Trade Alert - January 2017, Issue 37
On 1 December 2016, the current president and Socialist leader, Francois Hollande, decided not to seek a second term as President of France. Mr. Hollande is the first French President to decide not to run for a second term.
The first round of elections for the new president will be held in April 2017. According to opinion polls, the Conservative Republican party candidate Francois Fillon has been viewed as a front runner for this year’s election, closely followed by the far-right leader of France’s National Front party Marine Le Pen. If no candidate wins a majority vote, there will be a run-off election between the top two candidates in May 2017.
The Financial Times reported that French sovereign bonds have suffered a significant price drop as investors have become concerned about the political uncertainty surrounding who will be the next French President.
France - civil law system: the French legal system underwent significant changes following the French Revolution and the abolition of the feudal system in the period 1789 to 1799, during which France transformed into a democratic society, the values and institutions of which still dominate French politics today. French law can divided into two categories; private law (“droit privé”) and public law (“droit public”) and differs from the traditional distinction between criminal law and civil law in other jurisdictions. The main body of statutes and laws governing civil law are set out in the Napoleonic Code, also known as the Code Napoléon or Code civil des Français (the “French Civil Code”), established under Napoléon I in 1804 and the Code de Commerce, the French commercial code.
France has recently amended the Civil Code and made minor reforms to the Insolvency rules in 2016 in order to provide investors with greater flexibility when doing business in France.
FRENCH CIVIL CODE REFORMS
On 1 October 2016, amendments to the French Civil Code on the provisions on contract law became effective under Ordinance n°2016-131 of 10 February 2016 (the “Ordinance”). The Ordinance applies to contracts entered into on or after 1 October 2016.
The Ordinance codifies principles which have developed under French case law over a number of years and has created a number of new rules in relation to pre-contractual and contractual relationships between parties. Some of the key reforms to French contract law are:
- the removal of the requirement for a ‘rationale’ for the validity of the contract;
- the introduction of a statutory duty to disclose material information during negotiations between parties; and
- in relation to termination of a contract, the introduction of the concepts of ‘unforeseen circumstances’ and ‘anticipated non-performance’ as tools for renegotiation or a suspension of obligations under a contract in certain circumstances.
Additionally, following the update to the French Civil Code, please note the relevant changes to secondary market trading considerations listed below.
In this month’s Trade Alert, we highlight the main types of insolvency proceedings in France.
INSOLVENCY MEASURES IN FRANCE
Under French law, the insolvency test is based on an assessment of cash-flow. A debtor is considered to be insolvent (“cessation des paiements”) when it is unable to meet its due and payable debts with its immediately available assets.
CONSENSUAL AND PREVENTIVE MEASURES
The purpose of these measures is to facilitate an agreement between the company and its main counterparts that aims at ensuring the continuity of the business.
(i) Mandat ad hoc
This pre-insolvency process is initiated upon the sole request of a debtor that is facing any type of financial difficulties without actually being insolvent. The process is confidential and only lightly regulated. The president of the local court appoints a mediator (mandataire ad hoc) to assist the company in solving its financial difficulties. The duration of the appointment is determined by the court and does not affect the management of the company, as the CEO remains in place and retains all its powers.
In practice, debtors frequently combine the use of mandat ad hoc and conciliation proceedings (see below), in order to make any agreement reached enforceable.
This pre-insolvency process is initiated upon the sole request of a debtor that is (i) not insolvent, or insolvent for less than 45 days; and (ii) facing actual or foreseeable legal, economic or financial difficulties. The process differs to mandat ad hoc in that the court appointed conciliator may only be appointed for a period of 4 months (this may be extended to a maximum of 5 months).
Any agreement reached may either be; (i) acknowledged by an order of the president of the court upon the request of any party; or (ii) approved by a formal judgment of the court (homologation). An order of the president acknowledging the agreement is confidential, whereas homologation is public, but homologation is required; (i) to ensure that creditors or shareholders (except in case of capital increase) lending new money to the company receive priority of payment in case of subsequent insolvency proceedings; and (ii) to ensure that the date that the debtor is considered insolvent is not a date prior to the judgment approving the agreement (which limits the hardening period). The commencement of a subsequent collective proceeding automatically puts an end to the conciliation agreement.
