FRANCE Law and Practice Contributed by: Arnaud Fromion, Frédéric Guilloux and Pierre-Benoît Pabot du Châtelard, Clifford Chance
assets and making financing available at a lower price. 1.5 Junior and Hybrid Capital Certain private credit providers quite common - ly provide payment-in-kind (PIK) instruments where the financial structure so requires to com - plete an acquisition or further capex. These are usually structurally subordinated, have a senior and total leverage ratio with typically respec - tively approximately 10% additional headroom versus senior covenant and approximately 20% headroom to the business plan for total leverage. They are usually secured and sometimes have a board observer right. In some instances, PIK providers negotiate the benefit of specific rights under the senior debt intercreditor arrangements so as to provide equity cure in the form of fur - ther PIK instruments to be downstreamed where the sponsor fails to do so, and certain reporting rights addressed in a good behaviour letter from the sponsor. Some PIK providers sometimes also participate as minority co-investors, sometimes through specific funds. Private creditor providers also happen to provide mezzanine-type financings, sometimes having an equity kicker element. 1.6 Sponsored/Non-Sponsored Debt Private credit providers are indeed primarily focused on private equity sponsors and their portfolio companies, due to the amount of deals that can be subject to financing opportunities and rollover of assets. That being said, some PE assets that were anticipated to be sold are being retained by PE houses within their portfolios or are being incor - porated into continuation funds, reducing the
amount of deals that are available in the market. As a result, private credit players have diversified their lending activity towards sponsorless trans - actions, whether or not to the benefit of private companies and public companies. 1.7 Recurring Revenue Deals and Late- Stage Lending Private credit providers are increasingly being seen to be more involved in financing of ARR and late-stage lending, in particular in the field of biotech. 1.8 Deal Sizes, Fund Sizes and Fundraising Private credit transactions range from small to large-cap transactions, with some providers being able to provide large amounts on their own. However, the trend is for sponsors to pool two to four providers for the larger transactions, both for relationship and risk-management rea - sons, but also to ensure sufficient liquidity for future capex. The private debt funds are steadily growing in size. 1.9 Impending Regulation and Reform Lending is a regulated business in France and triggers licensing requirements. Whilst certain French regulated private credit funds (FPSs, SLPs, OTs, FPCIs) are permitted to originate corporate loans subject to certain requirements (applicable to the loans, the funds and their managers), foreign credit funds, other than EU ELTIF funds, are not permitted to extend loans in France. AIFMD2 The current European Directive on Alternative Investment Fund Managers (AIFMD) requires fund managers to comply with a variety of pru -
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