Transactional issuesSPV forms
Which forms can special purpose vehicles take in a securitisation transaction?
Since the 2017 reform (see question 1), 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 nor 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 significant advantages in transactions where the benefits of international tax treaties are sought. Its creation requires obtaining a tax ruling confirming 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 benefit from the ELTIF that allows investments by a larger base of investors interested in long-term financing. 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 the outlay 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 reflects 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 qualified 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.
What are the registration requirements for a securitisation?
There is no registration requirement for the creation of an OF under French law (without specific circumstances).Obligor notification
Must obligors be informed of the securitisation? How is notification 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 notification 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 notified if the servicer of the securitised receivables is changed.
What confidentiality and data protection measures are required to protect obligors in a securitisation? Is waiver of confidentiality possible?
The rules relate to the protection of confidentiality, banking secrecy or to the protection of 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 law on treatment of personal data requires that any treatment of personal information regarding individuals is notified to the French Data Protection Authority. It also limits the transfer of personal data and aims to ensure that personal information is adequately stored and treated, ensuring that individuals have access to information relating to them.
Furthermore, when the assignor of receivables is a credit institution, confidential information is covered by strict banking secrecy legislation, prohibiting the transfer of said information to third parties without prior consent of the obligors concerned.
A waiver of confidentiality by the person protected by it is generally available. It must be foreseen in the contract ab initio and it is necessary to name organisations to which information could be given, such as the French Tax Administration.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 specifically regulated by French law. It should be noted that 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 will look in particular at the structural features of the securitisation entity, which is expected to be bankruptcy remote and tax exempt, and of a ‘true sale’ transfer of assets and of the related security. Rating agencies also focus on the quality of securitised assets and of the election 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 lack of liquidity with its assets. The aim of the rating agency is to determine if the management company would be able to cope with its investment’s decisions regarding:
- 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 such TCN have the same rights in terms of ranking and are permanently backed by eligible receivables allowing a refinancing through the euro system in accordance with Decree No. 2014-361 of March 2013.Directors’ and officers’ duties
What are the chief duties of directors and officers 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 note holders, having regard to the fund regulations. The management company acts under the control of the custodian. FCTs have no directors or officers. 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 will be finalised 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?
Retention rules have been imposed in securitisation transactions by several EU rules, including the Capital Requirements Regulation (EU) No. 575/2013 and the Capital Requirements Directive IV. Under these rules, originators or sponsors or initiators of a securitisation transaction must retain a 5 per cent exposure in the relevant securitisation. Retention rules have been confirmed and refined 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 complementing the existing ‘indirect approach’ that mainly imposed on investors a duty to check that retention rules have been complied with.
Before the 2008 global financial crisis, credits could be originated and distributed without keeping any risk on a 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.