Luxembourg: Modernisation of the securitisation law
On 9 February 2022, the Luxembourg Chamber of Deputies (Chambre des Députés), adopted the law modernising the Luxembourg law of 2 March 2004 on securitisation, as amended (the New Securitisation Law). The New Securitisation Law enhances legal certainty and flexibility of the Luxembourg securitisation regime, while ensuring and increasing effective protection for investors.
The New Securitisation Law has modernised the following main aspects.
New sources of funding
The financing of a securitisation transaction is no longer limited to the issuance of securities but is open to the issuance of any type of financial instrument.
Furthermore, in addition to the issuance of any financial instruments, securitisation undertakings can have recourse, in whole or in part, to the conclusion of any type of loans, whose yield or repayable principal depends on the risks acquired (eg profit participating loans, asset-backed loans).
New legal forms
The legal forms that can be used for securitisation companies are now broadened by:
- The unlimited company (société en nom collectif)
- The common limited partnership (société en commandite simple)
- The special limited partnership (société en commandite spéciale)
- The simplified limited company (société par actions simplifiée)
New authorisation and supervision requirements
A securitisation vehicle must be subject to the authorisation and supervision of the CSSF, when it issues to the public on a continuous basis.
Only securitisation vehicles issuing more than three times per year (on an all compartments basis) non-private placements with a denomination below €100,000 per each unit issued to non-professional investors need to be authorised and supervised by the CSSF.
New rules governing the accounting treatment of equity-financed compartments
The accounting treatment and distribution of profits and losses of equity financed compartments shall now be done on a compartment basis unless the articles of the securitisation entity provide otherwise.
Where compartments are equity-financed:
- The balance sheet and the profit and loss account prepared for each compartment shall be approved only by the shareholders of that compartment, unless the articles of the securitisation entity provide otherwise
- Limitations to the distribution of profits and other distributable reserves may be determined by reference to each compartment, without regard to the global situation of the securitisation entity, unless the articles of the securitisation entity provide otherwise
- The legally required reserve according to the Luxembourg law of 10 August 1915 on commercial companies, as amended, shall be determined on a compartment basis without regard to the global situation of the securitisation entity, if this is provided for by the articles of the securitisation entity
Holding of securitised assets
A securitisation entity can now:
- Directly own the assets generating the cash flows that are securitised
- Acquire such assets or risks to be securitised indirectly, either through a subsidiary or via the acquisition of an entity holding these assets or risks
A securitisation vehicle can now grant security interests over its assets to parties that are involved in a securitisation transaction but are not direct creditors of the securitisation vehicle.
Active management of securitised assets is now allowed for Luxembourg securitisation vehicles but only where the following conditions are met:
- The pool of securitised risks is made up of debt securities, claims or debt financial instruments
- The securitisation entity is not financed by issues to the public
The following default waterfall of payments/order of priority in respect of debt and equity instruments issued by a securitisation vehicle is now applicable to securitisation entities unless otherwise agreed:
- The units of a securitisation fund are subordinated to the other financial instruments issued by, and loans contracted by, such securitisation fund
- The shares (actions) or corporate units (parts sociales) or partnership interests (parts d’intérêt) of a securitisation company are subordinated to other financial instruments issued by, and loans contracted by, such securitisation company
- The shares (actions), corporate units (parts sociales) or partnership interests (parts d’intérêt) of a securitisation company are subordinated to the profit shares (parts bénéficiaires) issued by such securitisation company
- The profit shares (parts bénéficiaires) issued by a securitisation company are subordinated to the debt financial instruments issued and to the loans contracted by such securitisation company
- Non-fixed yield debt financial instruments issued by a securitisation vehicle are subordinated to fixed yield debt financial instruments issued by that securitisation entity
New registration requirements
It is now mandatory for securitisation funds (and their liquidation) to be registered with the Luxembourg business register. Existing securitisation funds must register within six months after entering into force of the New Securitisation Law.
For more information, see our detailed update here.