“This is the first time that a French Court of Appeal recognizes the parallel debt mechanism in the context of security packages put in place as part of secured international financings granted to a French corporation. ”
24 January 2011
Latham & Watkins Finance Department
Belvédère Court of Appeal Decision Confirms Efficacy of Parallel Debt Mechanism Under French Law
On 21 September 2010, the Dijon Court of Appeal1 issued an important decision confirming the efficacy under French law of a “parallel debt” mechanism which had been used in the security package put in place as part of French issuer Belvédère’s secured high yield issuance of May 2006.
French law has not, until recently, had a concept similar to the common- law trust concept. The trust concept permits (among other things) the holding and management of security by a trustee on behalf of a group of creditors. There was recently introduced under French law the concept of “fiducie” (articles 2011 et seq. of the French Civil Code), which has some of the characteristics of a trust, as well as a specific provision creating the notion of security agent (article 2328-1 of the French Civil Code). For various technical reasons, these new statutory provisions have not been embraced by French practitioners as efficient and practicable means of managing security interests in the way that a common-law security trust would allow.
In international financings involving security in France, the practice has
often been for a number of years to use the parallel debt mechanism, in a way similar to its wide-spread use in Germany or The Netherlands. It has been seen as an efficient tool for the management of security interests granted in favor of a syndicate group of lenders and/or fluctuating group of bondholders (recently, in the Picard, Europcar and Novasep financings, for example). In the Belvédère bond issue, the parallel debt mechanism had been created under a collateral sharing agreement governed by New York law, and used in connection with security interests granted by the French issuer.
The qualifications which accompanied this practice, both in law firms’ legal opinions and in legal risk factor disclosures in offering memoranda, had always emphasized that there was no judicial confirmation that parallel debt mechanisms worked.
This decision however constitutes a recognition by a French Court of Appeal of the parallel debt mechanism, which should be seen with increased confidence as a helpful tool to organize the holding of French law security in international financings
that is, until French law is able
to provide a tool which practitioners determine provides similar comfort and advantages.
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