Structured Finance & Securitisation

Structured Finance & Securitisation in France

Report generated on 24 March 2020

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Table of contents

GENERAL FRAMEWORK Legislation Applicable transactions Market climate

REGULATION Regulatory authorities Licensing and authorisation requirements Sanctions Public disclosure requirements

ELIGIBILITY Originators Receivables Investors Custodians/servicers Public-sector involvement

TRANSACTIONAL ISSUES SPV forms SPV formation process Governing law Asset acquisition and transfer Registration Obligor notifcation Credit rating agencies Directors’ and ofcers’ duties Risk exposure

SECURITY Types Perfection Enforcement Commingling risk

TAXATION Originators Issuers Investors

BANKRUPTCY Bankruptcy remoteness True sale Consolidation of assets and liabilities

UPDATES AND TRENDS Key developments of the past year

LAW STATED DATE Correct on

Contributors

France

Olivier Hubert [email protected] De Pardieu Brocas Maffei

GENERAL FRAMEWORK Legislation What legislation governs securitisation in your jurisdiction? Has your jurisdiction enacted a specifc securitisation law?

Securitisation in France is mainly regulated by specifc legislation relating to the regulated funds specialising in securitisation activities, namely, fnancing entities (OF). Such legislation has been codifed in the French Monetary and Financial Code (MFC). EU Regulation 2017/2402 providing a general framework for securitisation also applies since it is of direct application in France.

French banking monopoly rules are also of great relevance since an exemption from banking monopoly rules is generally necessary to conduct securitisation activities in France. This is because securitisation activities typically involve the acquisition or granting of receivables (either loans or commercial receivables), which are also typically considered as being a banking activity by French banking authorities and case law.

Securitisation legislation has been deeply renovated by a 2017 ordinance of the French government, which entered into force on 3 January 2018 and replaced the old 1988 law. The purpose of this 2017 ordinance is to create a broad category of OF that regroups the old mutual securitisation funds (FCT) and other types of regulated funds now authorised to provide fnancing either by granting loans or by purchasing receivables. This 2017 ordinance also recaptures the provisions of the 1988 legislation establishing a robust legal framework for the transfer of receivables through a true sale process.

The purpose of the 2017 legislation is to allow non-bank private investors to invest in any type of receivables (including debt, loans, commercial receivables or distressed debt) through a fnancing entity that can be structured either as a traditional securitisation entity (OT) or a specialised fnancing entity (OFS).

This French legal framework aims at providing all OF, in other words, both OT and OFS, with a strong and clear legal regime that eliminates uncertainty regarding the true sale transfer of the receivables and reduces the seller’s or originator’s risk; both the OT or OFS can be created either as a corporation or as an organised and legally transparent co-ownership and are allowed to acquire receivables or to extend loans. In addition, an OFS is also allowed to hold other types of assets and qualify as an alternative investment fund (AIF), regulated by the Alternative Investment Fund Managers Directive (Directive 2011/61/EU) (AIFM), which may qualify as a long-term European investment (ELTIF).

The tax regime of an FCT will generally remain the same; the tax regime of an OFS will shortly be clarifed by the French tax authorities.

Applicable transactions Does your jurisdiction defne which types of transactions constitute securitisations?

The MFC does not specifcally defne which transactions qualify as a securitisation transaction; however, it broadly defnes the purpose of securitisation entities as being entities exposed to risks, including insurance risks, by acquiring receivables, granting loans, guarantees and security interest, underwriting risks through participation in credits, concluding forward fnancial instruments or contracts transferring insurance risks, and such securitisation entity fnances or covers those risks by issuing securities (shares or debt instruments) or forward fnancial instruments or borrowing money or through other resources (L214 of the MFC).

Market climate How large is the market for securitisations in your jurisdiction?

The French securitisation market has followed the same trends as the European market. Since 2010, it has progressively re-established itself. According to a survey published by the association for fnancial markets in Europe, in 2017, France ranked second in Europe (after the UK) for the new issues of securitised receivables, which amounted to €36.9 billion in 2017, compared with €235 billion for the whole European Union.

For investors, securitisation offers interesting investment opportunities with yields that are on average higher compared with those offered by corporate bonds, in particular on the lower tranches of collateralised loan obligation.

