Investment in credit funds by French insurance companies (and similar institutions)

Credit funds are increasingly marketed to French insurance companies (entreprises d'assurance). Other similar institutions, such as contingency institutions (institutions de prévoyance) and complementary pension institutions (institutions de retraite complémentaire), also appear as an important source of debt financing.

Investments made by these companies and institutions are subject to restrictions due to specific prudential regimes applicable to them, when it is intended that such investments be admitted to represent the regulated commitments (engagements réglementés) of an insurance company or of a contingency institution, or be eligible as a placement of the funds allocated to the reserves of managed risks (réserves des risques gérés) for complementary pension institutions.

With respect to French insurance companies, a number of substantial changes have been recently made to the rules governing such eligible investments. In particular, a new category of investment vehicles (Fonds de Prêt à l'Economie) has been created, and other changes have been made in order to improve the investment opportunities for French insurance companies.

Fonds de Prêt à l'Economie can take the form of either French securitisation schemes or French specialised professional investment funds. They can invest in claims on and debt securities issued by local entities, public institutions or legal entities having for their main purpose commercial, industrial, agricultural or real estate business activities (excluding financial activities and collective investment schemes) and established within the European Union. Investments made by Fonds de Prêt à l'Economie which take the form of French securitisation schemes must satisfy additional conditions regarding in particular their maturity and the date of their acquisition. The main other requirements applicable to Fonds de Prêt à l'Economie relate to the derivative transactions they are authorised to enter into, the appointment of an asset manager and depositary, the obligations of the asset manager to report to the insurance companies investing in the Fonds de Prêt à l'Economie and the characteristics of the bonds, units or shares they are authorised to issue. It is worth noting that bonds, units or shares issued by Fonds de Prêt à l'Economie do not need to be traded on a recognised market.

Furthermore, bonds, units or shares issued by a French securitisation scheme whose assets only comprise loans granted to or guaranteed by the OECD Member States, local entities or public institutions, and real estate guaranteed loans granted to legal entities or individuals having their registered office or residence in a Member State of the OECD (as well as assets transferred to the securitisation scheme in relation to derivatives transactions or collateral arrangements and funds temporary available), have become eligible for investments by French insurance companies, provided that they comply with some but not all of the requirements applicable to Fonds de Prêt à l'Economie.

Other investment opportunities have been improved for French insurance companies. In particular, the ability of French insurance companies to invest directly in loans has been broadened to include a new category of loans when they have been granted under a programme approved by the French banking regulator. Furthermore, the residual category of eligible investments which comprised shares, units and rights issued by commercial companies, as well as bonds, participative or subordinated notes issued by regulated insurance or mutual companies, has been clarified to include instruments issued by French securitisation schemes, when such instruments are not eligible investments pursuant to other categories (in particular, when such instruments are not traded on a recognised market and the issuer does not comply with the conditions newly set out for Fonds de Prêt à l'Economie).

Finally, it is worth noting that the regime governing the accounting treatment of investments made by French insurance companies has also been amended. French insurance companies are likely to prefer investments which may benefit from the favourable accounting treatment set out in Article R. 332-19 of the French Code des assurances (which allows to avoid the disadvantages resulting from the application of the residual accounting regime set out in Article R. 332-20 of the French Code des assurances). In the context of credit funds, such favourable accounting treatment only applies to redeemable securities which are either traded on a recognised market, or assimilated to "BMTN" when they comply with valuation, quotation and liquidity requirements, other than indexed bonds and units of securitisation schemes. Bonds, units or shares issued by Fonds de Prêt à l'Economie are not eligible for such favourable accounting treatment. However, the disadvantages resulting from the application of the residual accounting rgime set out in Article R. 332-20 of the French Code des assurances have been recently reduced when such regime applies to redeemable bonds, units or shares issued by Fonds de Prêt à l'Economie.

Please click on the links below for the other articles in this issue of Credit Funds Insight.

• CLO update: EBA publishes Final Draft RTS on Securitisation Risk Retention
• AIFMD: frequently asked questions
• Unitranche facilities: one to watch?
• Securitisation vehicles subject to AIFM Law in Luxembourg