FRANCE Trends and Developments Contributed by: Magali Béraud, Anthony Minziere and Jonathan Nabarro, Nabarro Béraud Avocats
and the funding requirements of deals is filled by mezzanine. This is not universally well perceived by debt funds notwithstanding the higher returns on the funds made available because the volume they are able to deploy in a mezzanine financ- ing is considerably less than when deals were entirely funded by unirate instruments. The financing structure may also be completed by a PIK instrument. Changes to PIK Financing For many years, very few deals in France were structured using instruments with fully capi- talised (or payment-in-kind – PIK) debt (apart from quasi-equity invested by equity investors alongside their pure equity investments). Trans- actions continue to be structured using this type of instrument. At the outset, there was no spe- cific practice relating to this type of instrument and this led to a good deal of negotiation and a variety of different deal structures. It is now almost invariable for these instruments to be issued by the holding company of the issu- er or borrower of the senior debt, thereby creat- ing what is termed structural subordination. This obviates the need for an intercreditor agreement between the senior lenders and the PIK lenders, the corporate structure providing the required subordination of the PIK instrument. If the pro- ceeds of the PIK instrument are downstreamed by way of a share capital increase rather than by an inter-company loan, the PIK instrument is effectively isolated in the holding company and it does not interact with the senior debt. This enables the PIK instrument to be treated as quasi-equity which is therefore excluded from the calculation of the financial ratios at the level of the senior debt issuer.
Nevertheless, it could be in the interests of both the senior lenders and the PIK lenders to have some form of agreement regulating the co- existence of the two types of instruments, which results from the intense negotiations in the early days of the implementation of this kind of debt structure. From the perspective of the senior lenders, it is not desirable that the PIK instrument has more restrictive undertakings or events of default than the senior debt, that it include any financial cov- enants, or be able to be amended without the consent of the senior lenders. It is possible to rely on the structural subordination of the PIK instrument, the change of control provisions of the senior instrument providing a strong means of dissuading the holders of the PIK instrument from enforcing their security over the issuer of the senior debt. This has generally been the position adopted by the French banks and their advisers. Conversely, the holders of the PIK instrument would not want the senior lenders to be able to amend the senior instrument in a manner which is detrimental to their interests. If there is no agree- ment in place, it would be possible for the senior lenders to further restrict cash outflows to the issuer of the PIK instrument. Even though there is no cash interest payable under the PIK instru- ment, it may be necessary for some upstreaming of funds to be possible. Also, the holders of the PIK instrument would not want the senior lend- ers to empty the senior issuer of its substance by enforcing asset security and leaving the PIK issuer holding an empty shell, thereby depriving the PIK instrument of its value. There is therefore still a demand on the part of PIK lenders to have some sort of agreement with the senior lenders although the latter prefer merely to rely on the structural subordination.
209 CHAMBERS.COM
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