The debtor will benefit from a moratorium on all legal actions in relation to payment obligations incurred prior to the insolvency or security enforcement measures over the assets of the debtor on the commencement of one of the following insolvency proceedings:-
(i) Safeguard proceeding
The purpose of safeguard proceedings is to facilitate the restructuring of the debtor while its difficulties are still at an early stage in order to allow the continuation of its business, the maintenance of employment and the discharge of debt.
This public process is initiated upon the sole request of a debtor. The court will appoint a receiver to supervise or assist the debtor, but the management remains in control. There is an observation period (from 6 to 18 months) for the debtor to prepare and submit a safeguard plan to the court, which provides for reorganisation of the operation, and restructuring and/or rescheduling of debts.
Creditors are consulted on the plan either individually or as part of creditors’ committees, depending on the size of the company (optional for companies with less than 150 employee and which turnover is under EUR 20 million). There are three committees: (i) the credit institutions’ committee, gathering all the creditors holding financial debt; (ii) the bondholders’ committee; and (iii) the suppliers’ committee gathering suppliers whose claim represents at least 3% of the total amount of the suppliers’ claims. The committees vote on whether to accept the safeguard plan proposed by the company, or the alternative plan proposed by the creditors. To be adopted the plan must be approved by at least 66.6% in value of those voting within each committee. The plan will be binding upon all members of the committees. The credit institutions’ committee and suppliers’ committee may propose alternative safeguard plans, which are also submitted to vote.
The creditors which are not part of a committee are individually consulted. Unless they individually consent, the claims of such creditors cannot be reduced. The schedule of repayment of their debts should not exceed 10 years, with a first instalment paid at least one year after the judgment approving the plan and instalments amounting to at least 5% of the debt per year after the third year.
(ii) Accelerated financial safeguard (sauvegarde financière accélérée, known as “SFA”)
The accelerated financial safeguard proceeding has been introduced in French law to facilitate “pre-pack” bankruptcies and “fast-track” addressing financial difficulties of large companies. This process allows a debtor to rapidly implement a restructuring plan without affecting the position of its non-financial creditors.
In order to file for an SFA proceeding, the debtor must have previously opened a conciliation proceeding and either; (i) meet one of the following criteria: (a) at least 20 employees; (b) EUR 3 million in turnover; or (c) total assets in its balance sheet of at least EUR 1.5 million); or (ii) establish consolidated accounts. The debtor must also: (i) have prepared a draft plan in the context of the conciliation proceeding, which aims at protecting its operations in the long term; and (ii) demonstrate to the court that such plan is likely to receive the support of a sufficiently large number of financial creditors. The SFA lasts one month, which can be extended by a further month only.
Only financial creditors are involved in the SFA proceeding. The other creditors are not directly impacted by the SFA. Their debt is not automatically stayed and continues to be due and payable according to their contractual or legal terms.
(iii) Accelerated safeguard (AS)
This process is similar to the SFA, in that the debtor must meet the same conditions to commence the process. However, AS proceedings involve all creditors rather than only financial creditors, and may last up to three months. This process enables the debtor to impose a pre-packaged restructuring plan negotiated with a majority of creditors in the framework of a confidential conciliation on dissenting creditors.
(iv) Judicial rehabilitation proceeding
This process is available to debtors that are insolvent but the business appears viable. The director(s) must file a petition with a view to opening a judicial rehabilitation or liquidation proceeding within 45 days of the date when it became insolvent (unless it has filed for a conciliation proceeding within such time frame). The process to implement a rehabilitation plan is very similar to the safeguard plan in a safeguard proceeding. The main differences are:
- the powers of the receiver are strengthened: all payments should be controlled by the receiver. The court could also require the receiver to carry out the entire management of the business (generally in case of mismanagement);
- the transferability of the shares held by managers: the shares or any securities giving access to the capital of the company held by de jure and de facto managers cannot be transferred except as approved by the court; and
- the possibility of cramming down the shareholders.
