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Developments in French securitization legal environment
October 7, 2010
Securitization and Structured Finance: Notes in Depth

The approach to securitizations in civil law jurisdictions differs from that in common law jurisdictions. Civil law jurisdictions, with the formality of their codes, the inability to rely on equitable principles, and the uncertainty of case law applicable to the financial sector, pose special challenges to securitization. In many cases, these challenges are addressed by enacting securitizations law as it is the case in France or Italy.

Some of the practical implications resulting from recent changes in legal framework of French securitization (the “French Securitization law”) are summarized in this alert. 

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French Securitization: How does that work?

The use of French Securitization Law is required to avoid the application of the French banking monopoly (i.e., purchasing non-matured receivables is a regulated activity in France that can only be carried out (in principle) by credit institutions).

Asset sale and perfection

  • Main features of the sale and perfection:
    • Asset sale to a French organisme de titrisation (“OT”) set up as a French fonds commun de titrisation (“FCT”) or a French société de titrisation (“SdT”).  OTs are bankruptcy remote entities under French law;
    • Assets include receivables of any kinds, loans, bonds, and ABS, whether existing or future;
    • Sale can be governed by French law or any foreign law;
    • Full legal assignment to the OT to be performed by a single transfer document (“bordereau”);
    • Assignment is effective between the parties and enforceable against the underlying debtors and third parties as of the date affixed to the bordereau upon its delivery to the OT, irrespective of the law governing the receivables and the location of the underlying debtors, and without any other formality (no notification of debtors is required);
    • The bordereau must include certain mandatory provisions, including the means of designation and identification of the receivables that are subject to the sale;
    • The collection duties of the seller and the retention of certain risks do not impact the legal “true sale”; and
    • All related security interests (including mortgages, pledges, guarantees) and ancillary rights are transferred to the OT, without any further formality.

French Securitization: Asset Sale and Perfection

  • Purchase price
    • On the purchase date, the FCT pays the purchase price of the receivables to the seller;
    • Price is discounted for funding costs and expenses; and
    • The seller may advance cash or may be deemed to have advanced cash against a subordinated note for the amount of the reserves.
  • True sale requirements at the time of each sale
    • Offer letter from the seller;
    • Bordereau executed by the seller;
    • Full listing of invoices;
    • Counter-signature and dating of the bordereau by the société de gestion;
    • Agreement to subscribe for units by the conduit;
    • Payment of subscription monies to the FCT;
    • Issue of units by the FCT;
    • No filings are required to perfect the sale; and
    • Debtor notification is not required to perfect the sale.
  • Transfer of title to the receivables is effective from the time when the duly signed bordereau is dated and remitted to the société de gestion
  • Future receivables
    • French Securitization Law specifically provides that the sale of receivables that come into existence after the date of the sale contract is not affected by the commencement of insolvency proceedings against the seller. An insolvency official will have the right to terminate the sale agreement that provides for the sale of receivables after any insolvency proceeding of the seller but sales up to that point will have been perfected.
  • Unbilled receivables
    • The right to receive payment under French law can be securitized notwithstanding the fact that no invoice is generated on or after the remittance of the good or the delivery of the service, subject to terms and conditions of the underlying contract entered into with the seller being adhered to.
  • Insolvency of seller
    • As regards the sale of receivables to an FCT, French Securitization Law specifically provides that such a sale is not affected by the commencement of insolvency proceedings against the seller
    • The assignment is valid and enforceable against the underlying debtors and third-parties as from the date of the bordereau without any further formality, including bankruptcy of the seller.
    • Assignment can be challenged within the 18-month period preceding the commencement of bankruptcy proceedings of the seller if:
      • the OT was aware of the seller’s insolvency at the time of the assignment;
      • the obligations of the seller notably exceed the obligations of the OT under the sale;
    • Assignment, contemplated prior to the commencement of any bankruptcy proceeding, of receivables that do not exist (i.e., future receivables) on the date of the bordereau will remain effective after the commencement of such bankruptcy proceeding.
  • Effect of notification
    • Receivables are freely assignable without underlying debtors’ consent in the absence of contractual provisions to the contrary.
    • The French Commercial Code provides that provisions prohibiting or restricting the assignment of receivables between commercial parties (i.e., excluding consumers) are null and void.  Confidential duties such as banking secrecy provisions are not enforceable against the OTs.
    • In the absence of notification, payment to a seller, in good faith, will discharge the debtor’s payment obligation. Notification is required if the FCT wants to be paid directly by the debtor.
  • Control over cash
    • Where the purchaser is an FCT, all collections can be credited to a “compte d’affectation spéciale” or “trust account” to isolate cash collections received by the seller from a seller’s funds in the event of its bankruptcy.
    • It is possible to “transform” the seller’s existing collection accounts into “trust accounts,” which will remain in the name of the seller and would be swept frequently into an account in the FCT’s name.
    • If insolvency proceedings are opened against the seller, neither any insolvency officer nor its creditors (other than the FCT) will be entitled to any funds in the collection account, which shall be for the sole benefit of the FCT. The FCT will have immediate access to such funds account without any interference or delay caused by the insolvency of the seller

An example of a French securitization structure

French Securitization Structure


The foregoing has been prepared for the general information of clients and friends of the firm. It is not meant to provide legal advice with respect to any specific matter and should not be acted upon without professional counsel. If you have any questions or require any further information regarding these or other related matters, please contact your regular Nixon Peabody LLP representative. This material may be considered advertising under certain rules of professional conduct.