On 21 May 2021, a bill of law amending the law of 22 March 2004 on securitisation (the “Bill of Law”) was presented to the Chamber of Deputies.
Over the years Luxembourg-based securitisation vehicles have enjoyed major success, proving to be reliable and flexible instruments enabling a wide range of operations and transactions. The amendments provided for in the Bill of Law aim to further increase this flexibility and take into account global, European and local market dynamics, while retaining and strengthening other features valued by market players.
Hereinafter you will find the main features of the Bill of Law, which will benefit both existing and new securitisation vehicles. The focus will be placed on (i) new opportunities in the active management of securitisation vehicles, (ii) new extended financing arrangements for securitisation vehicles and (iii) making it easier for securitisation vehicles to securitise tangible assets.
I. Active management: an open door to CLOs
The Bill of Law provides for the option for certain securitisation vehicles to avail of the opportunities presented by active management.
More precisely, securitisation vehicles with portfolios composed of a basket of risks relating to debt securities, debt financial instruments or receivables could be actively managed to the extent that the securities issued to finance such risks are not offered to the public.
The Bill of Law clarifies that securities are deemed to be offered to the public to the extent that (i) they are not intended for professional clients within the meaning of Article 1 - 5) of the law of 5 April 1993 on the financial sector, (ii) their denomination is less than EUR 100,000 and (iii) they are not distributed in the form of a private placement. These criteria are cumulative.
The active management could be performed internally or by a third party. It would then be possible for a securitisation vehicle to appoint an asset manager or advisor to actively manage the portfolio. Loan selection activity and reinvestment or restructuring decisions could be delegated to the manager/advisor by the securitisation vehicle in a way similar to that already known in the market for collateralised loan obligations (CLOs).
II. Borrowing arrangements: removal of limits
From the entry into force of the amendments, securitisation vehicles would be able to incur indebtedness by way of borrowing in order to finance, wholly or in part, the acquisition of underlying assets, with the value or return of such borrowing dependent on the risks securitised.
There is no precise definition of borrowing, as the intention of the legislator is to permit any form of indebtedness that gives rise to a repayment obligation on the securitisation vehicle. This approach enables alignment with Regulation (EU) 2017/2402 of the European Parliament and of the Council of 12 December 2017 laying down a general framework for securitisation and creating a specific framework for simple, transparent and standardised securitisation.
The Bill of Law supplements this new possibility by enlarging the scope of security interests that can be granted by a securitisation vehicle. More precisely, it would become possible for securitisation vehicles to grant any kind of security interests in order to secure relevant obligations relating to securitisation transactions. Accordingly, security interests could be granted to third parties other than investors in the securitisation vehicle.
III. Easier securitisation of tangible assets
Both tangible and intangible assets can be securitised. However, in practice, securitisation of tangible assets such as commodities, planes or boats has been challenging.
There would now be certainty about securitisation vehicles’ ability to securitise such assets directly and indirectly, in particular through a company wholly or partially owned by the securitisation vehicle. This direct or indirect acquisition of the assets should not, however, be understood as an option to develop a commercial or entrepreneurial activity, which remains prohibited for securitisation vehicles. Concretely, it means that transfer or acquisition of ownership of the underlying assets to an entity owned by the securitisation vehicle could be used as a tool for refinancing the asset concerned.
Aircrafts, ships, satellites and containers will be more welcome in Luxembourg than ever.
IV. New forms of companies
Securitisation will become accessible to new forms of companies such as the very popular common limited partnership (SCS) and special limited partnership (SCSp), but also the unlimited company (SNC) and the simplified limited company (SAS), adding a number of new opportunities for structuring transactions – notably through efficient, tax-transparent vehicles.
V. Legal Subordination
The law will provide for a welcome set of subordination rules applicable to the various financial instruments available for securitisation vehicles.
Junior financial instruments will be subordinated to senior ones, with the option for the securitisation vehicle to contractually opt for a different order. More precisely, the law states that (i) units issued by a securitisation fund will be subordinated to the other financial instruments by, or borrowings entered into by, such securitisation fund. In respect of securitisation companies, the following ranking applies: (i) shares or partnership interests (depending on the legal form of the company) are subordinated to the other financial instruments issued by, or borrowings entered into by, the securitisation company; (ii) shares or partnership interests (depending on the legal form of the company) are subordinated to the beneficiary units issued by the same securitisation company; (iii) the beneficiary units are subordinated to debt financial instruments issued by, or borrowings entered into by, the same securitisation company and (iv) non-fixed-rate debt financial instruments are subordinated to fixed-rate debt financial instruments issued by the same securitisation undertaking.
VI. Tax implications
The Bill of Law is a welcome measure fostering the continued attractiveness of Luxembourg securitisation vehicles. While no tax provisions have been inserted, the current tax regime remains of great interest in this context. It is important to note that Luxembourg securitisation vehicles taking the form of corporate vehicles are fully taxable. However, they can be rendered tax neutral thanks to the ability to deduct from their taxable base commitments made to shareholders and bondholders, and the absence of withholding tax. As fully taxable resident entities, they enjoy the benefits of double tax treaties and European tax directives (such as the parent subsidiary directive). One should nevertheless consider the impact of the new interest limitation and anti-hybrid rules resulting from the implementation of the EU anti-tax avoidance directives (ATAD). Services provided to a securitisation company are, as a rule, exempt from VAT.
VII. Next steps and how we can help
Arendt will be delighted to assist you in better understanding the Bill of Law and the opportunities it creates for your existing and new vehicles.
Our multi-disciplinary team of legal professionals, tax experts, regulatory/compliance experts and corporate services specialists will provide you with a fully integrated solution customised to your set-up and specific requirements.
MATTHIEU TAILLANDIER - Partner
LYNN ALZIN - Counsel
THOMAS ALLAIN - Senior Associate
LAURA ARCHANGE - Senior Associate