Securitisation is a sophisticated financing mechanism that transforms illiquid assets into tradable financial securities. At the heart of this operation is a legal entity, the securitisation undertaking, whose choice of form is not insignificant. Under French law, there is a duality of structures: the fonds commun de titrisation (FCT) and the société de titrisation (ST). Understanding their respective regimes is essential for any economic player considering the use of a securitisation vehicle. this key mechanism of banking and financial law. This initial decision determines the flexibility, governance and international visibility of the operation. Our firm, with its support in banking and financial lawoffers you a comparative analysis of these two vehicles to help you make the right strategic choice for your business. legal framework for securitisation undertakings in France.
Dual forms of securitisation vehicles: a strategic choice
With the Order of 13 June 2008, the French legislature introduced an alternative to the traditional debt securitisation fund structure. The aim was to modernise the Paris financial centre by offering an option inspired by international practice, particularly in Luxembourg and the United States, where securitisation vehicles often take the form of companies. This strategic choice enables the initiators of a securitisation transaction to opt for the structure best suited to their objectives, between the contractual flexibility of the securitisation mutual fund and the legal certainty offered by the securitisation company. The fundamental distinction lies in whether or not the vehicle has legal personality, a criterion that has decisive practical consequences for the governance, management and perception of the vehicle by international investors.
The fonds commun de titrisation (fct): an unincorporated co-ownership structure
The fonds commun de titrisation (FCT) is the historic form of securitisation vehicle in France. Its legal nature is unique: it is a co-ownership of assets with no legal personality. This absence of legal personality means that the FCT has no existence of its own as a subject of law. It cannot therefore enter into contracts, take legal action or own property in its own name. To compensate for this inability, the law requires the involvement of a management company, which acts as the fund's "armed wing", representing it in dealings with third parties and carrying out all acts of management. Legally, the FCT is a special-purpose asset, i.e. a pool of assets (the securitised receivables) and rights exclusively dedicated to the securitisation transaction and isolated from the assets of the management company and those of the unitholders. This structure gives the CTF a quasi-personality, allowing it to have a name and autonomous assets, without being a legal entity.
The special nature of fct co-ownership: unitholders with no management powers
The legislator describes the FCT as co-ownership. However, this is a very different system from the common law of joint ownership set out in the Civil Code. By subscribing to fund units, investors become co-owners of the securitised assets. However, this ownership is stripped of its usual prerogatives. Unitholders have no direct management powers over the fund's assets. They can neither initiate the division of assets nor participate in day-to-day decisions, which are the exclusive responsibility of the management company. This structure protects the integrity of the securitisation transaction by preventing any interference by investors in the management of the receivables portfolio. Their rights as security holders are essentially financial: they receive the income generated by the assets and are entitled to the repayment of their capital in accordance with the terms and conditions set out in the fund rules.
Setting up and winding up the fct: a flexible system
The creation and life of the FCT are marked by a high degree of flexibility, governed mainly by contractual freedom. The fund is set up at the initiative of the management company. It is the management company that draws up the fund rules, a veritable charter defining all the legal and financial characteristics of the fund: nature of the risks, financing strategy, conditions for issuing units, rights of unitholders, etc. The absence of the constraints associated with setting up a company (no share capital to be deposited, no articles of association to be registered with the Registre du Commerce et des Sociétés) means that it can be set up quickly and with less formality. The liquidation of the CTF is also defined by its regulations. It generally takes place at the end of the scheduled term, when all debts have been recovered and investors repaid, but early liquidation clauses may be provided for. The management company then proceeds with the sale of the last assets and the distribution of any liquidation surplus, in accordance with the established rules.
The securitisation company (st): a structure with legal personality
As an alternative to the FCT, the securitisation company (ST) is an entity with full legal personality. It must be set up in the form of a public limited company (SA) or a simplified joint stock company (SAS). This provides a recognisable and secure structure, particularly for international investors used to traditional corporate forms. Legal personality gives the ST complete autonomy: it owns its own assets, can enter into contracts, take legal action and interact directly with third parties. This legal stability is often preferred for complex structures or recurring issuance programmes, such as ABCP (asset-backed commercial paper) programmes. Although it is also managed by an external management company, the ST has its own management bodies (board of directors or chairman, general meeting), which gives it a more formal governance structure than an FCT.
The "very special" st regime: derogations from ordinary company law
Although the ST takes a conventional corporate form (SA or SAS), the legislator has introduced a "very special" legal regime that derogates in many respects from the ordinary law governing commercial companies, in the interests of flexibility and efficiency. The purpose of these flexible arrangements is to adapt the way the company operates to the specific requirements of securitisation. For example, the quorum rules for general meetings have been relaxed: no quorum is required for an ordinary meeting or an extraordinary meeting held on second call. Similarly, the strict rules on holding more than one office as chief executive or member of the management board do not apply to offices held within a corporate structure. Other important derogations concern the appointment of the statutory auditor, who is appointed by the management body and not by the general meeting, or the non-application of provisions of the Commercial Code relating to the subscription of capital or the valuation of contributions in kind. Finally, and this is a fundamental protection, Book VI of the Commercial Code on companies in difficulty does not apply to securitisation companies.
Articles of association of the securitisation company: precise mandatory information
The articles of association of a securitisation company, like the by-laws of a CTF, are the central document organising its operation. They must contain a number of mandatory provisions, set out in detail in the French Monetary and Financial Code, which reflect the company's specific purpose. This information goes beyond the usual clauses in the articles of association of a public limited company (SA) or a simplified joint stock company (SAS). The articles of association must precisely define the nature of the risks to which the company proposes to be exposed, the strategy for financing or hedging these risks, the conditions for issuing its shares and debt securities, and the types of guarantees it may receive or grant. They must also detail the company's asset investment strategy, including liquidity management and the conditions for recourse to specific financial transactions. This level of detail in the articles of association ensures the transparency of the operation for investors and provides a strict framework for the company's activities.
Comparison and advantages/disadvantages: which choice for which operation?
The choice between a securitisation mutual fund and a securitisation company depends entirely on the objectives of the transaction, the profile of the targeted investors and the type of assets to be securitised. The CTF is attractive because of its great contractual flexibility. Its operation is almost entirely defined by its regulations, which means that it can be customised. The absence of share capital and the lightness of its formation make it a quick and efficient vehicle to set up. However, the fact that it has no legal personality may be an obstacle for some international investors unfamiliar with this concept of co-ownership, and may complicate the application of international tax treaties. The ST, on the other hand, offers the stability and security of an internationally recognised legal entity. Its corporate structure, although subject to exceptions, is a reassuring guarantee of formal governance. It is the preferred form for large, recurring issue programmes that require high visibility on international markets. On the other hand, its formation and corporate life are more regulated and potentially more costly than those of a CTF. In short, the FCT is often the tool for flexibility and one-off transactions, while the ST is the tool for structuring and recurrence on an international scale.
Solent avocats: your partner for structuring your securitisation vehicles
The structuring of a securitisation transaction and the choice of its legal vehicle are decisive stages involving major financial and legal issues. Whether you opt for the flexibility of a securitisation mutual fund or the robustness of a securitisation company, every detail of the regulations or articles of association must be meticulously studied to ensure the security and effectiveness of the arrangement. Our firm offers you its expertise in banking and finance law to guide you through this strategic decision and secure all your operations.
Sources
- Monetary and Financial Code, articles L. 214-168 to L. 214-186 (provisions relating to securitisation undertakings)
- French Monetary and Financial Code, articles R. 214-217 et seq.
- Commercial Code (provisions relating to public limited companies and simplified joint stock companies)
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