debtors be informed about the securitization? How is the notification done?

There is no obligation to notify debtors of the securitization and transfer of debts they owe. Under French law on securitization, the transfer of receivables to the SPV is effective between the assignor and the assignee on the date indicated on the deed of transfer, without any obligation of prior notification to debtors or other formalities; however, until the transfer is notified to the affected debtor, the transfer is considered a silent transfer and that debtor may continue to pay its debt by payment to the assignor. The debt transfer takes place on the date indicated on the transfer date and the assignment becomes effective between the parties and enforceable against third parties on this date. Debtors must be informed in the event of a change in the manager of the securitized receivables.

What confidentiality and data protection measures are necessary to protect debtors in a securitization? Is a waiver of confidentiality possible?

The rules of French law applicable to the protection of confidentiality, banking secrecy and personal data remain applicable after the securitization of the receivables concerned and may restrict the transfer of information to investors or to the securitization entity.

For example, the rules of the General Data Protection Regulation restricting the processing or transfer of personal information about individuals and aimed at ensuring that personal information is stored and processed adequately, ensuring that individuals have access to the information they need. concerning, will remain applicable to the personal data transferred. to the securitization entity.

In addition, when the assignor of receivables is a credit institution, confidential information is covered by strict legislation on banking secrecy, prohibiting the transfer of this information to third parties without the prior consent of the debtors concerned.

A waiver of confidentiality by the person protected by it is generally available, and certain statutory exemptions may apply in certain circumstances.

Credit rating agencies

Are there rules governing the relationship between rating agencies and issuers? What factors do rating agencies focus on when rating securitized issues?

The relationship between rating agencies and French securitization entities is not specifically regulated by French law. Recent legislation has removed an old requirement to obtain a rating for securities issued by listed securitization vehicles.

When a rating is sought, rating agencies implement a rating methodology that involves multiple legal and economic factors and depends on the type of securitized receivables. Rating agencies in particular examine the structural features of the securitization entity, which should be bankrupt and tax-exempt; a true assignment by sale of the securitized receivables and the related collateral is generally required. Rating agencies also focus on the quality of securitized assets and the selection process. Indeed, the rating agencies will analyze the liquidity of the assets pooled in the FCT or the SDT, the maturity of these assets and the strategy of the management company, in particular with regard to its reaction in the event of a lack of liquidity in the within its assets. The objective of the rating agency is to determine that the management company would be able to cope with the main risks incurred by the securitization entity, in particular:

  • credit risks;
  • service agent performance risk;
  • the risk of the guarantor;
  • legal risks associated with the fund;
  • sovereign risk;
  • interest rate;
  • currency risks; and
  • repayment risks.

Under French law, securitization entities can issue bonds or commercial paper (TCN). No rating is required when there is no public offering of bonds. TCNs issued by a securitization entity do not have to be rated if the holders of the TCN have the same rights in terms of classification and are permanently backed by eligible debts allowing refinancing via the euro system in accordance with Decree No. 2014 -361 of March 2013.

Duties of directors and officers

What are the main functions of the directors and officers of SPVs? Should they be independent of the author and owner of the SPV?

An OF is not operated like an SPV, but is managed by an approved management company whose main mission is to act independently in the sole interest of the holders of securities issued by the securitization entity, in compliance with fund regulations. The management company is supervised by the AMF. The CTF does not have a director or an officer. SDTs have directors, but all day-to-day management functions are delegated to the management company.

The management company has a duty of best execution, that is to say that a given transaction must be implemented under the best market conditions for its client.

The fund management company must be independent from the initiator and must not follow any instructions given by the initiator.

If the securitization entity is a joint stock company, it must be managed by an approved management company acting independently in the interests of the holders of securities issued by it.

Exposure to risk

Are there regulations requiring originators and arrangers to maintain some risk exposure in a securitization?

Before the global financial crisis of 2008, loans could be created and distributed without keeping any risk on the originator’s balance sheet. This has been amended by regulators to align the interests of investors with those of originators and sponsors of originators.

Custody rules have been imposed in securitization transactions implemented in France by several EU rules, in particular Regulation on capital requirements (EU) n ° 575/2013 and Directive IV on capital requirements. own funds. Under these rules, originators, sponsors or originators of a securitization transaction must maintain 5 percent exposure in the relevant securitization. The custody rules have been confirmed and refined by the Securitization Regulation (EU) No 2017/2402 and the Capital Requirements Regulation (EU) No 575/2013 amending Regulation (EU) No 2017 / 2401, which impose a new direct approach where originators, sponsors and original lenders have a direct obligation to retain risk; this approach complements the existing indirect approach which mainly imposed on investors an obligation to verify compliance with the retention rules.

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November 1, 2020

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