Trade Alert - February 2014, Issue 2
What are the Risks for Loan Traders?
Banking Licence Required – 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. Breach of the French banking monopoly regulations is a criminal offence and it can lead to a fine of up to EUR 375,000 with respect to individuals and EUR 1,875,000 with respect to legal entities. It can also lead to a penal sentence of up to 3 years’ 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. Risk: what may appear to be a UK counterparty bank, may hold the loan in a French branch.
Transfer by Assignment – It may be possible to become a lender of record without a licence where the transfer relates to fully funded terms loans via English law assignment (or French Law cession de créance) as a transfer by novation or French law cession de contrat may trigger a banking licence requirement and risk losing your rights to security in French insolvency proceedings. Revolving loans and new money facilities will always be required to be sub-participated if the investor is not authorised in France.
Trusts and parallel debt structures – in its decision dated September 13, 2011, the French Supreme Court in Belvédère S.A. upheld the validity of the parallel debt mechanic under the law of the state of New York and allowed the trustee to file proof of claims on behalf of bondholders within French safeguard proceedings.
Up to 18 Months Hardening period – a French insolvency administrator, the creditors’ representative (mandataire judiciaire) and the criminal prosecutor may look back and challenge any transaction which is not in the best interest of the company. The hardening period (i.e. the period between the date of suspension of payment and the date of the opening judgment, which may be up to 18 months) applies to all parties equally, whether connected or not. If a guarantee or security is granted by a borrower which is in suspension of payment for a loan previously provided, then the security or guarantee may be challenged and declared void if the borrower enters insolvency proceedings in the following 18 months.
Withholding tax – 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 50% applies. If an offshore entity is acquiring a French loan, this non-cooperative state list should be checked and tax matters should be confirmed with French counsel.
Notice requirements – Article 1690 French Civil Code requires a buyer to notify the transaction via French bailiff (huissier) or obtain a borrower not arised acknowledgement to ensure the transfer is enforceable against third parties (including those who will not be notified i.e. creditors including the French treasury). The law does not provide for a timeframe and there is no particular restriction on timing to notify an insolvent debtor. It is possible to make such notification and render the transfer enforceable at a later stage (i.e. once the borrower has become insolvent) – we however advise to proceed with the notification as soon as possible upon closing of the trade.
Special Note: Thanks to Guilhem Bremond (Associé) and Baptiste Guérard (Collaborateur) at Bremond & Associés for their assistance with the French Jurisdiction Update.
- Gecina – Blackstone took action to enforce its rights against 22.98% of the Gecina shares following the Luxembourg court ruling on 29 January 2014 re. enforcement of the Luxemburg law governed share pledge against Gecina, the French leading REIT listed on Euronext Paris. The judgments upheld that security under the Financial Collateral Arrangements Directive 2002/47/EC as implemented under the Luxembourg law of 2005 is enforceable upon non-payment by the Borrower and notice of the default from the creditor. This is contrary to the previous rulings of the Madrid Commercial Courts in the Alteco and Mag Import Spanish proceedings which prevented enforcement by creditors.
- Consolis Group – Franco-Belgian prefabricated concrete products manufacturer, which posted net sales of EUR 1.3 billion in 2012, completed a debt restructuring deal converting about half of the company’s senior debt and all of its junior debt (i.e. a mix of term loan and notes redeemable for shares) to “equity-like instruments”.
- Frans Bonhomme - French leader in the distribution of plastic pipes and fittings obtained a debt restructuring reducing its debt by more than 50% to less than EUR 300 million.
- Saur Hime - privately owned French waste and water management services provider is reported to look to reduce its EUR 900 million debt.
- Vivarte - the French retailer revealed plans to restructure its debt and sought support from a commercial court approved mandataire ad hoc to facilitate negotiations with the debtors.
- Airwave – Guardian Digital Communications Limited, HoldCo of Airwave, the UK’s emergency services communications provider is planning an amendment and extension via a Scheme of Arrangement to its £1.8bn loan which matures on 18 April 2014.
- PHS - Financial advisers are preparing to pitch first lien creditors under the company's £955 million facility in anticipation of a possible workout of the UK services business, after PHS requested a waiver on both its December 2013 and March 2014 leverage covenants.
- Spanish renewable energy companies – On February 3, 2014, a new Ministerial Rule was unofficially disclosed which develops the Spanish Electricity Sector Act (“ESA”), setting forth the remuneration parameters for renewable energy production plants. In line with expectations, the cuts are deemed considerable and it raises substantial controversy. The new remuneration parameters, when approved (expected in a few weeks), will be retroactively effective as of June 2013. For further information from Cuatrecasas, click here.
- Cyprus – Updated transfer procedures: Bank of Cyprus has issued a form of transfer for shares and buyers can receive account monies into an account in their own name. While it is helpful to have clarity on the procedure, the “Know Your Client” requirements are extensive and signing mechanics for documents are burdensome.
- Hedge transfers – funds continue to acquire loan hedges, either as part of portfolio deals or independently. Detailed due diligence of intercreditor arrangements and a clear understanding of the risks is required, as well as bespoke trading documents. David Cottle is advising on these queries.
Contact: Delphine Berger
+44 (0) 20 7170 8736
Delphine Berger is a Trainee Solicitor working on debt and claims trading in the secondary market. Prior to joining Cadwalader, Delphine obtained Bachelors and Masters degrees in German and French law from both Universität zu Köln and Université Paris 1 Panthéon-Sorbonne in 2009 upon which she qualified as in-house counsel at a Fortune 500 company in Paris. Delphine is a French national and is fluent in French, German and Thai.