Several banks and financial institutions have preferred over the last few years to implement the securitisation of their receivables without using the specific vehicle, i.e. the so-called "Fonds commun de creances", set up by French law.

These asset securitisations aim at the same goals as those achieved through the FCC: replacement of doubtful receivables, improvement of the rate risk management, increasing of equity and capital profitability.

2.1 Legal securitisation versus non-legal securitisation

2.11 Implementation of high-performing vehicles

Most of the securitisation operations performed outside the legal mechanism set up by the Law dated December 23, 1988 are based on the implementation of high-performing vehicles from a tax and finance point of view.

These schemes generally combine:

- the implementation of structures in tax havens;

- the issue of complex shares.

a) The setting-up of local structures in tax havens

Such structures aim at repurchasing the receivables concerned from the selling bank and issuing shares as the counterpart of the transferred receivables. They are located in tax havens in order to avoid any taxation on the proceeds of the receivables.

Thus in 1989, the Credit Commercial de France (CCF) set up Finov, a trust in Jersey charged with repurchasing a receivable held by the CCF on LDC countries.

In the same way in 1989, the DIAC, a credit institution controlled by Renault, set up an investment company, Cars no 1, in Guernsey, which repurchased receivables held by the DIAC on car buyers.

b) The issue of complex shares

These recipient structures must issue shares in order to obtain the money necessary to repurchase receivables from the selling bank.

These shares may be directly and totally subscribed by the selling bank (the CCF was the only subscriber of the bond issued by Finov).

In other circumstances, the structure charged with the repurchasing of the receivables from the selling bank may issue shares subscribed by private investors. In this case, the shares should combine safety, profitability and liquidity in order to attract private investors. (For instance, Cars no 1 issued redeemable preference shares). These securities let the investors receive date the initial subscribed capital (including the discount) capitalised monthly according to the month-rate PIBOR on the redemption.

2.12 Advantages linked to non-legal securitisation

Non-legal securitisation may be more favourable to French banks than legal securitisation.

a) More flexible management

The management of non-legal securitisation operations is more flexible insofar as there may be fewer constraints and limits compared to those fixed by the securitisation's legal status and relating to:

- The nature of the receivables

Indeed, non-legal securitisation operations may concern any kind of receivables. Originally, it was essentially the unique process to realise cash from a portfolio of trading assets (i.e. Bull securitised its trade receivables in Jersey) or of very short term receivables.

Nevertheless, since the Law dated January 4, 1993, some new kind of receivables such as revolving credit receivables can be securitised through French FCC's (i.e. Credit Lyonnais has securitised revolving credit of credit cards).

- The management of the investment fund

Originally, non-legal securitisation operations were carried out in foreign countries where there were no constraints on the fund management. (For instance, in Cars no 1, set up by the DIAC in Guernsey, amortised receivables can be replaced by other receivables of the same nature and the maturity of which is less than the one relating to the redeemable preference share issued by the investment company.)

Since the Law dated January, 1993 and the Decree n>93-589 dated March 27, 1993, management rules of the FCC have become more manageable. After the issue of certificates, the fund can repurchase receivables; but only the same kind of receivables. (New Article 34 of the Law and new Article 8 of the Decree).

- The open-ended character of the fund

Management of opened funds avoids the negative effects of redemptions made before the due date. Indeed, in the case of closed-funds, such redemptions imply the distribution of the cash to share owners, raising the issue of the reinvestment of this cash and the probable reduction in share profitability. On the contrary, opened funds allow the reinvestment of this cash in the fund increasing the shares' liquidating value.

Pursuant the Law dated December 23, 1988, the capital of the FCC is fixed from the issue of certificates (Article 34 paragraph 1).

b) Higher-performing set-up

Non-legal securitisation may, in fact, allow the implementation of a higher-performing set-up from a tax and finance point of view (for example: the securitisation operation implemented by the CCF and the efficiency of the set-up of the DIAC linked to the redeemable preference shares and the opened-fund mechanism).

The tax neutrality of the vehicle user (trust, company, others) is necessary to the success of the operation: this explains why the vehicle is generally located in tax havens.

Pursuant to Article 238 bis-OI of the French Tax Code, corporation tax is applicable to the proceeds of assets transferred to foreign structures in order to administer them (i.e. trust). As securitisation qualifies more as a sale than a transfer, this article may not be applicable in the case of transfer to foreign structure: the application of corporate tax would depend on the way in which the given operation is structured.

2.13 Higher risk linked to non-legal securitisation

Non-legal securitisation operations may be more risky than those came out through FCCs insofar as the law requires several guaranties when implementing an FCC aimed at protecting investors and debtors.

Pursuant to the Decree dated March 9, 1989 supplemented by the Regulation dated November 3, 1993, the French FCC must have a maximum ratio of available funds in order to protect investors.

However, the increase in risks stemming from non-legal securitisation operations should not be exaggerated. Indeed, in order to attract private investors, shares issued by the structures described above should be adequately secured. Thus, the DIAC has guaranteed the safety of shares issued by Cars no 1 by:

- selecting the receivables to be securitised according to the risk attached to each receivable;

- requesting a rating of the risk attached to the securitised portfolio from Standard and Pool's agency.

2.2 Tax treatment uncertainties

The withholding tax regime applicable to non-legal asset securitisation remains unclear.

2.2 There are two legal way in order to transfer receivables outside the French legal status :

International tax treaties generally withdraw withholding tax; but securitisation operations are frequently carried out with "offshore" structures in countries that did not sign any treaty (i.e. Jersey).

As the vehicle is a foreign entity, the special simplified regime of receivable selling provided for by the securitisation legal regime in France (to the FCC) will not apply.

Consequently, there are two ways in which to transfer receivables outside the French legal status :

- Transfer of receivables by subrogation :

The first possibility of transfer is the "subrogation" which transfers to the non-legal vehicle the receivable and security debts for the amount of the original value (of the receivable). At the same time, the creditor usually pays an amount for the risk and financial cost.

Pursuant to Article 125-A-II of the French Tax Code, withholding tax (15%) applies on interest which would be paid by a French company to a foreign structure. Nevertheless, it seems that Article 125-A-III only applies between the creditor and debtor and consequently does not apply to a subrogation case (an operation between the original creditor and a new creditor alone).

- Transfer by sale of receivables :

The second possibility of transfer is the sale of receivables through the "Bordereau Dailly" procedure. In that case, the receivable is transferred for its market value. This transfer is a purchase/sale operation only between the creditor (the seller) and the structure used (the buyer). This operation is outside the scope of Article 125 A-III of the French Tax Code, which only applies to relations between creditors and the debtors.

Moreover, as there is no amount paid by the French creditor to the foreign vehicle, the withholding tax (which applies on amounts paid for provision of a service provided or used in France pursuant to Article 182-B of the French Tax Code - the rate is 33.33%) would not be applied.

2.22 Transfer of assets with interest :

The tax regime of a transfer between a French debtor and a non-French vehicle (new creditor) is unclear when there is a transfer of receivable with interest.

Pursuant to Article 125-A-III of the French Tax Code, withholding tax may be apply on the amount of interest paid by the French debtor to the foreign transferee (new creditor). (There is not application of the exemption pursuant to Article 131-quater of the French Tax Code which is limited to loans initially subscribed in foreign countries).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought for your specific circumstances. For additional information contact Claire Acard at +33 (1) 55 61 10 10 or enter text search: 'Archibald Andersen' and 'Business Monitor'. The members of Archibald Andersen Association d'Avocats (S.G. Archibald and Arthur Andersen International) are registered with the Hauts-de-Seine Bar.