Wednesday, March 3, 2010

A rare victory for creditors in France

Original posted in Euroweek:

A judgement from a French court of appeals upholding creditors’ rights could be just what is needed to bring securitisation issuers from the country out of the wilderness.

As Europe’s securitisation market slowly climbs back to health, one jurisdiction has been notably absent from the public primary market.

Despite a rash of car loan ABS from German manufacturers’ captive finance companies and intermittent rumours, we haven’t seen a peep from Renault or Peugeot, both fairly frequent issuers in the pre-crisis era.

At least part of the reason for France’s absence from the recovery has been the tremendous uncertainty created by a shock court ruling in 2008, which granted bankruptcy protection to borrower special purpose vehicles in the Windermere XII CMBS, backed by the Coeur de la DĂ©fense office complex in Paris.

The original ruling surprised the market, which previously had assumed that SPVs would not be subject to so-called sauvegarde protection from creditors, even though only one of the two types of SPVs used in French securitisation have an explicit exemption from insolvency law.

The market was really thrown into turmoil, however, in 2009 when the French Commercial Court froze the assignment of rents to the securitisation and granted the borrowers a five year enforcement standstill, despite soaring vacancies in the property.

The ruling seemed to undermine the fundamental basis of secured commercial property finance in France, a sector that was already less active than in other jurisdictions because of the market’s relatively tenant friendly lease terms.

The rent assignment, however, was upheld on appeal and last week the Court of Appeal overturned the entire sauvegarde process, restoring the bondholders’ rights. The decision came as a huge relief not just to investors in Windermere XII, but the entire French securitisation market. It held that while an SPV that was not structured as a fonds commun de titrisation could in principle seek sauvegarde protection, it should only be granted when the borrower faced insurmountable difficulties in going about its business. The court held that the cost of finding a replacement swap provider — the proximate cause of the insolvency filing — was not sufficient cause, and sauvegarde protection could not be used in effect to unilaterally change the terms of a contract.

Furthermore, the reaffirmation of the enforceability of rent assignment means that the appeal of sauvegarde protection to borrowers will be greatly reduced.

While these decisions may still be appealed to France’s highest court, for the moment French securitisation has pulled back from the brink. No doubt investors will tread more warily than before — and rightly so — but they can now be assured that France’s insolvency law is less capricious than they thought

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