Ordinance No. 2017-1432 dated Oct. 4, 2017 (the Ordinance), together with its two implementing decrees dated Nov. 19, 2018, is bringing significant changes to the French legal framework for asset management and direct lending.
In addition to the already existing specialized professional funds1 (SPF) and securitization vehicles2 (SV), the Ordinance introduces a new type of alternative investment fund (AIF), under French law referred to as specialized financing vehicles3 (SFV).
SFV will combine the regulatory advantages of both SPF and SV in terms of asset mix (e.g., SFV, unlike SV, may hold equity, quasi-equity or tangible assets), liability structure (e.g., SFV, unlike SPF, may issue debt securities), investors' protection (e.g., insolvency proceedings as well as seizure and attachment proceedings do not apply to SFV, while they do apply to SPF) and marketing within the EU (shares or units of SFV may be marketed within any EU member state under the "marketing passport" of the Alternative Investment Fund Managers Directive, which does not cover shares or units of SV).
This advantageous regulatory framework is expected to make SFV the optimal debt vehicle in Europe — and in particular, the ideal scheme for direct lending under French law and throughout Europe — in the future.
Pursuant to the Ordinance and its implementing decrees, SFV will indeed be able to grant loans, provided the management company is licensed for "direct lending" activities by the Autorité des marches financiers (AMF) or the financial authority of another EU member state.
For granting loans, SFV can follow either of two routes:
1. The European Long-Term Investment Fund (ELTIF) route pursuant to Regulation (EU) No. 2015/760 (the ELTIF Regulation) if the SFV itself has been licensed by the competent authority (i.e., for French funds, the AMF) as an ELTIF, in which case, the SFV must comply with the following conditions:
- It must not be exposed exclusively to "financial undertakings" or collective investment schemes.
- The maturity of the loan must be less than the life of the ELTIF.
- The leverage ratio must not exceed 30 percent of the value of the capital of the ELTIF.
- Cash borrowings may not be used for granting loans.
- Derivatives may be entered into for hedging purposes only.
- Exposure to commodities, notably via derivatives, is prohibited.
- Short selling is prohibited.
- Securities lending, borrowing or repos may not affect more than 10 percent of the assets of the ELTIF.
- There may be no redemption requests from investors except as otherwise provided in the fund documentation; if there are, gates are to be stipulated, and the management company must be able to demonstrate that an appropriate liquidity management system and effective procedures for monitoring the liquidity risk of the ELTIF are in place.
2. The French route, in which case the SFV does not need to be licensed per se but must meet the following conditions:
- It cannot grant loans to "financial undertakings," within the meaning of the ELTIF Regulation, to public law-governed legal entities or to collective investment schemes.
- The maturity of the loan must be less than the final maturity of the vehicle.
- The leverage ratio (exposure/NAV) determined in the funds documentation must not exceed a percentage to be fixed by ministerial order, the exposure being calculated pursuant to the calculation methodology set forth in Article 8 of Delegated Regulation (EU) No. 231/2013 of Dec. 19, 2012, it being provided that bridge financings covered by subscription commitments are excluded from the calculation.
- Borrowings may be used to finance direct lending; such borrowings' maturity, however, must not exceed the funds' maturity, and the management company must run "stress tests" to ensure that the assets' (notably loans') liquidity allows it to face the redemption requests and its undertakings arising out of borrowings.
- Derivatives may be entered into for hedging purposes (rate or credit risk) only.
- Short selling is prohibited.
- Repos and similar transactions are limited to 10 percent of the assets of the SFV.
- There may be no redemption requests from investors except as otherwise provided in the fund documentation; if there are, lockup periods and gates as well as the conditions of deferment of redemption requests that have not been satisfied must be stipulated.
1 fonds professionnels spécialisés
2 organismes de titrisation
3 organismes de financement spécialisés
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.