What are actively managed certificates?
Actively managed certificates (AMC) are debt instruments issued by an investment vehicle as a structured product giving investors exposure to a portfolio of underlying assets, such as liquid securities, bonds, funds, shares, derivatives or currencies.
What are the benefits of issuing an AMC?
The benefits of issuing an AMC is typically that the investment vehicle, typically a securitisation vehicle (SV) in Luxembourg, is easily set up within a shorter time frame than other investment vehicles.
The investment manager provides the SV with the initial portfolio composition, combining a portfolio of securities from various asset classes. The administration of the SV also offers a cost advantage for both the investors and the investment managers. AMCs can furthermore be issued with an ISIN number and can be listed on a stock exchange, thus making them transferable securities. This makes it possible for custodian banks to book the AMCs and for other fund vehicles to investment into the AMC.
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:
(i.)more than 1,350 securitisation vehicles with,
(ii.)more than 6,000 compartments existing in Luxembourg,
(iii.)representing a market share of 30% of all European SVs.
Setting up an SV in Luxembourg may have a variety of advantages:
1.choice between various legal forms, as well as corporate or fund type
2. choice between non-supervised or supervised
3. more advantageous tax treatment: SV are tax neutral vehicles
4. possibility to list the securities issued by the SV on a stock exchange
5. high level of investor protection, through the recognition of limited recourse and bankruptcy remoteness
6. the creation of compartments is allowed, and the segregation of assets and ring-fencing is explicitly recognized by the Securitisation Law
7.recognition of the enforceability of limited recourse, subordination, no seizure of assets and no petition provisions
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 continuous 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
- an 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?
An SV can be established in various legal forms such as:
(i.)Public limited company (Société anonyme or “SA”)
(ii.)Private limited liability company (Société à responsabilité limitée or “SARL”)
(iii.)Partnership limited by shares (Société en commandite par actions or “SCA”)
(iv.)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.
What are the main steps for the incorporation of the SV?
- Opening of a bank account to deposit the share capital
- Transfer of the share capital (The minimum share capital for the S.A. and the S.C.A. is: €30,000 and for an S.à r.l. is €12,000)
- Selecting a name for the SV
- Deciding on the corporate form
- Preparation of articles of incorporation
- Proxy by the shareholder to incorporate the company (no physical presence required for the incorporation)
- Blocking notice to be issued by the bank
- Appointment with the notary in Luxembourg
Following the appointment with the notary, the company is duly incorporated and has legal personality. Following the incorporation, the company is registered with the Luxembourg Trade and Companies’ Register.
What service providers does an SV have to appoint?
The SV needs to have a registered address in Luxembourg and should operate for substance purposes in such a way that it cannot be considered as tax resident in jurisdictions where investors or investments are located. The registered address is regularly provided by a domiciliation agent.
A company’s annual accounts must also in general be subject to an audit performed by an independent auditor.
There is no legal requirement in Luxembourg to have a resident director/manager, although this might be required for substance purposes.
How long does it take to set up 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.
Once a bank account is available to deposit the share capital, the SV can be incorporated. The incorporation can thus be finalized within 2-3 days. Upon incorporation before a notary the SV has legal personality and can enter immediately into legally binding agreements.
How much does it cost to establish an SV in Luxembourg?
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.
Contact us, for more information on the establishment and maintenance cost of an SV.