Luxembourg securitisation regime set for major boost
Office Senior Partner
David Van Gaever
09 February 2022
On 9 February 2022, the Luxembourg parliament adopted law no. 7825 (Law) amending, among others, the Luxembourg act dated 22 March 2004 on securitisation, as amended (Securitisation Act 2004) to Parliament.
The long-awaited Law includes a number of features that foster the development of Luxembourg as a leading European securitisation hub. For instance, Luxembourg securitisation undertakings will be able to raise finance entirely by way of loans. Furthermore, it will be possible for securitisation undertakings to actively manage their debt portfolios and to grant security interests in favour of indirect investors/creditors. The Law also takes the opportunity to confirm well-established market practices concerning the Securitisation Act 2004.
More details on some of the amendments are set out below.
“Securities” replaced by “financial instruments”
Until now, the Securitisation Act 2004 provided that a securitisation undertaking must finance the assumption or acquisition of risks relating to claims or, more generally, assets, by issuing “securities”. However, the term “securities” was undefined. This omission has given rise to uncertainties as to whether specific instruments qualify as “securities”. Furthermore, there were instruments that are popular in certain markets, which do not qualify as “securities” under their governing law and, therefore, could not be used by Luxembourg securitisation undertakings as a way of financing. The Law replaces the term “securities” with the term “financial instruments”, which has a wider meaning than “securities”. This change removes the uncertainties referred to above and enables Luxembourg securitisation undertakings to use new means of financing (such as, German law governed Schuldscheine).
100% loan financing possible
Under the previous regime, a Luxembourg securitisation undertaking could only take out loans in limited circumstances: (i) during the warehousing phase, (ii) as a short term liquidity facility and (iii) as a permanent means of financing if loan financing is ancillary in terms of volume when compared to the financing obtained by issuing securities. These restrictions limited access to financing for investors who did not want to, or could not, subscribe to securities. To address this, the Law now enables Luxembourg securitisation undertakings to be financed exclusively by way of loans. By doing so, it also allows Luxembourg securitisation undertakings to carry out any type of securitisation that falls within the scope of Regulation (EU) 2017/2402 (the Securitisation Regulation). This flexibility makes Luxembourg securitisation structures even more attractive to investors.
Active management of CDOs and CLOs in private placements
The Law now expressly recognises the possibility for Luxembourg securitisation undertakings or their investment managers to actively manage repackaged debt (be it in the form of loans (CLOs) or debt securities (CDOs)) provided that a Luxembourg securitisation undertaking issues securities by way of a private placement. This is a key change given that the Commission de Surveillance du Secteur Financier (CSSF) has so far taken the view that investments by Luxembourg securitisation undertakings should be passively managed. The implemented change will give CLO and CDO managers more flexibility and a new jurisdiction of choice to host their platforms.
Legal subordination for different types of securities
The Law provides a complete set of rules for subordination that apply among various types of financial instruments issued by securitisation undertakings. According to these rules:
- Units of a securitisation fund are subordinated to other financial instruments issued by the securitisation fund and borrowings contracted by it.
- Shares (actions), corporate units (parts sociales) or partnership interests (parts d’intérêt) in a securitisation company are subordinated to other financial instruments issued by such securitisation company and borrowings contracted by it.
- Shares (actions), corporate units (parts sociales) or partnership interests (parts d’intérêt) in a securitisation company are subordinated to beneficiary shares (parts bénéficiaires) issued by it.
- Beneficiary shares issued by a securitisation company are subordinated to debt instruments issued and borrowings contracted by it.
- Non-fixed income debt instruments issued by a securitisation undertaking are subordinated to fixed income debt instruments issued by it.
Corporate forms of SENC, SCS, SCSp and SAS are available
The Law adds four new corporate forms that a securitisation company can take. These are: (i) a general partnership (société en nom collectif), (ii) a common limited partnership (société en commandite simple), (iii) a special limited partnership (société en commandite spéciale) and (iv) a simplified limited company (société par actions simplifiée). This is a very welcome change as a number of players look for tax transparent securitisation structures and the above corporate forms provide suitable alternatives to the use of a securitisation fund.
Compartment operation adjusted for equity financings
The Law provides for a possibility to opt for certain operation rules for securitisation structures with equity financed compartments. For instance, it is possible to include in the constitutive document of a securitisation undertaking that specific financial statements are to be approved, or that profit distributions may be decided, at a compartment level.
Security interests and guarantees available for all parties
Under the previous regime, a Luxembourg securitisation undertaking could only grant security interests in favour of its own investors or its own direct creditors. This provision aimed to protect investors and to avoid the encumbrance of securitised assets for the benefit of third parties. In practice, however, it has led to difficulties for leveraged securitisation transactions as leverage did not always occur at the level of the securitisation undertaking. Until now, multi-layer security interest structures were put in place to deal with the restriction. The Law now enables a securitisation undertaking to grant security interests over the securitised assets to parties that are involved in a securitisation transaction but are not direct creditors of the securitisation undertaking. As a result, Luxembourg securitisation structures will benefit from a greater flexibility with respect to the set-up of security packages.
Activities triggering regulatory supervision
Under the Securitisation Act 2004, securitisation undertakings which issue securities “to the public” on a “continuous basis” must be authorised to carry out their activities. The Securitisation Act 2004 did not define those terms and the CSSF provided useful guidance to fill the gap. The Law has now incorporated the CSSF guidance into the Securitisation Act 2004. Accordingly, a securitisation undertaking will fall under the supervision of the CSSF if it issues more than three times per year financial instruments (i) to non-professional clients (within the meaning of the Luxembourg Banking Act 1993), (ii) the denomination of which is less than EUR100,000 (the threshold under the current guidance of the CSSF is set at EUR125,000) and (iii) which are not offered by way of a private placement.
Registration of securitisation funds
The Law expressly provides that securitisation funds (whether existing or yet to be created) will need to be registered with the Luxembourg trade and companies register and to obtain an individual registration number. So far, a securitisation fund had no individual registration number and its management regulations were displayed at the Luxembourg trade and companies register only as part of its management company’s file. This led to practical issues, such as, the inability of a securitisation fund to list its securities on some stock exchanges.