Bill No 7825 (the Bill), which, amongst other things, amends the Act of 2 March 2004 on securitisation was passed by the Chambre des Députés on 9 February 2022. The Council of State has not yet approved the exemption from a second vote.
The Bill clarifies the existing statutory framework on securitisations and adapts it in a flexible way to the requirements of the securitisation market.
In particular, the Bill:
- broadens the means by which a securitisation vehicle can be financed;
- allows securitisation vehicles to grant collateral in a more flexible manner and actively manage their assets within the limits set by the Securitisation Act; and
- provides clarification of the authorisation requirements for securitisation vehicles.
In addition, the Bill:
- increases the number of corporate forms a securitisation vehicle may take and
- provides clarification for multi-compartment securitisation vehicles issuing equity instruments.
Financing of a securitisation vehicle – recourse to loans now possible
The Bill specifies that a securitisation vehicle may 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; these 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 underlying 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, and ensure that any securitisation 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 for securitisation vehicles not issuing securities to the public. In this way, Luxembourg will become an even more attractive venue for CLO transactions.
Grant of collateral
Under the current framework, a securitisation vehicle may grant collateral over its assets only in favour of its investors or creditors in the context of the securitisation transaction, i.e. it cannot grant collateral to a third party. The amendments give securitisation vehicles greater flexibility to grant collateral over their assets, thus allowing for more flexible structuring of securitisation transactions while continuing to ensure a high level of investor protection.
The Bill clarifies certain aspects of the subordination of different types of instruments issued by securitisation vehicles subject to the Securitisation Act, unless contractually agreed otherwise. For instance,
- units issued by a securitisation fund/shares or units issued by a securitisation company are subordinated to debt instruments issued/loans taken out by these entities; and
- variable-yield debt instruments issued by a securitisation vehicle are subordinated to fixed-yield debt instruments issued by the vehicle.
Authorisation requirements for certain securitisation vehicles
Securitisation vehicles that continuously offer financial instruments to the public must be authorised by the Commission de Surveillance du Secteur Financier to carry out their activities. The Bill clarifies these concepts.
Securitisation vehicles that continuously offer financial instruments to the public are defined as undertakings that carry out more than three offerings of financial instruments to the public over the course of a financial year (by all compartments of the vehicle over this period).
An offer of financial instruments to the public is defined as an offering:
- that is not intended for professional clients, within the meaning of Article 1(5) of the Financial Sector Act of 5 April 1993, as amended,
- of instruments whose denomination is less than 100,000 euros and
- that is not a private placement.
These criteria are cumulative, meaning, for instance, that a securitisation vehicle offering instruments with a minimum denomination of 100,000 euros will not fall within the scope of the above definition.
This update is in response to market needs and practices that emerged following the entry into force of the Securitisation Act.The Bill will allow securitisation transactions to be carried out under Luxembourg law with greater flexibility and legal certainty, while ensuring effective investor protection. It is expected to enter into force shortly; we will be sure to keep you informed.
Josée Weydert | Partner, Banking & Finance | Email
Sara Gerling | Partner, Banking & Finance | Email