Residential mortgage loans and auto loans represent a signifcant part of the total amount of securitised assets.

Securitisation is of major importance to banks as a refnancing tool and for easing compliance with ratios imposed on banking institutions by the Basel Committee on Banking Supervision. In France, securitisation activity is fuelled by three main participants, including arranging banks, investors and legal counsel, developing the required high level of expertise.

REGULATION Regulatory authorities Which body has responsibility for the regulation of securitisation?

The main market institution responsible for regulating securitisation is the Financial Markets Authority (AMF). The AMF General Regulation (RGAMF) contains a number of detailed rules applied to creating securitisation entities and their management by a licensed fund management company.

French securitisation entities are regulated entities that are not directly supervised by the French market authorities. However, their management companies and custodians are supervised entities. The management company is overseen by the AMF and the custodian is generally supervised by the French Prudential Supervisory Authority.

Additionally, the law provides that instructions given by the management company will be performed by the custodian to the extent that only such decisions comply with the constitutive documents and regulations of the securitisation entity, and with the provisions of French law. The accounts of the securitisation entity are audited on a yearly basis.

If the relevant securitisation entity’s management strategy includes active asset management or entry into credit derivatives’ transactions as a protection seller, the management company will need to be licensed for this purpose and will have to set up appropriate organisational and risk-control procedures.

Licensing and authorisation requirements Must originators, servicers or issuers be licensed?

No licence is required from originators for securitising receivables. An originator may be any type of commercial company, including any seller of goods, vehicles or commodities, any service provider or any banking or fnancial institution.

Securitisation entities themselves need not obtain a specifc licence for issuing securities. However, specifc requirements apply to public offers of securities (including the publication of a prospectus approved by the AMF), but this does not in itself involve requiring a specifc licence for the issuer.

The servicing of the securitised receivables may be handled by the originator or by any entity that was in charge of the servicing before the transfer. The servicing may also be delegated by the management company to any other entity appointed for such a purpose. No specifc licence is required for servicing activities performed for a securitisation entity; these third-party servicers are exempted from complying with the decree relating to amicable recovery activities in France.

Certain covered bonds’ companies issuing bonds such as the sociétés de crédit foncier must be licensed as a credit institution, but they are generally not considered to be securitisation entities.

French authorities consider the purchase of non-matured receivables on a regular basis to be a banking activity requiring a banking licence; however, this requirement does not apply to French OF and French securitisation entities, which beneft from a specifc exemption from the banking monopoly rules. Foreign securitisation vehicles may also beneft from an exemption from the banking monopoly rules if their activities are conducted in a similar way to the OF and if the debtors of the securitised receivables are not consumers.

What will the regulator consider before granting, refusing or withdrawing authorisation?

As mentioned, no authorisation or licence is required for the creation of a securitisation vehicle under French law. However, the management company and the custodian will need to hold the appropriate licence for acting in such a role in the operation of the relevant securitisation entity.

If the management company and the custodian do not comply with the prescribed organisational rules or the conduct rules applicable to their activities, or if they do not fulfl their commitments towards the regulator, their licence could be suspended or withdrawn.

Sanctions What sanctions can the regulator impose?

Sanctions that can be imposed by the regulator depend very much on the relevant type of laws or regulations breached.

Sanctions can be imposed on the management company or on the custodian if the creation or operation of a French securitisation entity violates the provisions of the MFC or the RGAMF. Such sanctions may encompass suspension or withdrawal of their licence or fnes in certain situations, such as the failure to appoint an auditor or the communication of inaccurate information in respect of the securitisation entity.

According to article L571-3 of the MFC, violating French banking monopoly rules is sanctioned by three years’ imprisonment and a maximum fne of €375,000.

Violating the rules regarding the issuance of securities to the public is sanctioned, inter alia, by removal of authorisation or a delisting.

Public disclosure requirements What are the public disclosure requirements for issuance of a securitisation?

Public disclosure requirements applicable to a securitisation transaction derive from several regulations. First, the 2017/2402 EU Regulation imposes certain transparency rules to ‘simple, standardised and transparent’ (SST) securitisations; second, if the securitisation entity issues security by way of a public offer, it will have to comply with public offering rules.

