Securitisation is a sophisticated financial mechanism based on legal vehicles specifically designed to isolate assets and issue securities. For companies seeking to optimise their balance sheet or access new sources of finance, understanding how these entities work is essential. In France, securitisation vehicles are the mainstay of these operations. They enable assets, often receivables, to be transformed into tradable financial instruments. Navigating this legal framework, which is both protective and complex, requires a precise knowledge of the options available and their implications. The complete guide to securitisation and its implications for banking and financial law provides an overview of these mechanisms. This article focuses on the legal structures at the heart of the French system: the fonds commun de titrisation (FCT) and the société de titrisation (ST).
History and development of securitisation vehicles in France
Securitisation was introduced into French law late and gradually, as legislators sought for a long time to reconcile financial innovation with legal certainty. The foundation stone was laid by the Act of 23 December 1988, which created the fonds communs de créances (FCC). Initially, this system was restricted: only credit institutions and Caisse des Dépôts et Consignations could sell their claims, and only medium- or long-term claims. This initial version, deemed too rigid, has been successively relaxed.
Over the course of the 1990s and 2000s, a number of reforms broadened the scope of possibilities. Insurance companies, and then all commercial companies, were authorised to assign their receivables. The nature of securitisable assets was diversified to include future or even disputed receivables. A major advance was the introduction of compartmentalisation under the Act of 25 June 1999. This technique enables a single fund to create several watertight compartments, each carrying out a separate securitisation transaction with its own assets. In other words, several vehicles can be housed within a single structure.
The decisive turning point came with the Order of 13 June 2008. It replaced the notion of FCC with the broader concept of securitisation undertaking (SO). This reform not only modernised the existing framework, but above all introduced a duality of legal forms. Alongside the fonds commun, now called fonds commun de titrisation (FCT), came the société de titrisation (ST), which has legal personality. The ordinance also broadened the purpose of SPVs, allowing them to take on a variety of risks, including insurance risks, rather than simply acquiring receivables.
Legal forms of securitisation vehicles
French law currently offers two structures for carrying out securitisation transactions: the fonds commun de titrisation (FCT) and the société de titrisation (ST). The choice between these two vehicles depends on the objectives of the transaction, the profile of the investors and the type of assets involved. Each form has its own characteristics, advantages and constraints, which directly influence the governance and management of the transaction. Understanding the specific responsibilities of each player in a securitisation transaction is therefore inseparable from the choice of structure.
The fonds commun de titrisation (fct): an unincorporated co-ownership structure
The FCT is the direct heir to the original fonds commun de créances. Its main legal characteristic is its lack of legal personality. It is not a company, but a co-ownership owned by the unitholders. This legal nature has important practical consequences. The fund cannot act in its own name, enter into contracts or take legal action. It is necessarily represented and managed by a portfolio management company, which acts on behalf of the co-owners, and its assets are held by a custodian institution.
This structure offers great flexibility. Its operation is mainly defined by its regulations, a contractual document that sets out the rules of the operation, the characteristics of the assets, the terms and conditions for issuing units and the rights of investors. This contractual freedom means that bespoke packages can be put together to suit complex situations. What's more, the absence of share capital and the lightness of its governance make it a solution that is often favoured for its ease of implementation.
In regulatory terms, the FCT is classified as an alternative investment fund (AIF). However, in principle it benefits from a lighter regime and is not subject to all the constraints of the AIFM directive, with some exceptions. This classification clearly places it in the universe of collective investments, while preserving the specific nature of its operation.
The securitisation company (st): a structure with legal personality
Introduced in 2008, the securitisation company (ST) offers an alternative to the FCT by being a genuine legal entity. It must be set up in the form of a public limited company (SA) or a simplified joint stock company (SAS). As a legal entity, the ST has its own assets and liabilities, can enter into contracts in its own name, and is managed by its own corporate bodies (board of directors, chairman, etc.).
However, STs are not ordinary commercial companies. The Monetary and Financial Code provides for a number of exemptions from ordinary company law to make its operation more flexible. For example, the quorum requirements for general meetings are relaxed, and many of the provisions of the Commercial Code relating to capital formation and contributions in kind do not apply to STs. Like the FCT, it must appoint a management company and a custodian.
The existence of a legal entity is a considerable advantage, particularly for international transactions. Foreign investors are often more familiar with traditional corporate structures such as the SA or SAS than with the concept of co-ownership without legal personality. This form is therefore perceived as more legible and robust, which can facilitate the marketing of securities on international markets and the implementation of certain complex arrangements, such as short-term receivables securitisation conduits (ABCP programmes).
