The Legal System and the Development of Alternative Methods of Financing to Bank Credit; Or How French Law Has Failed to Adapt to the Evolution of the Economy and Finance

Abstract:     
Following on from the strengthening of the “Basel III” prudential regulations, a large number of commentators have predicted that this is likely to result in a reduction of the contribution made by banks to financing the economy. This evolving role for banks invites us to re-examine French law, to the extent that the legal system has an impact on the development of alternative methods to traditional bank financing: recourse to financial markets and the private equity market. However, in France, investors currently perceive a climate of relative legal uncertainty. The purpose of this article is to highlight to the public authorities the undesirable impact of the French legal system as it currently stands. We consider in detail several methods of financing: (1) high yield bonds, covered bonds and mezzanine bonds (all of which are held by institutional investors); (2) loan to own transactions (the purchase of debt instruments on the secondary market by distressed funds with a view to taking control of distressed borrowers); (3) loans made available by hedge funds to a company which is filing for bankruptcy; and finally (4) the purchase of equity by venture capital funds. This article will conclude in favour of a revision of certain French law and / or of European law and also in favour of a fundamental reform of the judiciary, in order to facilitate financing on the financial markets and capital investment in risky companies and projects.

Number of Pages in PDF File: 59

Keywords: bankruptcy law, corporate law, French law, U.S. law, banking law, banking monopoly over credit operations, covered bonds, distressed investors, venture capital, employment law, hedge funds, high yield bonds, debtor-in-possession loan, debt for equity swap, loan to own

JEL Classification: K22, K33, K39

Accepted Paper Series