SST disclosure obligations provide that the management company of the securitisation entity must verify that the originator, sponsor or the securitisation entity comply with their obligations to make certain information on the securitisation available under article 7 of the Regulation. This includes, inter alia, an obligation to make available:

information on the underlying exposures on a monthly or quarterly basis, depending on the type of securitisation involved; all underlying documentation ‘that is essential for the understanding of the transaction’; and monthly or quarterly investor reports, depending on the type of securitisation involved.

In the case of EU public securitisations, EU securitising entities are required under article 7(2) of the Regulation to make such information available via a securitisation repository. In the case of EU private securitisations, the management company should seek to ensure that the securitisation documentation confrms that such information will be provided to investors.

If the securitisation entity issues security by way of a public offer, it will have to comply with public offering rules. A French securitisation entity generally fnances its activities by issuing debt instruments such as notes in the form of negotiable debt securities or bonds. In addition, a fund without corporate personality can issue units, and funds created as corporations can issue shares. All such instruments can be issued publicly or privately and may or may not be listed on a regulated exchange. The choice between the two approaches is mainly driven by the size and type of transaction, the type of investors targeted, their demand, desire and constraints.

To date, there have been a number of FCT issues followed by a listing; but more unusually, FCT transactions giving rise to an offer to the public in the strict legal sense. Since solicitation of individual investors in respect of securities issued by securitisation entities is not permitted, public offerings of such instruments remain rare.

The public offering of units or notes issued by an FCT or shares or notes issued by a securitised company (SDT) in Paris requires the preparation of an AMF-approved prospectus. This document takes the form of a document describing the issuer structure and securities’ features.

Under article L214-170 of the MFC, if a securitisation entity issues securities subject to a public offer, these securities must be rated, and the rating document must be annexed to the prospectus and sent to the potential subscribers. Ordinance 2013-676, dated 25 July 2013, makes this rating requirement no longer applicable when the securities are merely admitted to trading on a regulated market without being the subject of a public offer.

For securities that are privately placed and where no information memorandum is required, a rating is not required but may be sought for commercial reasons. It is possible to list FCT units or notes and SDT shares or notes in France as well as in other jurisdictions, such as Ireland or Luxembourg.

What are the ongoing public disclosure requirements following a securitisation issuance?

France has transposed the Transparency Directive 2004/109/EC, which establishes requirements in relation to the disclosure of periodic and ongoing information about issuers whose securities are already admitted to trading on a regulated market situated or operating within an EU member state. This Directive only applies to securities listed on a regulated market. Although it does not apply to units issued by collective investment undertakings, it remains applicable to closed-end collective investment undertakings. Under the main rules imposed by the Directive:

the issuer of the relevant securities shall make public its annual fnancial report at the latest four months after the end of each fnancial year and shall ensure that it remains publicly available for at least 10 years; the issuer of the relevant securities shall make public a half-yearly fnancial report covering the frst six months of the fnancial year as soon as possible after the end of the relevant period, but at the latest three months thereafter. The issuer shall ensure that the half-yearly fnancial report remains available to the public for at least

10 years; by way of derogation, the above rules do not exclusively apply to issuers of debt securities, the denomination per unit of which is at least €50,000; and the issuer of debt securities who is admitted to trading on a regulated market shall ensure that all holders of debt securities ranking pari passu are given equal treatment in respect of all the rights attached to those debt securities.

In addition, as mentioned above, SST disclosure obligations, if applicable, impose periodic and ongoing information obligations pursuant to article 7 of the Regulation; this includes inter alia, an obligation to make available:

information on the underlying exposures on a monthly or quarterly basis, depending on the type of securitisation involved; and monthly or quarterly investor reports, depending on the type of securitisation involved.

ELIGIBILITY Originators Outside licensing considerations, are there any restrictions on which entities can be originators?

As already mentioned, French authorities consider the purchase of non-matured receivables on a regular basis to be a banking activity requiring a banking licence.

French fnancing entities, whether a traditional OT or OFS, beneft from a specifc exemption of the banking monopoly rule. When operating on French territory, foreign securitisation vehicles should ensure that their activities beneft from a similar exemption.

Receivables What types of receivables or other assets can be securitised?

Any type of receivable may be securitised, including, inter alia:

bank loans, commercial receivables and lease receivables; existing or future receivables (the amount and maturity of which are not determined on the relevant transfer date); defaulted or non-performing receivables or any type of debt instrument governed by French law or any foreign law; or future cash fows.

