What is Securitisation?
Securitisation is the method of taking assets that deliver a revenue stream, along with their attributed risks, packaging them in a special purpose vehicle (SPV), and then selling securities in the SPV to interested investors who earn dividends/interest and repayment of the principal amount on an agreed date.
Securitisation is often used to monetize illiquid assets, lower funding costs or repackage financial assets, and to adjust risk.
You may read our Damalion guide about Luxembourg securitization.
The bill modernising the Luxembourg Securitisation Law
Over the past years, the Luxembourg law dated 22 March 2004 on securitisation (the “Securitisation Law”) has validated a successful framework for a wide variety of securitisation, repackaging, and financing transactions.
It has established a reliable and investor-friendly legal and tax framework for securitisation transactions carried out by Luxembourg SVs promoting a high degree of flexibility.
On 9 February 2022, The Luxembourg Parliament (Chambre des Députés) passed a new bill modifying the Securitisation Law.
The primary takeaways from the new Bill are summarised in the following paragraphs:
- Financing the Securitisation Vehicle (SV): The financing of a transaction is no longer restricted to securities but is open to any financial instrument, as long as the repayable amount depends on the securitised risks. The purpose of this is to put the Securitisation Law in line with the European Securitisation Regulation, which doesn’t require financing solely in the form of securities.
- Certain accounting issues related to the compartments have been solved: The Securitisation Law allows multi-compartments SVs that are financed by equity, to authorize the balance sheet and the profit and loss statement of each compartment by virtue of the votes of such compartment’s shareholders only, given that such option is included in their articles of association. Also, the articles of association of an SV may provide that profits, distributable reserves, and mandatory legal reserves of a compartment, are specified on a separate basis and without reference to the financial situation of the SV in general.
- New legal forms for SVs: Catching up with the growths in the Luxembourg companies law, the new Securitisation Law introduces additional corporate structures available for the SVs: unlimited companies (sociétés en nom collectif) (SENC), 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).
The need of audit for Luxembourg securitization structures
All SVs (including SVs in the form of a common limited partnership (société en commandite simple), a special limited partnership (société en commandite spéciale), and an unlimited company (société en nom collectif) have to formulate and publish annual accounts, in each case to be audited by one or more authorized Luxembourg independent auditors (réviseurs d’entreprises agréés).
- Clarification on supervision by the Luxembourg regulator (CSSF): The Modernised Securitisation Law ascertains that an SV must be subject to CSSF supervision, when it issues to the public on a continuous basis, in accordance with the current interpretation given by the CSSF in its FAQs. The threshold of denomination for public issuances is proposed to be reduced from EUR 125,000 to EUR 100,000 (to correspond with the Prospectus Regulation exemption). Thus, only SVs issuing more than three times per year securities to the public with a denomination below EUR 100,000 to non-professional investors would need to be approved by the CSSF. A non-respect of application for authorization by the CSSF in such cases is now also subject to penalties.
- Direct and indirect holding of assets: The Modernised Securitisation Law elucidates that an SV may hold, directly and indirectly, the securitised assets. This means, for instance, that the direct holding of real estate by an SV would be explicitly permitted.
- More flexibility around passive management: With The Modernised Securitisation Law, active management will be allowed for SVs for risks linked to bonds, loans, or other debt instruments, except if the financing instruments are issued to the public. This should enable Luxembourg to attract more CDO/CLO structures that have historically been set up in other jurisdictions.
- Legal subordination: The Modernised Securitisation Law aims at implementing a formal legal set of subordination rules applicable to financial instruments issued by an SV.
By virtue of law,
- shares and partnership interests will be subordinated to other financial instruments issued by the SV,
- shares and partnership interests will be subordinated to beneficiary shares issued by the SV,
- beneficiary shares will be subordinated to debt financial instruments issued by the SV, and
- variable floating rate financial instruments will be subordinated to fixed-rate financial instruments issued by the SV.
However, there will be room for flexibility as the set of subordination rules can be overridden in the constitutional documents or issuance documents.
- A more flexible framework for the security interests granted by an SV is introduced: For years, financing arrangements involving an SV were impeded by the prohibition put on the SV to grant security interests, unless they were granted for its own obligations or in favor of its investors. A structure where the secured debt was incurred at the level of the parent or a subsidiary of the SV was bound to run into some complications. The new law introduces a degree of flexibility, which allows an SV to secure the obligations of other persons, and not only its own, as long as such obligations are associated with the securitisation transaction. The sanction of nullity for the non-compliant transaction has also been eliminated.
- Clarification on securitisation funds: The Modernised Securitisation Law further explains that securitisation funds (and their liquidation) have to be registered with the Luxembourg business register, with current securitisation funds having to register within six months after entering into force of the Draft Bill.
- Tax: The Modernised Securitisation Law does not directly include any specific tax measure regarding SVs, which benefit already under the Securitisation Law from a very appealing tax regime. Indeed, SVs established as corporate vehicles may be able to fully deduct from their taxable base commitments or distributions made to shareholders or investors without triggering any Luxembourg withholding tax, irrespective of the location of the shareholders and investors. Moreover, as SVs established as corporate vehicles are fully taxable, they may be eligible to double tax treaty access and EU directives. Finally, management services to SVs may principally rely on a VAT exemption.
In light of the above, Luxembourg has been able to establish itself as a primary center for securitisation transactions, and given the wide array of flexible and investment-friendly provisions, it is highly likely to continue to be successful in this respect in the future.
To register your securitization vehicle in Luxembourg, please contact your Damalion expert now.
