FRANCE Trends and Developments Contributed by: Magali Béraud, Anthony Minziere and Jonathan Nabarro, Nabarro Béraud Avocats
In France, the beginning of 2024, like 2023, was rather quiet on the acquisition finance front with a combination of macroeconomic events and the increase in interest rates having a major impact on the mergers and acquisitions mar- ket (as was the case elsewhere in Europe). We noticed that many transactions completed this year were build-ups made by existing portfolio companies, but there was also an increase in sponsorless transactions and flex equity as well as in the use of continuation funds. Banks have gained market share from debt funds, particu- larly because the margins charged by debt funds combined with a high benchmark index make the interest rates charged by unirate financing quite expensive (even if there is a slight decrease in margins for some debt funds). In addition, we have noticed that transactions are taking longer to finalise, as sellers want to maintain high sales prices in a difficult macroeconomic environment. Many of these trends and innovations are very specific to France because of certain legal con- straints, in particular the recourse to bond issues in lieu of loans in order not to fall foul of the restrictions on entities other than licensed lend- ing institutions lending on a habitual basis. Increased Presence of Banks In recent years, the acquisition finance market in France was very much oriented in favour of unirate financing provided by domestic and international debt funds rather than traditional bank lending. These funds have substantial commitments available, have speedy approval processes and are generally able to act as sole lender and therefore underwrite the full financ- ing requirement. They also tend to remain the sole counterparty where amendments or waivers are required. Also, they generally have a greater understanding of the business. Often, the unirate lender will appoint a board observer to the board
of the issuer who will attend all board meetings with all relevant information (even though they may not cast a vote). Thus they will have a much more intimate knowledge of the workings of the business. Banks, on the other hand, had liquidity con- straints which often made it necessary to struc- ture the financing on a club deal basis which made the process more cumbersome and time- consuming. Recent trends, such as the increase in inter-bank lending rates, have seen the French banks returning to the acquisition finance space, although this is still mostly on a club deal basis. However, a number of transactions have been completed with fully underwritten loans fol- lowed by a syndication. Banks are able to lend senior debt at rates which are lower than those acceptable to many debt funds. However, there are often constraints on the amount of leverage that banks can provide. This has resulted in a resurgence of mezzanine finance to complete the financing structure and has also put a degree of competitive pressure on direct lending funds. The last few months have seen a slow resur- gence of direct lending with the gradual easing of interest rates and the continuation of build- up strategies for which unirate financing is often better suited than bank finance. Return of Mezzanine As a corollary of the return of the banks and of the underlying reasons for their increased pres- ence, mezzanine financing has continued to play a role in financing structures. Although unirate lending is making a comeback, there are still deals that are done with a senior debt plus mez- zanine financing structure. With the return of bank lending, the gap between the leverage which is acceptable for senior debt
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