Securitisation can, for example, encompass residential and commercial mortgage loans and non-mortgage assets such as:

trade receivables; credit card balances; consumer loans; lease receivables; and motor vehicle loans.

Securitisation of an insurance risk is particularly considered by the law.

In practical terms, securitised receivables must be transferable. In other words, no contractual provision of the underlying contract must prohibit or restrain the transfer of these receivables.

At the time they are transferred to the securitisation entity, securitised receivables must be identifable; in other words, they must be sufciently defned so that they can be easily and specifcally transferred.

Investors Are there any limitations on the classes of investors that can participate in an offering in a securitisation transaction?

Securities issued by securitised entities are generally offered to professional investors through private placements. Any type of investor can participate in an offering made by a securitisation entity; however:

investors from non-cooperative jurisdictions may be prevented from participating in such offerings since substantial withholding taxes will apply to coupon payments under the issued securities; and offerings directed to individuals may be held within the rules applying to public offers whereby a full prospectus approved by the AMF may need publishing and individual investors prohibited for such securities.

Securitisation funds called fonds de prêt à l’économie are a special type of securitisation fund created in 2013 to encourage insurance companies to invest in private-sector company debt. They must comply with certain criteria laid down by the insurance code (eg, no tranching and holding assets in accordance with specifc criteria). Such funds issue non-rated and non-eligible securities.

Custodians/servicers Who may act as custodian, account bank and portfolio administrator or servicer for the securitised assets and the securities?

The entity acting as custodian of a French securitisation entity must be a French credit institution, the French branch of a European credit institution or certain other institutions designated by a specifed regulation.

The custodian acts as the depository of the receivables acquired by the FCT and of its other liquid assets.

The entity acting as servicer of a French securitisation entity can be the originator of the securitised receivables or any third party, provided that the debtor is notifed of this.

The servicing of the securitised assets encompasses several actions, including, inter alia:

administering the securitised receivables; collecting the cash generated by these assets; and ensuring regular reports to the administrator managing the special purpose vehicle (SPV).

Public-sector involvement Are there any special considerations for securitisations involving receivables with a public-sector element?

According to French law, receivables can be transferred or securitised even if the debtor is a public body or government entity. However, securitisation of receivables with a public-sector element requires particular attention.

The main concern is ensuring that any recourse against the public entity is transferred to the securitisation entity. It may be necessary to combine the general rules of transfer with specifc rules applicable to those public entities such as, for instance, the notifcation of transfer to the public accountant of the relevant public entity if the securitisation entity seeks direct payment. In addition, the transfer to the securitisation entity of unconditional payment undertakings of public entities may require special approval by such entities.

TRANSACTIONAL ISSUES SPV forms Which forms can special purpose vehicles take in a securitisation transaction?

Since the 2017 reform, securitisation transactions may be implemented through two types of OF, which can be structured as either an OT or an OFS.

OTs can be created as a corporation or a special form of transparent entity. Legally speaking, an FCT is a co-ownership of securitised receivables. It is created by an independent management company acting as the fund manager, in accordance with article L214-181 of the MFC. It has no shareholders or share capital and it corresponds with the common method used to securitise receivables under French law. An FCT can be created with several components, whose assets and liabilities are segregated from those within the FCT’s other components. French securitisation entities can also be created as a corporation or an SDT. Such a corporation would be managed by a licensed management company and its assets held through a custodian. An SDT can provide signifcant advantages in transactions where the benefts of inter national tax treaties are sought. Its creation requires obtaining a tax ruling confrming its tax status.

An OFS is a new tool available for securitisation transactions, which are funds that qualify as an AIF regulated by the AIFM directive. They can be managed by fund managers complying with the AIFM and may beneft from the ELTIF that allows investments by a larger base of investors interested in long-term fnancing. As OT, an OFS can be created as legally transparent entities or a corporation.

SPV formation process What is involved in forming the different types of SPVs in your jurisdiction?

Creating an OF involves the following steps in terms of timing, costs and organisation:

the selection of a licensed management company, a custodian and an auditor; the drafting and negotiation of the fund regulations or constitutive documents, a receivable purchase agreement, a servicing agreement and various ancillary agreements; and the placement with investors of the securities issued by the securitisation vehicle (either through a public or private placement).

