Modernisation of the Luxembourg Securitisation Law
Luxembourg is expecting to pass shortly the draft bill number 7825 (the “Draft Bill”), which will amend the Luxembourg law on securitisation dated 22 March 2004 (the “Securitisation Law”), giving this investment vehicle further advantages for investors and promoters.
A highly successful framework
Since 2004 Luxembourg has had the Securitisation Law in place. 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 the securitisation vehicle (SV) 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. The Luxembourg legal framework has proven to be highly popular and has been used in some of the largest European transactions of its kind. It is a framework that is specifically designed for cross-border transactions. More than 2500 SVs have been created since then and as of April 2021 there were:
(i.)more than 1,370 SVs existing in Luxembourg with,
(ii.)more than 6,000 compartments,
(iii.)managing around EUR 334 billion,
(iv.)representing a market share of 30% of all European SVs.
162 SVs were established in 2020 and 62 in the first quarter of 2021, showing the continuous success of this investment vehicle.
What are the changes proposed under the Draft Bill?
1. More legal forms available – including the Limited Partnerships
Under the current Securitisation Law, the SV can be established in various legal forms such as:
a. Public limited company (Société anonyme or “SA”),
b. Private limited liability company (Société à responsabilité limitée or “SARL”),
c. Partnership limited by shares (Société en commandite par actions or “SCA”),
d. Cooperative company organized as a public limited company (Société cooperative organisée comme une SA or “Scoop SA”),
e. 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.
Under the Draft Bill, the SV can now be also created as a:
a. Common Limited Partnership (Société en commandite simple: “SCS” or “CLP”),
b. Special Limited Partnership (Société en commandite spéciale: “SCSp” or “SLP”),),
c. General Partnership (Société en nom collectif), or
d. Public Simplified Company (Société par actions simplifieé)
This will further increase the success of the SV, in particular the possibility to set it up as a Special Limited Partnership, which has gained popularity in recent years due to its flexibility and structuring possibilities.
2. New funding methods for the SV:
Currently the SV has 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.
The Draft Bill is intended to broaden the scope of existing funding methods available to SVs by changing the currently used undefined term “securities” to “financial instruments”.
As long as the value or return of the SVs tracks the performance of the underlying assets, the Draft Bill also provides for the possibility of them being funded exclusively by loans.
3. Clarification on when CSSF authorization is required:
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 authorization and supervision by the Luxembourg Financial Regulator (the “CSSF”), but the Securitisation Law did not define the concepts of “issuance to the public” and “continuous”. The market was relying on the guidance issued by the CSSF, but the Draft Bill now clarifies this guidance, according to which the 3 following criteria have to be met cumulatively:
(i.)the issuance is not addressed to professional clients,
(ii.)the financial instruments have a denomination lower than 100.000 Euros, and
(iii.)the financial instruments are not distributed in a private placement.
4. Active management of the SV is possible
An important improvement is the possibility for the SV to actively manage private debt portfolios, provided they issue the financial instruments privately. They can either manage those assets themselves or outsource the asset management to a third party. Previously the SV was only allowed to passively manage its portfolio.
5. Direct or indirect holding of assets is possible
The Draft Bill also clarifies that SVs have the right to hold, directly or indirectly, the securitised assets. The holding of real estate directly by a SV or through a holding subsidiary by the SV is now explicitly permitted.
6. Ranking between different financial instrument introduced
There are also proposed rules regarding legal subordination, which would apply to the financial instruments issued by SV. In line with market practice, these rules confirm the subordination of equity and fund units to debt instruments. Furthermore, financial instruments with fixed returns rank senior to those with variable returns. As these rules will be applied by law and not contractually, this will not be considered as tranching under the EU Securitisation Regulation, thus avoiding additional obligations. The Draft Bill however allows the SV to derogate from the above rules either contractually or under its constitutional documents.
7. More flexibility to grant collateral
The Draft Bill introduces greater flexibility with respect to the granting of collateral. It will now be possible for the SV to grant security interests or guarantees to any party involved in the securitisation transaction, including to persons who are not the direct creditors or investors of the SV.
8. Securitisation funds will need to register
In addition, the Draft Bill stipulates that securitisation funds should be registered with the Luxembourg Trade and Companies Register (Registre de Commerce et des Sociétés), which is not the case currently.
9. Financial statements and distributions per compartment
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:
a. allow to ring-fence and segregate certain assets and liabilities in one compartment
b. a SV may create a new compartment, simply by a decision of the board of directors, without the need for any external approvals
c. 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
The Draft Bill explicitly provides that the financial statements for a specific compartment can be approved by the shareholders of the specific compartment only. The distribution of revenues can then be made at compartment level.
Other advantages of establishing the SV in Luxembourg
In addition to the above mentioned changes, setting up an SV in Luxembourg has also other advantages:
(i.) Choice and flexibility: The SV allows for a great choice between various legal forms, corporate or fund type, non-supervised or supervised vehicles
(ii.) Tax Neutrality: SV are tax neutral vehicles
(iii.) Listing vehicle: possibility to list the securities issued by the SV on a stock exchange
(iv.) High level of investor protection: through the recognition of limited recourse and bankruptcy remoteness
(v.) Umbrella structure: The SV allows for the creation of multiple compartments and the segregation of assets
(vi.) Speed of establishment: Most SVs are not supervised and can thus be established quickly within a few days. The finalization of the SV documentation will depend on the input of all parties.
In conclusion the Draft Bill and the modernized Securitisation Law will bring about important changes and much needed clarification. This will ensure that the Luxembourg SV will remain an important investment vehicle in international transactions.
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