What is a securitisation?
A securitisation is a transformation of assets or risks into negotiable securities by way of transfer of such assets or risks to a special purpose vehicle. The advantage of a securitisation is that it creates liquidity for the corporate or originator by removing a debt or another risk from its balance sheet and receive funding from investors.
A securitisation vehicle (SV) is an investment vehicle that can offer an efficient and well-established option, when considering the various investment structures available in Luxembourg.
Why set up a securitisation vehicle?
A SV can provide certain benefits to originators:
1. Liquidity: assets that are not sellable, but generate a regular income stream can be structured in a SV and provide the originator with liquidity.
2. 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.
3. 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 a SV may have the following benefits:
1. 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.
2. Combination of yields and risks: Securities issued by a 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.
Why in Luxembourg?
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 has proven to be highly popular and has been used in some of the largest Pan-European securitisation transactions. According to PWC as of May 2019 there were:
- more than 1,350 securitisation vehicles with,
- more than 6,000 compartments existing in Luxembourg,
- 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:
- choice between various legal forms, as well as corporate or fund type
- choice between non-supervised or supervised
- more advantageous tax treatment: SV are tax neutral vehicles
- possibility to list the securities issued by the SV on a stock exchange
- high level of investor protection, through the recognition of limited recourse and bankruptcy remoteness
- the creation of compartments is allowed, and the segregation of assets and ring-fencing is explicitly recognized by the Securitisation Law
- recognition of the enforceability of limited recourse, subordination, no seizure of assets and no petition provisions
What assets can be securitised?
The SV can securitise any risks relating to:
1. claims (créances)
2. movable or immovable assets or
3. obligations assumed by third parties or inherent to all or part of the activities of third parties
Examples of such assets are:
- residential and commercial mortgage loans
- corporate loans
- credit card receivables
- trade receivables
- debt securities and equity securities (subject to certain conditions)
- rights and claims relating to financial contracts
- rights and claims relating to operating businesses
The above-mentioned assets produce a regular and predictable flow of funds and can thus be structured in a securitisation vehicle. In addition, the Securitisation Law does not require a specific diversification of the assets.
How are securitisations financed?
Securitisation have to be financed through the issue of securities (valeurs mobilières) the value or return of which depends on the securitised assets. Securities means any kind of debt securities and equity securities including shares (subject however to certain conditions).
These securities may be issued either secured or unsecured and the SV may also issue different types of securities in relation to a specific compartment.
Is the SV supervised or non-supervised?
Securitisation companies and funds are in principle unregulated vehicles, provided that the securitisation vehicle does not issue securities “on a continous basis to the public”. In this case the SV would become subject to CSSF autorisation and supervision.
However, these two criteria have to be met cumulative:
- the SV would have to issue securities on a continuous basis, meaning more than 3 times a year; and
- and these securities have to be issued to the public, i.e. the securities have a denomination of less than 125,000.00 EUR.
The activities of the SV are however restricted in simply administering the flow of funds of the underlying securitisation. The SV cannot engage in an active management, as this would require a different license.
What are the benefits of compartments?
One of the advantages of the SV is its ability to create compartments in a cost- and time efficient way. The benefits of compartments are:
- allow to ring-fence and segregate certain assets and liabilities in one compartment
- a SV may create a new compartment, simply by a decision of the board of directors, without the need for any external approvals
- for investors each compartment is treated as a separate entity, but without a separate legal personality, thus reducing the cost of setting up a new legal entity
Which legal form?
A SV can be established in a various legal forms such as:
- Public limited company (Société anonyme or “SA”)
- Private limited liability company (Société à responsabilité limitée or “SARL”)
- Partnership limited by shares (Société en commandite par actions or “SCA”)
- Cooperative company organized as a public limited company (Société cooperative organisée comme une SA or “Scoop SA”)
Until 2016 the most commonly used legal form was the SA, as it allowed the SV to list and offer securities to the public, which was not possible for a SARL. Since 2016, SARLs have become increasingly popular, as this restriction has been removed.
The SV may also be created in the form of a securitisation fund. This fund does not have legal personality and needs to be managed by a management company, which is a commercial company established in Luxembourg.
Does the SV have access to the EU passport?
The SV does not benefit from any passporting rights. The SV may however decide to offer the securities to the public and admit them to trading on an EU-regulated market. In that case the SV could fulfill the conditions of the Prospectus Directive and may obtain a single passport on this basis.
How long does it take to set up a securitisation vehicle in Luxembourg?
The length of establishment depends on whether the SV is a supervised or non-supervised vehicle.
In principle most SV are non-supervised and can thus be established quickly within a few days. The drafting of the SV documentation will depend on the complexity and the input of the parties.
How much does it cost to establish a securitisation vehicle?
The set-up cost depends on the service providers chosen, but in principle the establishment and maintenance of the SV is closer to the cost of a corporate vehicle. The SV can be created as an umbrella structure with multiple compartments segregating the assets of the investors without any substantial additional costs, other than on the audit and accounting side.