The costs include initial costs and ongoing expenses.

The main advantage of a French OF, when compared to an SVP or similar foreign vehicles, is their regulated status: investors are protected by French legal provisions, which lay down the main principles applicable to the OF, and by the regulation applying to the manager itself and the AMF supervision.

Governing law Is it possible to stipulate which jurisdiction’s law applies to the assignment of receivables to the SPV?

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

This refects Regulation (EC) No. 593/2008 (Rome I), whereby an international contract shall be governed by the law chosen by the parties. However, should all elements relevant to the situation at the time of the choice be connected with France alone, such a choice of law will not prejudice the application of mandatory rules in France. Moreover, the contract can be qualifed as an international contract if there is a non-French element and the law must not be chosen to avoid French public policy considerations.

Asset acquisition and transfer May an SPV acquire new assets or transfer its assets after issuance of its securities? Under what conditions?

Yes. A French securitisation entity is allowed to purchase new receivables after the initial purchase and to issue additional units under two main conditions:

the regulations of the securitisation entity must specify the circumstances and conditions under which it may purchase additional receivables; and an additional transfer deed must be signed in order to transfer the new assets to the fund.

Registration What are the registration requirements for a securitisation?

There is no registration requirement for the creation of an OF under French law (without specifc circumstances).

Obligor notifcation Must obligors be informed of the securitisation? How is notifcation effected?

There is no obligation to notify obligors about the securitisation. Under the French Securitisation Law, the transfer of receivables to the SPV is effective as of the date indicated on the transfer deed, without any requirement for prior notifcation to the obligors or other formalities. It is considered as a silent transfer. The receivable transfer occurs as of the date indicated on the transfer date. Consequently, the assignment becomes effective between the parties and enforceable against third parties. The obligors must be notifed if the servicer of the securitised receivables is changed.

What confdentiality and data protection measures are required to protect obligors in a securitisation? Is waiver of confdentiality possible?

French law rules applicable to the protection of confdentiality, banking secrecy and personal data remain applicable

after securitisation of the relevant receivables and may restrain the transfer of information to investors or to the securitisation entity.

For example, the General Data Protection Regulation rules limiting the treatment or transfer of personal information regarding individuals and aiming to ensure that personal information is adequately stored and treated, ensuring that individuals have access to information relating to them, will remain applicable to personal data transferred to the securitisation entity.

Furthermore, when the assignor of receivables is a credit institution, confdential information is covered by strict banking secrecy legislation, prohibiting the transfer of said information to third parties without the prior consent of the obligors concerned.

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

Credit rating agencies Are there any rules regulating the relationship between credit rating agencies and issuers? What factors do ratings agencies focus on when rating securitised issuances?

The relationship between rating agencies and French securitisation entities is not specifcally regulated by French law. Recent legislation removed a former obligation to procure the rating of securities issued by securitisation entities that are listed.

When a rating is sought, the rating agencies implement a rating methodology that involves multiple legal and economic factors, and depends on the type of securitised receivables. Rating agencies look in particular at the structural features of the securitisation entity, which is expected to be bankruptcy remote and tax exempt; a true sale transfer of the securitised receivables and of the related security is generally required. Rating agencies also focus on the quality of securitised assets and on the selection process. Indeed, rating agencies will analyse the liquidity of assets pooled into the FCT or SDT, the maturity of those assets and the strategy of the management company, especially regarding how it will react if there is a lack of liquidity within its assets. The aim of the rating agency is to determine if the management company would be able to cope with the main risks incurred by the securitisation entity, including, inter alia:

credit risks; servicer performance risk; guarantor’s risk; legal risks attached to the fund; sovereign risk; interest rate; currency risks; and repayment risks.

Under French law, securitisation entities may issue bonds or commercial paper (TCNs). No rating is required when there is no public offering of bonds. TCNs issued by a securitisation entity need not be rated if the holders of the TCN have the same rights in terms of ranking and are permanently backed by eligible receivables allowing a refnancing through the euro system in accordance with Decree No. 2014-361 of March 2013.

Directors’ and ofcers’ duties

What are the chief duties of directors and ofcers of SPVs? Must they be independent of the originator and owner of the SPV?

