Securitisation vehicles (SVs) in Luxembourg are governed by the Law of 22 March 2004, as amended.
As a modernisation initiative in accordance with new market trends, a proposition to amend the Securitisation Law was submitted to the Chamber of Deputies in March 2021 and has been discussed. The proposed text provides additional flexibility for SVs while ensuring the protection of investors from the risks related to the investments in securitised pool of assets.
On 9 February 2022, the Chamber of Deputies voted the law amending, among others, the Securitisation Law.
Key features of the amended Securitisation Law
Key features of the amendments include (i) additional legal forms for SVs, (ii) a clarification of the definition of offer to the public on a continuous basis, (iii) extension of the scope of borrowing settlements, (iv) active management of assets and (v) equity financed compartments.
(i) Additional legal forms
The new Securitisation Law opens the door to new legal forms for SVs, mainly partnerships: unlimited companies (sociétés en nom collectif) (SNC), common limited partnerships (sociétés en commandite simple) (SCS), special limited partnerships (sociétés en commandite spéciale)(SCSp) and simplified public limited liability companies (sociétés par actions simplifiées) (SAS).
This gives more flexibility for the establishment of SVs, as the incorporation in front of a notary will no longer be needed in case of the incorporation of an SV as a partnership.
Furthermore, the Securitisation Law clarifies that the securitisation funds have to be registered with the Luxembourg Trade and Companies Register (RTS). Existing securitisation funds will have a six months transitional period to register with the RTS following the entry into force of the law.
(ii) Clarification of the definition of offer to the public on a continuous basis
Under the regime of the Law of 2004, any SV which continuously issues instruments (a) to the public and (b) on a continuous basis, must be authorised by the CSSF.
The amended Securitisation Law clarifies these criteria.
(a) Issuance to the “public” requires 3 cumulative conditions:
- to non-professional investors
- issue of less than EUR 100 000
- issue not distributed via private placement.
(b) “Continuous” issuance refers to more than three issuances per financial year, assessed at the level of the entire vehicle thus including the issuances made by all sub-funds, which reiterates the definition provided in the CSSF FAQ on Securitisation.
(iii) Extension of funding opportunities
The amendments to the Securitisation Law include the possibility for an SV to incur indebtedness by way of borrowing to finance, partially or entirely, the acquisition of underlying assets, without any limitation. As such, SVs will be able to get financing through financial instruments defined as per the law dated 5 August 2005 in financial collateral arrangements. Moreover, they will now be able to grant collaterals over their assets to the extent that the granting of such collateral is related to the securitisation structure.
In addition, the term “securities” is replaced by “financial instruments” in the amended Securitisation Law. It broadens the type of instruments that an SV may issue to finance its underlying assets, to all financial instruments covered by Luxembourg law dated 5 August 2005 on financial collateral arrangements, as amended.
(iv) Active management of securitised assets
Until today, a SV was required to have a passive management of its securitised assets. The new Securitisation Law allows active management of risk portfolios, under certain conditions.
Only portfolios composed of debt securities, financial debt instruments or receivables, may be actively managed by the SV, and under the strict condition that financial instruments financing such portfolio are not issued to the public. The active management may also be delegated to a third party.
The Securitisation Law introducing active management of debt portfolios may open the door to managed collateralised loan obligation (CLO), as long as the issuance of financial instruments is not made to the public.
(v) Equity financed compartments
The Securitisation Law now clarifies the segregation of assets in several compartments is possible as long as it is included in the constitutive document of the SV. It means that the accounts of profit and loss are made in a segregated manner as well as decision of distributions made to investors holding equity issued by one compartment.
This rule ensures the protection of investors investing in the financial instruments issued by one compartment from any potential loss coming from other compartments of the SV.
The new Securitisation Law is likely to be published and enter into force in the coming days. As the amendments to the Securitisation Law introduce more flexibility in the Luxembourg securitisation regime, we may expect to observe concrete impacts in the market within the next months.
If you want to know more on that topic, we invite to register to our webinar which will give an overview of the key changes and opportunities through the eyes of key financial actors, service providers and market exchange in Luxembourg.