Ways in which securitisation vehicles are exposed to risk
The purpose of a securitisation undertaking is no longer simply to acquire receivables but, more broadly, to "expose itself to risks" and finance them. French law lists a number of techniques that enable a securitisation undertaking to expose itself to these risks.
The most traditional method is the acquisition of receivables. The TO buys a portfolio of receivables (home loans, consumer credit, commercial invoices, etc.) from a company (the assignor). This transfer is carried out using a simplified form, by simply handing over a slip, inspired by the Dailly assignment. This simplicity is a key factor in effectiveness, making the transfer enforceable against third parties without further formality. Complexities can arise, however, when it comes to managing and recovering these receivables, an issue detailed in our article on the complexity of recovering receivables under securitisation arrangements.
The TO can also grant loans directly to companies, thus providing an alternative to traditional bank financing. This option, which is subject to certain restrictions, is part of a wider drive to diversify sources of finance for the economy.
Another technique is synthetic securitisation. Here, the TO does not receive the assets themselves, but only the associated risks. In practice, it enters into contracts such as credit default swaps, under which it undertakes to cover losses on a portfolio of assets in exchange for a premium. This mechanism makes it possible to transfer a credit risk without transferring ownership of the underlying receivables.
In a similar way, the TO can expose itself to insurance risks, acting as an alternative to traditional reinsurance. It can also grant guarantees, securities or enter into risk sub-participation contracts, more sophisticated techniques that enable innovative financial arrangements.
Financing and risk coverage
Once exposed to the risks, the securitisation vehicle must finance or hedge them. The main method of financing is to issue financial instruments to investors. These securities may take the form of units (for FCTs), shares (for STs) or debt securities, such as bonds.
A fundamental feature of securitisation is the possibility of "slicing" the issue. The TO can issue several categories (or tranches) of securities, each offering a different risk/return profile. Senior tranches are the safest and offer a lower yield, as they are redeemed first. The "mezzanine" and "junior" (or subordinated) tranches present a higher risk but a higher potential return, as they absorb any initial losses in the asset portfolio. This mechanism makes it possible to target a variety of investor profiles.
In addition to issuing securities, a TO may also borrow or use other forms of debt to finance itself. To protect itself, it can also set up hedging mechanisms. It can take out forward financial instruments to hedge against certain risks (interest rate, exchange rate) or be the beneficiary of guarantees or sureties granted by third parties to secure its own assets.
Bankruptcy remoteness
One of the cardinal principles of securitisation is to protect investors against the risk of bankruptcy of the seller, the company that originated the assets. This is the concept of "bankruptcy remoteness". French law has put in place a robust legal arsenal to guarantee this protection.
The strongest rule is the inapplicability of the collective procedures of Book VI of the Commercial Code (safeguard, reorganisation, judicial liquidation) to securitisation undertakings. A TPO cannot go bankrupt in the traditional sense of the term. Its liquidation regime is governed by its own articles of association or by-laws. This immunity is essential: it assures investors that their investment will not be affected by the financial difficulties of the originator of the transaction or other participants.
Other mechanisms reinforce this protection. The assets of the collective investment scheme are earmarked for a specific purpose and are liable only for the scheme's (or the subfund's) own debts. They cannot be seized by the creditors of the transferor, the management company or the custodian. In addition, the transfer of receivables to the transfer agent by way of a bordereau is final and enforceable, even if it takes place just before the opening of insolvency proceedings against the transferor, thereby neutralising the risks associated with the suspect period.
Finally, the mechanism of the specially allocated account makes it possible to secure financial flows. The sums recovered in respect of assigned receivables can be paid into a dedicated bank account, which is isolated from the assets of the entity responsible for collection. In the event of the latter's bankruptcy, the funds in this account are protected and reserved for the debt collector's creditors.
Setting up and managing a securitisation vehicle requires specialised legal expertise to structure the transaction, draft the documentation and ensure compliance with a dense legal and regulatory framework. For advice tailored to your financing project, you can contact our firm for a legal support for setting up and managing securitisation vehicles.
Sources
- French Monetary and Financial Code, articles L. 214-166-1 et seq (provisions relating to financial institutions).
- French Monetary and Financial Code, articles D. 214-217 et seq (regulatory provisions relating to financial institutions).
- Regulation (EU) 2017/2402 of the European Parliament and of the Council of 12 December 2017 creating a general framework for securitisation.
- Commercial Code.
- Civil Code.
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