An OF is not operated like an SPV, but is managed by a licensed management company whose chief duty is to act in an independent manner in the sole interest of the holders of securities issued by the securitisation entity, having regard to the fund regulations. The management company is supervised by the AMF. FCTs have no directors or ofcers. 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, meaning that a given operation should be implemented under the best market conditions for its client.

The fund management company must be independent of the originator and does not have to follow any instruction given by the originator.

If the securitisation entity is a corporation, it has to be managed by a licensed management company acting independently in the interest of the holders of securities issued by it.

Risk exposure Are there regulations requiring originators and arrangers to retain some exposure to risk in a securitisation?

Before the 2008 global fnancial crisis, credits could be originated and distributed without keeping any risk on the originator’s balance sheet. This has been changed by regulators with a view to aligning the interests of investors with those of the originators and sponsors of initiators.

Retention rules have been imposed in securitisation transactions implemented in France by several EU rules, including the Capital Requirements Regulation (EU) No. 575/2013 and the Capital Requirements Directive IV. Under these rules, originators, sponsors or initiators of a securitisation transaction must retain a 5 per cent exposure in the relevant securitisation. Retention rules have been confrmed and refned by the new Securitisation Regulation (EU) No. 2017/2402 and the related Capital Requirements Regulation (EU) No. 575/2013 amending Regulation (EU) No. 2017/2401, which impose a new direct approach whereby originators, sponsors and original lenders have a direct obligation to retain risk; this approach complements the existing indirect approach that mainly imposed on investors a duty to check that retention rules have been complied with.

SECURITY Types What types of collateral/security are typically granted to investors in a securitisation in your jurisdiction?

In a typical French securitisation transaction, it is rare that security is granted to investors on the assets of the securitisation entity. It should be noted that French securitisation entities are bankruptcy-remote by virtue of the law and the granting of security renders more difcult the management of the securitised assets. Therefore, investors generally are not granted security on the assets of the securitisation entity, although this has been permitted since a 2008 ordinance. There is no specifc requirement in relation to the type of security. Consequently, a pledge can be created over securitised receivables.

Credit enhancement is also possible through guarantees provided by:

the originator; the originator’s afliate; a credit establishment; or an insurance company.

Other methods of credit enhancement exist, such as the issuance of specifc units, over-collateralisation or cash reserve funds.

Perfection How is the interest of investors in a securitisation in the underlying security perfected in your jurisdiction?

When a pledge of receivables is created in favour of investors, the mere execution of the pledge agreement is sufcient to ensure perfection of the pledge towards third parties. Notifcation of such a pledge to the pledged debtor improves protection but is not a condition of the pledge’s validity .

More generally, protection of the investor’s interest is ensured by the French securitisation entity’s management company. To some extent, the management company plays the same role as a security trustee because it will ensure that all securitised receivables are collected and the corresponding collections are distributed in accordance with the fund’s regulations.

Enforcement How do investors enforce their security interest?

The management company of the securitisation entity will enforce any security interest or right that secures the securitised assets.

If the investors have been given any security interest in the fund’s assets, they should be able to enforce it through their representatives if the securities are bonds governed by French law, and if a bond representative has been appointed.

Commingling risk Is commingling risk relating to collections an issue in your jurisdiction?

In securitisation transactions where the originator remains in charge of the collection of the securitised receivables, there is a risk that, upon a bankruptcy affecting the originator, the proceeds of the securitised receivables are commingled with the assets of the originator and retained by the bankruptcy administrator.

This risk can be avoided or mitigated by creating a special collection account dedicated to the collection of the securitised receivables. The sums credited on this account are not available to the creditors of the originator if it becomes bankrupt, according to article D214-228 of the MFC.

TAXATION Originators What are the primary tax considerations for originators in your jurisdiction?

The primary tax considerations for originators include:

value added tax (VAT) treatment of securitised receivables; exemption from VAT on the sale and transfer of receivables by the originator to the securitised entity; whether any profts generated by the assignment of receivables to an FCT are taxable; whether the servicing agent’s fees are exempt from VAT; and withholding tax on payments received in relation to foreign trade receivables.

Issuers What are the primary tax considerations for issuers in your jurisdiction? What structures are used to avoid entity-level taxation of issuers?

