Luxembourg: modernising securitisation

01 December 2021

The Luxembourg Parliament is set to update its securitisation laws in a move which could boost the jurisdiction’s flexibility and attractiveness to investors.

Luxembourg has been a favoured destination for securitisation transactions, driven largely by the Securitisation Law passed by its parliament in 2004.

According to EY, in 2020 29.3% of Euro area securitization vehicles were domiciled in Luxembourg, coming second only to Ireland, which was home to 29.8% of securitisation vehicles in 2020.

Luxembourg as the alternative jurisdiction of choice

Luxembourg’s flexible securitization laws makes it an attractive destination for multi-jurisdictional vehicles.

In recent years this popularity has been boosted by a clampdown on some offshore jurisdictions and increasing international regulation of alternative investments, including private equity. According to EY this has encouraged the re-domiciliation of previously offshore funds in Luxembourg.

Now further possibilities are likely to be created by the long-awaited modernisation of the Securitisation Law. On 21 May 2021, the Luxembourg government submitted bill number 7825 to the Parliament.

The targeted amendments to the Securitisation Law are expected to help  increase flexibility and legal certainty as well as signal Luxembourg’s willingness to be established as the leading hub of the securitisation market in Europe.

What is the amendment to Luxembourg’s Securitisation Law?

The amendment means the replacement of the notion of “securities” by the term “financial instruments”.

The current Securitisation Law involves the definition of what constitutes a “security” and there have been questions about the qualification of certain instruments as securities, in particular ones not considered securities in another jurisdiction.

The amendment suggests replacing the term “securities” with the broader term “financial instruments”.

Therefore, the refinancing of a transaction will no longer be limited to securities but is open to any financial instrument, so could include notes or loans.

This will enable Luxembourg to attract more debt instruments such as collateralized loan obligations (CLO) or  collateralized debt obligation (CDO) structures which have historically been set up in other jurisdictions.

The changes will make securitisation even more attractive for investors such as private equity houses or family offices who already extensively use partnership structures in Luxembourg.

The main changes are:

  • Alternative corporate forms: securitization undertakings incorporated as securitization companies can be incorporated as general partnerships, limited partnerships, special partnerships and simplified joint-stock companies.
  • Active management: active management of certain securitized assets is possible for a basket of risks, made up of debt securities, financial debt instruments or receivables, and is reserved only for securitization undertakings that do not finance themselves by issuing to the public
  • The legal subordination of different types of debt and equity instruments issued by a securitisation vehicle is defined in the draft law.
  • More flexibility in collateral creation: a securitization undertaking may grant security interests or guarantees over its assets solely to cover liabilities into which it has entered to effect their securitization, or for the benefit of investors in the securitization transaction concerned
  • Compartmentalizationsegregation of assetscan also be replicated/mirrored in the securitization company’s accounting. In securitization companies where such an arrangement is possible, certain decisions, such as profit distribution, should be taken at the compartment level. These clarifications are intended to protect investors in one compartment from contamination by other compartments.
  • Registration requirement: Article 25 of the Bill introduces a legal obligation for securitization vehicles (the instrument) to register with the RCS in an identical format to the registration of mutual funds.
  • Potential investors:the Bill allows retail investors to accept crowdfunding offers.
  • The Bill incorporates the guidance provided by the CSSF on the definitions of issuance of securities “to the public” and “on a continuous basis” to the Securitisation Law. As a result, and in line with the FAQs of the CSSF on securitisation, issuance of securities are on a continuous basis if more than three issuances of securities are carried out by a securitisation undertaking (taking into account all its compartments, not at compartment level) in the same financial period. An issuance is to the public if it is not targeted at professional clients, if the securities are in denominations below EUR 100,000 and the issuance is not done under a private placement. In such case no CSSF approval is required.

What it means for your Luxembourg business?

The amendment aligns the draft law with European Securitisation Regulation, which does not require financing solely in the form of securities. It should also reduce the legal formalities and the cost to set up those securitisations.

The options of legal forms that can be used for securitisation companies will be enlarged by the Luxembourg partnership regime.

The Bill still needs to be approved by the Parliament of Luxembourg.

Who is affected?

Most securitisation Funds and Companies will be affected by those new rules, however for most of them it will create new opportunities for  their current and future transactions.

How ZEDRA can help

We welcome these changes as they make the Luxembourg securitisation market even more attractive. They remove uncertainty and give investors more legal protection.

If you require any assistance on your existing or future securitisation vehicle, feel free to contact us directly Frank Walenta and Wim Ritz.

How Can We Help You?