Insolvency in France – an Introduction
The French ecosystem is facing a major paradigm shift.
While companies and major businesses have benefited for several years from cheap debt due to an abundance of liquidity (fuelled by banks, alternative providers of funding and private debt) and an accommodating monetary policy characterised by extremely low interest rates, they are now facing a sharp liquidity rarefication.
On the economic front, companies are bearing the full brunt of the rising energy costs, supply disruptions and pre-existing inflation, all of which have been exacerbated post-COVID-19 by exogenous geopolitical factors such as the Ukrainian conflict. Although government subsidies have helped to limit the rise in energy prices and inflation more generally, making French companies more resilient in the short term than their counterparts in neighbouring countries, the effects of the above are widespread.
French borrowers' cost structures have been heavily impacted by ever-increasing operating expenses. This is due to low cash flow combined with an inability to take out bank loans due to the rise in interest rates. Such inflation has also resulted in a decrease in the valuation of listed companies.
The liquidity concern also challenges financial sponsors whose post-LBO investment horizon is complete and who are now facing the difficulty of selling without sacrificing value – since any potential buyer is now burdened with a heightened level of acquisition and refinancing indebtedness.
These difficulties have not yet led to an increase in the number of insolvency proceedings, even if the end of the state-guaranteed loan (PGE) scheme and the need to repay these loans at the end of the 1+1 years' grace period explains why we are back to pre-COVID-19 levels.
This status quo may change: the liquidity problem cannot be addressed by traditional bank loans or even through private debt, given the context mentioned above. Consequently, stressed or distressed companies and businesses (either listed or private) will have to resort to the following:
- For viable companies or premium assets with a profitable going concern and consistent current trading – renegotiating the existing "cov-lite” debt structure through soft restructuring (ie, "amend and extend” agreements), together with granting adapted sets of covenants and "restructuring remote” security packages (fiducies, or even double luxco) in the framework of out-of-court proceedings (ie, the consensual mandat ad hoc/conciliation duo).
- For more compromised companies (or those failing to restore consensually and that would enter into a subsequent round of restructuring) – the provision of new money either by existing shareholders and sponsors who do not wish to be ousted or by new players, such as equity funds/debt funds, in a debt-to-equity swap context. This type of restructuring may be carried out within mandat ad hoc or conciliation, or by way of in-court proceedings (safeguard, accelerated safeguard, judicial reorganisation), bearing in mind that these traditional debtor-friendly legal devices have now shifted and became more creditor-friendly with the reform, notably with the suppression of the possibility of imposing a debt rescheduling upon creditors (within a maximum period of ten years) in safeguard.
Alienor Huchot (Associate, White & Case, Paris) contributed to the development of this publication.
This article was first published by Chambers and Partners on November 22, 2022. For further information please visit Chambers and Partners website.
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