The primary tax considerations for securitisation entities acting as issuer include:

whether the FCTs are exempt from corporation tax in France (article 208(3)-octies of the General Tax Code); whether the issuance of notes by the SPV is exempt from any stamp duty; and whether the management company’s fees and other fees are exempted from VAT.

The main structure used to avoid entity-level taxation is the FCT; securitisation implemented through corporations having the form of an SDT may also beneft from a specifc tax regime, but in the absence of clarity on certain aspects it may be advisable to seek a specifc tax ruling.

Investors What are the primary tax considerations for investors?

The primary tax considerations for investors mainly comprise the absence of withholding tax on securities issued by the securitisation entity and its tax treatment. As in many countries, the payment of interest and other income on debt securities established or domiciled in a non-cooperative state or territory within the meaning of article 238-0 A of the French Tax Code may be subject to a 75 per cent withholding tax.

BANKRUPTCY Bankruptcy remoteness How are SPVs made bankruptcy-remote?

The MFC (article L214-175 III) expressly provides that bankruptcy law (contained in Book No. VI of the Commercial Code) does not apply to French securitisation entities, which means, in effect, that they are bankruptcy-remote.

In addition, a number of structuring features are generally used to mitigate potential insolvency risk. These include limiting the securitisation entity’s activities to securitisation, ensuring that the securitisation entity has no contractual liabilities unrelated to the relevant securitisation and ensuring that the investor’s and creditor’s recourse is limited to the securitisation assets.

True sale

What factors would a court in your jurisdiction consider in making a determination of true sale of the underlying assets to the SPV (eg, absence of recourse for credit losses, arm’s length)?

In a French securitisation involving the transfer of receivables to an OF, a true sale of the securitised receivables should be recognised by a French court if a transfer deed has been executed on the transfer date, the relevant transfer price has been paid and if the other requirements of article D214-219 of the MFC have been fulflled. The existence of recourse against the originator would not affect the true sale of the receivables.

No clawback should affect such a transfer since article L 214-169, amended in 2017, now expressly provides that such a transfer will not be affected by a state of cessation of payments of the seller at the time of transfer or if the seller is subsequently declared insolvent under any French or foreign-equivalent insolvency proceedings.

Consolidation of assets and liabilities What are the factors that a bankruptcy court would consider in deciding to consolidate the assets and liabilities of the originator and the SPV in your jurisdiction?

Under French insolvency law, the risk of consolidating the asset and liabilities of a company with the assets and liabilities of another company is limited to specifc circumstances, which include the commingling of assets or the de facto management of the consolided company by the other company.

A commingling of assets is unlikely to happen in the context of a securitisation transaction, since the securitisation company will have its own accounts and its assets will be held by a custodian, strictly separated from those of the originator. Even when the originator continues to act as the servicer of the receivables transferred to the SPV, the allocation of all amounts he or she receives into an affected, specially dedicated account should avoid that risk by making the management company the unique proprietor of the money held in the account.

Under normal circumstances, the risk of a de facto management of the securitisation entity by the originator would remain theoretical, since the securitisation entity is created as a separate entity from the originator, and is managed by a licensed management company (not by the originator), with no interference by the originator in the daily operation of the relevant entity.

UPDATES AND TRENDS Key developments of the past year Are there any rules governing securitisations pending in your jurisdiction or reforms under way, such as prohibitions on fnancial frms betting against the securities they package, improved disclosure and oversight of the asset-backed securities market, rules limiting bank compensation structures that incentivise risk, etc?

35 Are there any rules governing securitisations pending in your jurisdiction or reforms under way, such as prohibitions on fnancial frms betting against the securities they package, improved disclosure and oversight of the asset-backed securities market, rules limiting bank compensation structures that incentivise risk, etc?

A number of recent French measures relating to securitisation are aiming to implement the Securitisation Regulation (EU) No. 2017/2402. In particular, the AMF has been designated as the competent national authority, within the

meaning of article 29 of the regulation, in charge of checking compliance by originators, sponsors, investors and securitisation entities of the applicable law.

More recently, the PACTE law of 22 May 2019 has clarifed a number of technical points, such as the responsibilities of the custodian with respect to securitisation entities created prior to 1 January 2020 and the right of the fund manager to recover securitised receivables.

LAW STATED DATE Correct on Give the date on which the information above is accurate.