Bill 7825 amending the Luxembourg Securitisation Law of 22 March 2004
For so many years, Luxembourg has attracted securitisation transactions due to its favourable framework deriving from the law dated 22 March 2004 on securitisation, as amended (Securitisation Law).
On 21 May 2021, the Luxembourg government submitted bill no. 7825 to the Parliament (Bill) aimed at making targeted amendments to the Securitisation Law.
The adjustments, long-awaited by the market players, are intended to provide new possibilities by increasing flexibility and legal certainty, while ensuring effective protection for investors. This modernisation of the Securitisation Law further reflects Luxembourg’s willingness to be established as the leading hub of the securitisation market in Europe.
Clarifications of the Luxembourg securitisation scope
A welcome replacement of the notion of “securities” by “financial instruments”
The current Securitisation Law requires any securitisation vehicle which undertakes or acquires risks whose underlying are claims or assets to be financed by issuing “securities”, a concept that was certainly too narrow and leads to some issues. Many questions have arisen about the qualification of certain instruments as securities, in particular those not qualified as such by their legal framework under their foreign law.
The Bill suggests replacing the term “securities” in the Securitisation Law by the broader term “financial instruments”, aiming to put an end to the on-going discussions and enable a broader category of instruments to be issued.
A new possibility for securitisation vehicles to be exclusively financed by borrowings
Until now, only specific circumstances allowed a Luxembourg securitisation vehicle to use borrowings as funding, considerably restricting the possibilities for investors.
The Bill proposes broadening funding sources by providing that the securitisation vehicles may exclusively be financed through borrowings. The notion of borrowing within the meaning of the Securitisation Law includes any form of indebtedness that gives rise to a repayment obligation from the securitisation vehicle, including indebtedness where the amount repayable depends on the performance of underlying assets or the financial situation of the issuer. As some investors were subject to restrictions on the financial products in which they could invest, this addition takes into account the flexibility required by the market and by this way, makes the Luxembourg jurisdiction more attractive.
A refined definition of the issuance of securities to the public on a continuous basis
The Securitisation Law, as currently in force, provides that securitisation vehicles that issue securities to the public on a continuous basis must be authorised by the Commission de Surveillance du Secteur Financier (CSSF) to carry out their activities. For the purpose of assessing whether an authorisation is required, the CSSF had already clarified the notion of a “continuous basis” by stating that an issuance of securities is deemed to be carried out on a continuous basis when the securitisation vehicle undertakes more than three issues to the public per year, the number of issues to be taken into consideration being the total number of issues of all compartments of the securitisation vehicle.
Based on this definition, the Bill goes further by providing that a securitisation vehicle which issues financial instruments more than three times per year:
- to professional clients (within the meaning of the law of 5 April 1993 on the financial sector, as amended); or
- whose denomination is greater than EUR100,000; or
- which are offered by way of a private placement, is deemed not to be seen as an issuance made to the public.
The denomination is aligned with the Regulation (EU) 2017/1129 of the European Parliament and of the Council of 14 June 2017 on the prospectus to be published when securities are offered to the public or admitted to trading on a regulated market and meets current general capital market practices.
Adjustments to the acquisition, management and securitisation of assets
A direct or indirect acquisition of the assets
The Bill suggests introducing in the Securitisation Law the clarification that a securitisation vehicle may undertake risks by acquiring, directly or indirectly, the securitised assets. The Bill expressly provides that the securitisation vehicle could acquire the assets to be securitised either by being a party itself to the acquisition agreement or through a partly or wholly owned entity.
An active management of the assets
The Bill also proposes inserting a new article in the Securitisation Law whose purpose is to introduce the possibility for the securitisation vehicles to securitise risk portfolios actively managed by the vehicle itself or a third - party only if the financial instruments are issued by way of a private placement.
This modification will allow Luxembourg to attract actively managed collateralised loan obligations (CLOs) and collateralised debt obligations (CDOs).
The extended scope of creditors benefitting from a security interest over the securitised assets
Until now, the Securitisation Law did not allow for securitisation vehicles to grant security over their assets to third parties to the securitisation transaction. The securitisation vehicle could only grant security interests for the benefit of its investors or creditors, the security interest otherwise risked being considered null and void.
The Bill does not break with this approach but broadens the scope of creditors who will be able to benefit from a security interest over the securitised assets. It grants this benefit to any creditor party to the securitisation transaction and, therefore, not only to securitisation vehicle direct creditors but also to its indirect creditors. The Bill also suggests removing any reference to the current sanction for granting a security interest in breach of this principle.
New corporate rules
The emergence of alternatives corporate forms
By introducing new corporate forms that could be used to set up a securitisation vehicle such as the general partnership (société en nom collectif), the limited or special partnership (société en commandite simple or société en commandite spéciale) and the simplified limited company (société par actions simplifiée), the Bill promotes flexibility and the use of tax transparent corporate forms alongside the current use of securitisation funds.
Accounting and distribution rules set up on a compartment basis
The Bill proposes equity-financed compartments take certain decisions at a compartment level. If provided for in their constitutive documents, it is suggested that only the shareholders of that compartment could approve the balance sheet or profit and loss accounts. In the same way, the profit and the distributable reserves might also be determined on a compartment basis, while the legal reserve should only be determined on such a basis. The introduction of such accounting segregation pursues the objective of protecting a compartment investors from other compartments.
New requirements for securitisation funds
While until now securitisation funds did not have to register with the trade and companies register, the Bill introduces this new obligation for existing and future securitisation funds. Not only does it provides investors with an additional way of identification, registration leads to the attribution of an RCS number, and therefore avoids certain administrative issues, including the inability for a securitisation vehicle to list its securities on a stock exchange.
The Bill further introduces the obligation for securitisation vehicles having opted for the partnership form (either general, limited or special limited) to draw up and publish annual accounts in accordance with the provisions of the law of 19 December 2002 on the register of commerce and companies and the accounting and annual accounts of companies.
A legal entrenchment of subordination rules for securitisation
The Bill expressly states subordination rules already applicable to commercial companies and mutual funds and already used in practice in securitisation transactions.
Those rules are set up as follows:
- Units of a securitisation fund are subordinated to other financial instruments issued by the securitisation fund and borrowings contracted by the fund.
- Shares (actions), corporate units (parts sociales) or partnership interests (parts d’intérêt) in a securitisation company are subordinated to other financial instruments issued by such securitisation company and borrowings contracted by the securitisation company.
- Shares (actions), corporate units (parts sociales) or partnership interests (parts d’intérêt) in a securitisation company are subordinated to beneficiary shares (parts bénéficiaires) issued by the securitisation company.
- Beneficiary shares (parts bénéficiaires) issued by a securitisation company are subordinated to debt instruments issued and borrowings contracted by the securitisation company.
- Non-fixed income debt instruments issued by a securitisation undertaking are subordinated to fixed income debt instruments issued by the securitisation undertaking.
These subordination rules may be overridden by any clauses defining differently the ranking of the rights of investors and creditors, such as the constitutive documents, the management rules of the securitisation fund or any contract to which it is party.