Luxembourg: long-awaited modernisation of the securitisation regime arrives
Luxembourg-based securitisation vehicles have long benefited from a successful, reliable and flexible regime, under the law on securitisation dating back to 22 March 2004. However, the jurisdiction has continued to take global and local market dynamics into consideration, and as of 9 February 2022, the Luxembourg parliament has adopted law No. 7825 (the “New Law”), which makes both important adjustments and clarifications, as well as increasing the flexibility and legal certainty of the securitisation business.
The Luxembourg market is welcoming a broadening of the available financing techniques for securitisation transactions, as well as the removal of certain restrictions that constituted barriers to certain types of structures and transactional arrangements. The effect of these changes is to reinforce the attractiveness of Luxembourg as a jurisdiction of choice for securitisation business.
Improved financing flexibility
By broadening the available means of financing to include any financial instrument, and by confirming the possibility of financing exclusively by borrowing (loans or any other form of indebtedness), the New Law provisions bring greater flexibility, effectively simplifying the structuring discussions. These changes enable the use of instruments that do not qualify as securities under their domestic governing law, thereby increasing attractiveness for investors and potentially leading to a reduction of legal formalities and the associated costs.
The New Law enacts the CSSF's (Commission de Surveillance du Secteur Financier) interpretation of what constitutes “an offer to the public on a continuous basis”, and slightly lowers the securities denomination threshold, bringing clarity on this concept, as well as aligning securitisation and prospectus legislation. With the statutory definition of this concept, securitisation vehicles issuing financial instruments less than three times per year to professional investors on a private placement basis, with a denomination per unit of at least €100,000, do not need to be authorised by the CSSF.
In addition to clarifying the seniority ranking of certain debt-related securities over equity-linked securities, the compartment adjustments of equity-financed securitisation structures on profit distributions, reserve allocation and approval of accounts, other innovations have also been implemented on the corporate governance side.
More legal structures and a boost for assets
The permitted legal forms of securitisation companies have been expanded to tax transparent partnerships, including: (i) common limited partnerships (société en commandite simple); (ii) special limited partnerships (société en commandite speciale); (iii) special limited companies (société par actions simplifiées); and (iv) general partnerships (société en nom collectif). This change increases securitisation attractiveness for investors such as private equity houses or family offices who already extensively use partnership structures in Luxembourg for their usual business.
Existing or new securitisation funds will have now to be registered with the Luxembourg trade and companies register and obtain a separate identification number.
From an asset perspective, the New Law provides for more flexibility on the set-up of security packages, enabling the possibility to grant security interests to parties involved in a securitisation transaction that may not necessarily be direct creditors of the securitisation undertaking.
The major boost provided by the New Law on the asset side relates to the authorisation of the active management of securitisation vehicles. By permitting the active management of securitisation vehicles for risks linked to bonds, loans and other debts instruments, so long as the financing instruments are issued on private placement basis, Luxembourg is now in a position to attract CLO structures.
Those structures have historically been set up in other neighbouring jurisdictions, especially Ireland, where CLO activity has been centralised since the challenges faced by the Netherlands shutting these transactions out. This key change will reopen the door for those types of transactions and will increase the interest of CLO/CDO managers to implement their platforms through Luxembourg.
Talk to TMF Group
TMF Group welcomes this news for the Luxembourg market and looks forward to supporting you on your securitisation projects.
If you have any questions related to the New Law or require assistance with any aspects of securitisation in Luxembourg, talk to us.
