When launching a new issuance of securities, such as bonds, notes, sukuk or security tokens, the promoters regularly choose the Luxembourg securitisation vehicle (SV).
The promoters of the SV can either:
1.Establish their own securitisation company or securitisation fund; or
2. Choose to rent a compartment of an existing securitisation platform.
Having your own securitisation structure has certainly advantages, as the promoter can have more control on the design of the overall structure and choose the relevant service providers.
Choosing an existing platform as a service provider, offers the possibility to use a structure that is already fully operational and has all service providers in place. Listing of the securities might also be facilitated, as the platform already has listings of other securities on its platform.
Why use a securitisation vehicle?
A securitisation vehicle (SV) in Luxembourg can provide certain benefits:
(i.)Liquidity: assets that are not sellable but generate a regular income stream can be structured in an SV and provide the originator with liquidity.
(ii.)Access to capital markets: A securitisation may provide an originator with an efficient way to access capital markets. If for example a corporate has a BBB-rating but is able to securitise assets that may obtain a AAA-rating, then he may be able to access funds at a lower cost, despite having the cost of setting up the SV.
(iii.)Diversify funding sources: By receiving funding from investors, a corporate is able diversify funding, in particular in times in which funding it is difficult to obtain bank financing.
On the investor-side, investing into an SV may have the following benefits:
(i.)Higher return on quality assets: Investors may be able to invest into assets that are of higher quality than the corporate and generate better, more stable return, only depending on the performance of these assets and not depending on the overall performance of the corporate.
(ii.)Combination of yields and risks: Securities issued by an SV usually offer different forms of securities, paying different yields, depending on the risk exposure or maturity. The investor thus has the choice according to his risk appetite.
What is the legal framework for securitisations?
Luxembourg has since 2004 the Securitisation Law in place, which is a flexible and innovate legal framework that is specifically designed for cross-border transactions.
This framework remains highly popular and has been used in some of the largest Pan-European securitisation transactions. As of 2020 there were:
a. more than 1,319 securitisation vehicles with,
b. more than 6,000 compartments existing in Luxembourg,
c. representing a market share of 30% of all European SVs.
The definition of a securitisation under the Securitisation Law is broader than in other jurisdictions, making this legal framework beneficial for various structures and allowing it to cover all types of asset classes and securitisation transactions.
Setting up a securitisation vehicle in Luxembourg may have a variety of advantages:
a. choice between various legal forms, as well as corporate or fund type.
b. choice between non-supervised or supervised.
c. more advantageous tax treatment: SV are tax neutral vehicles.
d. possibility to list the securities issued by the SV on a stock exchange.
e. high level of investor protection, through the recognition of limited recourse and bankruptcy remoteness.
f. the creation of compartments is allowed, and the segregation of assets and ring-fencing is explicitly recognized by the Securitisation Law.
g. recognition of the enforceability of limited recourse, subordination, no seizure of assets and no petition provisions.
Why rent with a securitisation platform in Luxembourg?
Luxembourg offers a toolbox of solutions to establish an investment fund. Service providers in Luxembourg offer the possibility to rent a compartment or sub-fund of on a variety of funds or vehicles, managed by the service provider. These are typically regulated solutions, but non-supervised platforms are also available.
Renting a securitisation platform in Luxembourg has a variety of advantages:
1.Time-to-market: The platform is already established, making the issuance of the securities much quicker.
2. Cost: Renting on a platform is a good choice for smaller funds or for first-time fund projects, allowing the fund manager to plug into an existing infrastructure and have a clearer overview of the costs involved of managing a fund in an EU jurisdiction such as Luxembourg.
3. Choice of between different platforms: Promoters have the choice between a variety of funds and securitisation platforms in Luxembourg, allowing them to compare the advantages and the cost structure.
4. Investor protection: Investors are comfortable with Luxembourg, as it has the following advantages for investors:
5. it is a reputable jurisdiction with established legal frameworks for funds and investment vehicles,
6. professional and globally recognized service providers are established in Luxembourg,
7. Well-established practice: Renting a compartment on an existing platform is a well-established practice in Luxembourg and is a tried and tested concept.
Which other structures exist that allow the rental of a sub-fund?
In principle any fund that offers the possibility of an umbrella structure. In practice, the most commonly offered solutions are the following:
- UCITS: (Undertaking for Collective Investment in Transferable Securities) is the leading globally distributed investment fund product.
- UCITS is a highly regulated retail fund, supervised by the CSSF.
- It is subject to strict rules in investment and diversification and may only invest in listed securities, bonds, index components and assimilated assets.
- UCITS funds benefit from a European passport, meaning that once authorised by the CSSF in Luxembourg, they can be distributed to the public in all other EU Member States, on the basis of a formalized procedure.
- Due to its global reputation as a European retail fund, many countries around the world recognize the UCITS standard, making this the globally leading fund type distributed around the world.
- SIF: (Specialised Investment Fund) is a highly flexible fund.
- The SIF is reserved for well-informed and professional investors.
- The fund can either hold participations or hold assets directly.
- The SIF requires a low level of diversification of around 30% per asset.
- The fund may also qualify for the AIFMD passport, provided the conditions are met.
- RAIF: (Reserved Alternative Investment Fund) has been a highly successful fund type since its introduction in 2016. The RAIF allows for a significantly reduced time to market, with the option to transform later to a SIF or SICAR.
- The RAIF is structurally similar to the SIF or SICAR regime but is not subject to a direct supervision by the CSSF.
- The RAIF has to appoint an AIFM (Alternative Investment Manager) in Luxembourg, which itself is regulated by the CSSF, but can therefore benefit from the AIFMD passport.
How much does it cost to establish?
The establishment and running cost greatly vary between the solution chosen and the service providers. We can guide you to decide on the right structure and find the right securitisation platform for your project.
Reach out to us, to learn more about using securitisation platforms in Luxembourg.
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