While the current COVID-19 crisis affects mostly the primary debt market, which is paralysed in certain cases by the difficulty in carrying out the due diligence verifications that are necessary to the origination of a credit facility, the secondary debt market (syndication and securitisation) is also impacted.
An investor who wishes to acquire a participation in a credit facility must consider the following risks:
- the market risk related to the underlying asset: the value of the underlying asset could have decreased since the valuation carried out at the time of the facility origination, certain asset classes (such as retail) being more affected than others (such as logistics) by the crisis;
- the impact of negotiations currently taking place between landlords and tenants aiming to defer up to six months of rent (where rent is not waived by the landlord in exchange for a waiver by the tenant of its three-yearly break option or an undertaking to renew the lease): lenders must expect their borrowers who are landlords to request a modification of the amortisation profile of the facility that matches the rent deferrals being granted. It should be noted that the resulting extension of the final repayment date must remain less than one year unless measures are taken for the timely renewing of the mortgage registration (valid only one year after the original final repayment date);
- the risk of rate increases: the increase of long rates (in case of a fixed-rate loan) but also the increase of the credit risk premium and the increase of liquidity costs.
In the context of decreases in values and increases in rates, an investor who had started negotiations for taking a participation in a credit could consider not going forward with the transaction, at least not on the same basis. In doing so, the investor should be careful not to put their extra-contractual liability at risk for abusively discontinuing negotiations. Indeed, pursuant to case law now codified at article 1112 du Code civil, the initiative, the unfolding and the termination of pre-contractual negotiations are free but one must comply with the requirement of good faith. One must therefore have a "legitimate ground" for discontinuing negotiations; an essential modification of one's forecasts is a legitimate ground.
In this context, an investor may wish to purchase a debt for a price slightly below its nominal value. That is possible as long as there is no litigation with the debt; the debtor of a litigious debt can purchase it for the price at which it was sold plus interest and costs pursuant to article 1699 of the Civil Code. Article 1699 of the Civil Code does not apply in case of a grant of a sub-participation.
In the case of a loan to a business entered into between 16 March and 31 December 2020 and secured by the French State's guarantee pursuant to the modified 2020 finance law bearing No. 2020-289 (short called a "PGE"), only (French or European) credit institutions and sociétés de financement that are the original lenders can benefit from this French State guarantee. The Ministry of Economy does consider that the guarantee of the French State does not pass on to lenders who are assignees of the original lenders. In this case, one must consider taking a sub-participation from a lender of record.
Finally, remember that article L.511-5 of the French Monetary and Financial Code prohibits anyone who is not a credit institution or a société de financement from carrying out credit transactions on a usual basis and that the acquisition of a receivable that is not yet due is a credit transaction. However, since 2017, article L.511-6 of the same code enables foreign banks, insurance companies, retirement schemes and certain other foreign entities and institutions that do not have the European passport to take participations in facilities without fearing a violation of this prohibition, provided that the borrower is not a physical person acting in a non-professional capacity.
The COVID-19 crisis can therefore present challenges but also opportunities for debt investors interested in the French market.