(v) Judicial liquidation proceedings
If recovery of the debtor is impossible, a judicial liquidation proceeding could be commenced. Under this process, the relevant court will determine whether to end the operations of the debtor either (i) by a sale of the business as a going concern or (ii) by a piecemeal sale of its assets and rights. There is no observation period and the outcome of a judicial liquidation proceeding is decided by the court, without a vote of the creditors. The judicial liquidator has a duty to sell the assets of the debtor at the best available price, and then distribute the sale proceeds to the creditors according to their respective priority ranking.
RECAP – RISKS FOR LOAN TRADERS
LENDING LICENCE REQUIREMENTS
Carrying on a credit activity within the French territory where any drawing or rollover of advances occurs in France (by a French or foreign incorporated company), requires a banking licence pursuant to the French banking monopoly regulations. A breach of the regulations is a criminal offence and can lead to a fine or imprisonment.
It may be possible to structure a loan transfer to fall outside of the territorial scope of the French regulation, provided that the transaction is concluded between two non-French entities, by assignment and outside of France.
TRANSFERABILITY OF LOANS AND METHODS OF TRANSFER- UPDATE
The main methods of loan transfer are: (i) cession de créance, which is similar to an English law assignment in that it assigns rights but not obligations; (ii) cession de contrat which assigns the rights and obligations of an existing lender to the new lender; or (iii) by way of an English law assignment.
As noted above, it may be possible to become a lender of record in respect of a fully funded term loan using an English law assignment or a French Law cession de créance without triggering a banking licence requirement. However, transfers effected by English law novation may trigger a banking licence requirement and risk losing your rights to security in French insolvency proceedings.
Where there will be any future obligation to lend, such as a revolving loan or a new money facility, to avoid triggering a licence requirement the transfer should be effected by way of participation. Whereby the existing lender remains the lender of record and the new lender, the new lender shares in the risks and profits of the loan under the participation agreement.
Borrower consent: pursuant to the Ordinance, a cession de créance is valid without the consent of the debtor provided it is in writing. It will be enforceable: (i) against the debtor on the date of notification of assignment; and (ii) against third parties on the date the contract is signed. Additionally, if the debtor has provided consent in advance of the assignment, notice to or acknowledgement from the debtor is not necessary. However note that: (i) this remains subject to any specific consent requirements in the Credit Agreement; and (ii) the borrower should be notified in order to ensure the enforceability and transferability of any collateral which may secure the debt being assigned.
PARALLEL DEBT STRUCTURES
Following the French Supreme Court decision in Belvédère S.A. (Cour de Cassation, chamber commerciale, audience publique du Mardi, 13 Septembre 2011, No de pourvoi: 10-25533, 10-25731, 10-25908) French law recognises the validity of the parallel debt structure.
A French insolvency administrator, creditors’ representative (mandataire judiciaire) or criminal prosecutor may challenge any transaction which is not in the best interest of the company for up to 18 months from the completion of the transaction until the opening of the insolvent proceedings. An English law novation may have the effect of re-setting the applicable hardening period.
Interest paid to a non-French resident is generally free from withholding tax, unless such payments are made to a non-cooperative state (i.e. countries which France considers not to apply international standards with respect to exchanges of tax information) in which case withholding tax applies at a rate of 50%.
POST-TRANSFER FORMALITIES - UPDATE
Huissier no longer required! Pursuant to the Ordinance notification to the borrower by bailiff (huissier) is no longer required for the transfer of the receivable to be enforceable. Formal notification to, or written acknowledgment from, the borrower is sufficient. This is applicable to all assignment agreements executed on or after 1 October 2016, regardless of whether a loan agreement was executed prior to that date (note that a loan agreement executed prior to 1 October 2016 will remain subject to the previous Civil Code).
With special thanks to Bremond and Associés in France, who assisted us with this Trade Alert:-
+33 (0)1 55 73 45 20
+33 (0)1 55 73 45 20
CADWALADER & BREMOND ASSOCIÉS FORM CROSS BORDER RESTRUCTURING ALLIANCE
The alliance between Cadwalader and Bremond, both of which continue as independent partnerships, is the result of the two firms working successfully together on a number of complex cross-border transactions involving French issuers and assets.
