Luxembourg modernises securitisation regime to attract more issuance
On 9 February 2022, the Luxembourg parliament legislated to modernise the law of 2 March 2004 for securitisations in a move designed to boost the sector.
The modernised securitisation law enhances the legal certainty and flexibility of the Luxembourg securitisation regime, while ensuring and increasing effective protection for investors.
Additional funding sources
The modernised securitisation law broadens the means of funding to (i) any financial instrument and (ii) any form of loan. It thus increases the flexibility on the financing side of a Luxembourg securitisation transaction.
Previously, in order to finance itself, a securitisation entity needed to issue ‘securities’, the value or return of which depended on the securitised assets. Since there was no definition of the term ‘security’ in the old law, it was not clear whether certain types of instruments, especially those governed by foreign laws, qualified as such.
The modernised securitisation law replaces the notion of ‘securities’ with the wider concept of ‘financial instruments’, as defined in the Luxembourg collateral law of August 5, 2005, the value or return of which depend on the securitised assets. This modification enables securitisation vehicles to issue a broader category of instruments.
Furthermore, under the old regime, the use of loan financings was allowed only for specific purposes and on an ancillary basis. The new law removes such limitations and extends the means of funding for a securitisation vehicle to any form of loan, either on a partial or exclusive basis, the value or return of which depend on the underlying assets.
The financing via loans is a new and highly attractive structuring option of a securitisation transaction in Luxembourg. In the future, certain investors, whose investments are restricted for internal reasons to specific loan products, will be able to participate in Luxembourg securitisation structures.
New corporate forms
The modernised securitisation law offers greater structuring flexibility by introducing the possibility for securitisation entities to be set up in tax-transparent corporate forms. These could be common limited partnership, special limited partnership, simplified limited company and unlimited company. A Luxembourg partnership subject to the new law will need to prepare and publish annual accounts on the Luxembourg Trade and Companies Register.
Issuance to the public
The modernised securitisation law provides enhanced legal certainty as regards securitisation vehicles subject to the authorisation and supervision of the Luxembourg financial regulatory authority. A Luxembourg securitisation entity needs to be authorised and supervised under two specific criteria: “offer to the public” and “on a continuous basis”.
Under the new law, for an issuance to be considered public and on a continuous basis, it must occur more than three times per financial year. Furthermore, it should not be addressed to professional investors, it should not be distributed by private placements, and it should have a denomination of less than €100,000 per unit.
Under the old regime, a securitisation vehicle was not explicitly authorised to actively manage the assets in its securitised portfolio. In the future, however, the active management of a debt portfolio made up of debt securities, claims or debt financial instruments will be possible unless the relevant securitisation is offered to the public.
This major innovation will enable Luxembourg to attract collateralised loan obligations and collateralised debt obligations structures and to propose its jurisdiction as an efficient legal framework to the European market of collateralised loan obligations and collateralised debt obligations.
Holding securitised assets
In addition to easing the limitations of active management, the modernised securitisation law specifically clarifies that a securitisation entity can assume the risks to securitise by acquiring the underlying assets. It can also choose to take on risks directly or indirectly and, in this latter case, either through a wholly- or partly-owned subsidiary or via the acquisition of an entity holding these assets or risks.
The modernised securitisation law widens the scope of collateral arrangements granted by a securitisation vehicle.
Previously, security interests could be granted only for the benefit of direct investors or direct creditors of the securitisation vehicle. The new law allows securitisation entities to grant security interests to secure obligations relating to the security transaction they are involved in. These could be in favour of any party involved in the securitisation transaction.
Better investor protection
From now on, the following accounting segregation will enhance protection of an equity-financed compartment’s investors from other compartments, if provided for in the constitutional documents:
- Only the shareholders of a compartment shall approve the financial accounts relating to such compartment
- Limitations to the distribution of profits and reserves may be determined on a compartment-by-compartment basis
The modernised securitisation law introduces ranking of various financial instruments issued by a securitisation vehicle. It sets out subordination rules that apply unless otherwise agreed. So any form of debt that ranks senior to shares, unit or beneficiary units and fixed-income debt ranks senior to profit-participating debt, unless otherwise agreed.
The modernised securitisation law requires existing (with a grace period of six months) and future securitisation funds (and their liquidation) to enrol on the Luxembourg Trade and Companies Register.
This article was originally published by Global Risk Regulator.