Boost for Securitisation in Luxembourg
The Act of 22 March 2004 on securitisation (the "Securitisation Act") was amended in March 2022 to clarify the existing statutory framework, and make flexible adaptations that meet the requirements of the securitisation market.
Securitisation refers to a transaction in which an issuer – the securitisation vehicle ("SV" in the chart below) – issues financial instruments to acquire a pool of assets, with the return on the instruments depending on the performance of the securitised asset pool.
In practice, the pooled underlying assets are often loans but the Securitisation Act allows the securitisation of a very broad range of assets particularly if they generate a regular flow of income for the issuer, which allows the latter to meet their payment obligations of the issued financial instruments. Securitisation has a number of advantages. In the example of a securitised pool of loans it allows the original lenders to segregate risks in the securitisation vehicle, and this increases their lending capacity while satisfying regulatory capital requirements.
Over the past sixteen years, the Securitisation Act has helped confirm Luxembourg as a jurisdiction of choice for market participants that wish to set up a securitisation platform in Europe. Nonetheless, there was room for improvement in the statutory framework, which is why the Luxembourg legislature adopted the most recent amendments. The revised Securitisation Act draws on the experience of market participants and will certainly contribute to the continued success of Luxembourg as a securitisation venue.
Below we shed light on some of the most important changes to the Securitisation Act, including the following:
- a broader choice of corporate forms for securitisation vehicles
- more ways to finance securitisation vehicles
- the possibility for securitisation vehicles to actively manage their assets within the limits set by the Securitisation Act
- the possibility for securitisation vehicles to grant collateral
Greater choice of corporate forms
The following table contains an overview of the permissible corporate forms for securitisation vehicles prior to amendment of the Securitisation Act. These included both tax transparent and opaque entities:
Four additional corporate forms may now be used to structure securitisation transactions in Luxembourg:
The limited partnership has been particularly widely used for investment structures since its introduction into Luxembourg law. This corporate form is highly flexible and can be tailored to meet the needs of investors.
All of these corporate forms can establish segregated compartments when used for securitisation structures.
Financing of securitisation vehicles – recourse to loans now possible
Securitisation vehicles may now engage in all types of borrowing, in addition to issuing financial instruments. Indeed, certain investors are subject to restrictions on the types of financial products in which they can invest. The latest amendments are intended to allow securitisation vehicles to cater to such investors and finance their activities by taking out loans whose yield or principal repayment depends on the performance of the securitised assets.
The proposed amendments are consistent with Regulation (EU) 2017/2402 of 12 December 2017 creating a general framework for securitisation (the "Securitisation Regulation"), which allows for securitisation without the issuance of securities by means of loan positions.
In this way, it is ensured that any securitisation transaction falling under the Securitisation Regulation can effectively be carried out through a Luxembourg securitisation vehicle.
Active management of assets (CLO)
Active management will be possible for risk portfolios comprised of debt securities, financial debt instruments and receivables, but only if the securitisation vehicle does not issue securities to the public. Active management means that the Luxembourg vehicle will not only be able to buy and hold such instruments and receivables until maturity, but also to take selection and reinvestment decisions, in order to adapt to market developments for instance.
Thanks to these changes, Luxembourg will become a more attractive venue for CLO transactions which, until now were seldom structured through Luxembourg.
Grant of collateral
Under the previous framework, a securitisation vehicle could only grant collateral in favour of investors or creditors in the context of the securitisation transaction. In other words, it could not grant collateral to a third party, for instance in the context of the extension of bank financing to a subsidiary. The latest amendments give securitisation vehicles greater flexibility to pledge their assets as collateral, thus allowing for more flexible structuring of securitisation transactions while continuing to ensure a high level of investor protection.
The above amendments respond to market needs and practices that emerged following the entry into force of the Securitisation Act. The updated Securitisation Act will allow securitisation transactions to be carried out under Luxembourg law with greater flexibility and more legal certainty, while ensuring effective investor protection.