CAMAΪEU RESTRUCTURING: Cadwalader and Bremond & Associés recently acted as international counsel for a group of second lien lenders in the EUR 1.3 billion restructuring of the Camaïeu Group. With more than 1,000 stores in 21 different countries, Camaïeu is France’s leading retailer for women’s ready-to-wear fashion.
Cadwalader’s leading team of restructuring lawyers, led by partners Yushan Ng, Karen McMaster and Sinjini Saha acted as international counsel on the restructuring working with partners Delphine Caramalli, Guilhem Bremond and counsel Hector Arroyo of the French law firm Bremond & Associés.
The successful outcome of the year-long process involved a significant deleveraging via equitisation of all debt other than first lien debt and the introduction of a French fiducie structure.
DIRECT LENDING IN ITALY BY EU ALTERNATIVE INVESTMENT FUNDS
On 5 January 2017, the Bank of Italy Resolution of 23 December 2016 (the “Resolution”), amending the Bank of Italy and CONSOB Joint Regulation of 19 January 2015 on investment services and collective asset management (the “Regulation”) came into effect.
The provisions of the Resolution are intended to, inter alia, implement Article 46-ter of the Legislative Decree No. 58 of 24 February 1998 (the “Italian Financial Act”) which provides for the general conditions under which collective investment undertakings to which Directive 2011/61/EU applies (incorporated in an EU country other than Italy, “EU Alternative Investment Funds”, “EU AIF’s”) may engage in credit activity in Italy.
The provisions of the Resolution are also relevant for EU AIF’s which are intending to purchase performing or non-performing receivables (e.g. bank debt).
In order for the EU AIF to invest in Italy, it must comply with the following conditions:-
(a) it must be authorised to carry out credit investments in its home Member State by the relevant competent authority;
(b) it must be a closed end fund with an operating model equivalent to Italian AIF’s carrying out the same activity; and
(c) the legal provisions of the EU AIF home Member State in relation to risk mitigation and risk fractioning must be equivalent to those provisions applicable to Italian AIF’s exercising the same activity.
Authorisation procedure: the EU AIF which intends to carry out credit investments in Italy must submit a Notice, and supporting documentation, to the Bank of Italy at least 60 days prior to the commencement of the credit investment activity in Italy for approval.
TRANSFERRING DEBT - ASSIGNMENT OR NOVATION?
A trust allows legal ownership and beneficial interest to be separated. This structure is often used to hold security over a borrower's assets for the benefit of all lenders in a syndicated loan because it allows the borrower to grant the security in favour of the trustee for the benefit of the lenders under the syndicate, rather than granting separate security to each lender.
A major benefit of the trust structure is that an individual lender may sell all or part of its commitment under a syndicated loan without the need to release the relevant security and amend the security documentation. Rather, the new lender will become a beneficiary under the existing trust. This has the added benefit of avoiding the hardening periods being re-set as a result of the transfer (under the Insolvency Act 1986).
IMPORTANT ISSUES IF TRADING LOANS OUTSIDE OF THE UK: Countries with common law legal systems such as England and Australia recognise the concept of a trust. However, many countries with civil law legal systems do not recognise the separation of the legal and beneficial ownership created under the trust structure, therefore, a transfer by novation may create a new security interest and may require a lending licence in certain jurisdictions. Therefore, it is necessary to fully diligence any security package and assess whether the relevant jurisdictions will recognise the validity of the trust structure on a case by case basis.
The definition of Purchased Assets as set out in the Loan Market Association Terms and Conditions for Par and Distressed Trade Transactions includes the corresponding rights and benefits under any security relating to the Traded Portion. When transferring secured debt or debt in jurisdictions where a new lending activity requires a local law licence (e.g. France), it is important to consider whether the transfer should be effected by assignment or novation.
Assignment transfers the benefit of a contract to the assignee (i.e. the right of a lender (inter alia) to vote, receive payments and to benefit from security). Obligations cannot be assigned since the borrower cannot be forced to have different obligations or obligations to a new party without giving consent, although in practice obligations are often contractually assumed by the assignee. An assignment of a loan and security does not typically create a new security interest, re-set hardening periods or require a banking licence, since it is the assignment of an existing debt as opposed to the creation of a new loan.
