France: A new era for direct lending funds

A number of changes to French law have recently occurred or are currently being discussed which will allow investment funds to grant loans.

These changes should impact French investment funds using the ELTIF label, other French investment funds and non-French investment funds.

French investment funds using the ELTIF label

As a result of the European ELTIF Regulation (Regulation (EU) 2015/760 of 29 April 2015 on European long-term investment funds (ELTIF) (the ELTIF Regulation)), which came into force in December 2015 and allows ELTIFs to grant loans under specific conditions, the French legal regime governing investment funds has been amended by the law no. 2015-1786 dated 29 December 2015 (the Law). The ELTIF Regulation is directly applicable in France without having to be transposed into French domestic law. However, the Law amended the French Monetary and Financial Code to provide that French professional specialised funds (fonds professionnels spécialisés), professional private equity funds (fonds professionnels de capital investissement) and securitisation vehicles (organismes de titrisation) are entitled to grant loans to undertakings, under the conditions set out in the ELTIF Regulation, when they have received the authorisation from the French Autorité des marchés financiers (AMF) to use the ELTIF label.

The AMF has recently issued guidance on ELTIFs. Although this document does not officially constitute the formal doctrine of the AMF, it contains guidelines drafted to help fund managers who wish to obtain the authorisation to use the ELTIF label from the AMF.

What you need to know

• French investment funds authorised to use the ELTIF label are now authorised to grant loans.
• Other French investment funds will also become authorised to grant loans, under specific conditions to be set out in a Decree.
• Non-French investment funds could benefit from governmental Ordinances which would be designed to open new financing opportunities.

French investment funds other than those using the ELTIF label

The Law also amended the French Monetary and Financial Code. It provides that when they are not authorised to use the ELTIF label, the same categories of French investment funds are nonetheless entitled to grant loans to undertakings under conditions to be set out in a Decree. The French Government is currently working on the Decree mentioned above. In light of the responses received from market participants to a consultation launched in October 2015, which have just been published, the AMF has made several proposals. These have been transmitted to the French Government to assist in drafting the Decree. They will also be used as guidelines for preparing the doctrine of the AMF in respect of French direct lending funds.

AMF proposals

The proposals are detailed below:

• The AMF wishes that the rules governing the ability of French investment funds to grant loans ensure the application of equivalent principles between the lenders within a secured and clarified legal framework, taking into account the economic model of each actor.
• The management companies wishing to grant loans through the investment funds they manage should be licensed by the AMF pursuant to the AIFM Directive. They should implement a programme of activity validated by the AMF, in order to be able to grant loans. The AMF indicates that it will be particularly demanding in respect of applications filed by the management companies that wish to grant loans. Notably, this applies to organisational requirements, human and technical resources, expertise (in terms of credit risk analysis notably) and experience of the employees of the management company involved in such lending activities (for example, through previous experience in credit institutions). In addition, the management companies should conduct due diligence to ensure that they comply with all obligations applicable to other types of lenders (including rules resulting from banking case law, rules relating to anti-money laundering and terrorism financing, and rules applicable to lenders in the jurisdictions of the borrowers).
• Non-French management companies which manage French investment funds granting loans will need to be authorised by their home state regulator to grant loans.
• French professional specialised funds (fonds professionnels spécialisés), professional private equity funds (fonds professionnels de capital investissement) and securitisation vehicles (organismes de titrisation) should be the only French investment funds allowed to grant loans.
• Management companies should report all loans which have been granted to the AMF and to the Bank of France (Banque de France) on a quarterly basis.
• Management companies should be authorised to carry out debt collection in respect of the loans they have granted.

Additionally, the following constraints should apply to an investment fund granting loans as soon as its lending activity is no longer accessory (i.e. the loans granted by the fund represent more than ten per cent of the net assets of the fund):

• the fund should be a closed-ended fund or should at least limit the redemption of its units or shares to a portion of its assets;
• the loans should only be granted to non-financial companies and should have a maturity date shorter than the lifetime of the fund;
• the use of leverage for lending purposes should be prohibited. A fund could borrow cash of up to 30 per cent of its net assets, provided that the purpose of such borrowing is not to finance the granting of loans;
• the fund should be prevented from short selling, securities lending and entering into derivative transactions (except for the hedging of currency risk and interest rate risk); and
• the loans should be granted by the fund with a view to be retained by the fund until their maturity date. The transfer of the loans granted by a fund should be limited, in order to avoid the development of an “originate to distribute” model.

Decree

The AMF proposals could be entirely or partly reflected in the Decree to be adopted in the coming months. The Decree should also leave some discretion to the AMF to assess the details of the regime applicable to French investment funds wishing to grant loans.

Non-French investment funds

Non-French investment funds, even those which would be authorised to use the ELTIF label by their home state regulator, are currently outside the scope of these proposals. However, on 30 March 2016, the French Government published a bill promoting transparency, anti-corruption and economic modernisation (the Bill).

Sapin II Bill

The main purposes of the Bill, known as the “Sapin II Bill”, are to reinforce the fight against corruption and enhance transparency in France, and to propose a series of measures designed to modernise the economy. The Bill should be discussed in the coming months before the French Parliament. The Bill intends to allow the French Government to take, by way of Ordinances, measures designed to facilitate the financing of French undertakings by:

• amending the provisions of the French Monetary and Financial Code relating to alternative investment funds designed for professional investors and limiting the possibility of redemptions of their units or shares, and to their management companies licensed pursuant to the AIFM Directive, in order to define the conditions under which such investment funds are entitled to grant loans to undertakings;
• amending the provisions of the French Monetary and Financial Code relating to investment funds, their managers and depositaries in order to reinforce their capacity to ensure the financing or refinancing of investments, projects or risks, including through the acquisition of unmatured loan receivables; and
• changing the regime under which investors in the financial sector, whatever is the law applicable to them, could acquire loan receivables from credit institutions or financing companies by derogation to the French banking monopoly rules.

The public discussions of the Bill before the French Parliament should start in the coming months. Once the Bill has been passed, the Government will be entitled to publish Ordinances. As a result of these Ordinances, the situation of non-French investment funds willing to grant loans in France could become much clearer.