Novation extinguishes the original contract and replaces it with a new contract between (inter alios) the borrower, the transferor and the transferee, on the same terms as the original contract. A novation may in certain jurisdictions release and create a new loan and security interest, creating risks for the new lender, including:
- hardening periods may be reset;
- it may be necessary to have a banking licence to conduct new lending activity; and
- it may be necessary to perfect the security interest in each relevant jurisdiction, which could involve registration of the security interest at the relevant registry at a cost. Note however, that this can also apply to assignments where security is held on an individual lender basis and not on trust.
Accordingly, assignment may be the most appropriate method of transfer. However, the risks associated with novation may be avoided where the jurisdiction recognises security that is held on trust.
LOAN MARKET ASSOCIATION UPDATES
Mezzanine Facility Agreement Drafting Guide: On 12 January 2017, the LMA launched a new mezzanine facility agreement drafting guide for leveraged acquisition finance transactions.
Further updates have been made to the LMA intercreditor agreement and user guide for leveraged acquisition finance transactions.
LMA publishes settlement statistics for Q4 2016: the LMA has recently published its collated settlement statistics for the end of 2016. The statistics were collected from major European trading banks who provided information about median and mean par and distressed settlement times.
Average settlement times for distressed trades have been reduced by approximately 40% and for par trades have been reduced by approximately 18% since 2014.
Settlement figures for Q4 2016 can be viewed on the members website.
- BANCA MONTE DEI PASCHI DI SIENA (“MPS”)
Reuters reported that Italy’s fourth largest bank, MPS, is aiming to present a restructuring plan to the European Central Bank at the beginning of February. Italy must await approval from the ECB before completing the planned EUR 6.6bn injection of public funds.
Investors are able to review additional information regarding MPS’s business plan and share capital increase on their website.
- TOISA LIMITED
On 29 January 2017, Toisa, the global shipping company, filed for Chapter 11 protection in the Bankruptcy Court in respect of the group’s approximate USD 1 billion of debt. The shipping company owns a fleet of 26 offshore oil service vessels, 13 tankers and seven bulkers. Please see the court documents filed below:-
Please contact Michele Maman in Cadwalader’s New York office for further details.
The Financial Times reported on 10 January 2017 that Iceland has formed a new coalition government after more than two months of negotiation with various political parties and four failed attempts to form a government.
Bjarni Benediktsson was named as the new Prime Minister of Iceland, despite the recent scandal surrounding the Panama Papers in 2015 in which he was named, and will lead a new centre-right government with a parliamentary majority of just one seat. The new government will seek to end capital controls which have been in place in Iceland since the 2008 financial crisis.
GLITNIR HOLDCO EHF
On 19 January 2017, Glitnir redeemed the Notes in part by way of an optional redemption payment in cash pursuant to Condition 6.3 of the Terms and Conditions of the Notes. The final amount used to redeem the Notes was EUR 98,831,785.
The aggregate principal amount of the Notes is EUR 330,630,939 immediately following the payment on 19 January 2017.
Noteholders who wish to confirm the outstanding principal balance in respect of their holding of the Notes can do so by logging in to the secure website.
Cadwalader has been engaged to advise the FairSport Foundation on a pro-bono basis. FairSport is an international, non-profit foundation that was set up with the aim of eradicating doping in sport. FairSport encourages confidential sources to come forward and share their stories in circumstances where the integrity of sport is being compromised by doping. The foundation is a safe haven for those with important information to share. FairSport assists confidential sources by guiding them and protecting them through every aspect of the whistle-blowing process, which may include the provision of legal assistance, media guidance, financial assistance, psychological support and work placement.
FairSport aims to mitigate the negative effects on these individuals lives and careers after they have taken the decision to speak out. FairSport launched its website www.fairsport.org on 20 January 2017 so as to coincide with the premiere of the Bryan Fogel directed documentary “Icarus” at the 2017 Sundance Film Festival, which investigates the world of illegal doping in sports. Please click here for further information.
FAIRSPORT FOUNDATION KEY CONTACTS:
+44 207 170 8664
Partner, Washington D.C.
+1 202 862 2456