Luxembourg’s securitisation legislation of March 22, 2004 is currently in the process of being amended. Bill no. 7825, submitted to the Chamber of Deputies on May 21, 2021, has been drawn up to reflect increased international competition in the securitisation market. Significant planned changes to the 2004 law include a more precise supervisory scope for the Commission de Surveillance du Secteur Financier (CSSF), granting of securities in favour of indirect creditors, and authorisation for active management of assets held by a securitisation vehicle.

Extension of financing means to include loans

The bill permits securitisation undertakings to be financed through the issue of financial instruments and any form of borrowing. The definition of transferable securities – valeurs mobilières – in the previous version of the Law, which was considered as too vague is now replaced with “financial instruments”.

According to Article 1 of the law of August 5 2005 on financial collateral arrangements, this has the broadest possible meaning including:

  • Any securities such as options, warrants or futures conferring the right to acquire shares, bonds or other securities by subscription, purchase or exchange.
  • Any other “instruments evidencing ownership rights, claim rights or securities”, indicating that any securitisation undertaking may finance a securitisation transaction with loans or promissory notes. A new paragraph will be inserted in the definition section of the law, which will be henceforth read: “if a securitisation undertaking is financed, totally or partially, by contracting loans…

Grant of securities and guarantees to any party to a securitisation transaction

Under the draft legislation, a securitisation vehicle may grant security interests or guarantees over the securitised assets or risks in favour of any party involved in the transaction, including entities that are not direct creditors of and/or investors in the securitisation vehicle. Under the original law, security interests and guarantees over securitised assets could be granted only to investors or direct creditors of the securitisation undertaking.

Active management of certain categories of securitised assets

Pools of securitised assets comprising debt securities, claims or debt instruments may be actively managed as long as the securitisation entity is not financed by financial instruments offered to the public.

In practice, this would authorise actively managed collateralised loan obligation structures.

Clarifying the scope of CSSF supervision

The 2004 law does not define or clarify the concepts “issue to the public” and “issue on a continuous basis”. The bill states that financial instruments are issued on a continuous basis by a securitisation undertaking if it conducts more than three issues of financial instruments in a year.

Financial instruments are deemed to be offered to the public if three conditions are met: the financial instruments are not offered to professional clients as defined by the law of April 5, 1993 on the financial sector; the nominal amount of the financial instrument is less than €100,000; and it is not distributed via a private placement.

Broadening of legal forms

The law currently allows a securitisation entity to be established in the form of a public limited liability company, private limited company, corporate partnership limited by shares, or co-operative company organised as a public limited liability company.

Under the proposed revision, a securitisation entity will also be able to take the form of a general corporate partnership/unlimited company (société en nom collectif), a common limited partnership (société en commandite simple), a special limited partnership (société en commandite spéciale) or a simplified limited company (société par actions simplifiée).

Indirect acquisition of assets

The bill allows the securitisation undertaking to acquire assets indirectly to assume risks as part of a securitisation transaction. Acquisition through a wholly-owned and newly-formed vehicle would in the future be permitted.

Clarification of subordination rules

The default waterfall of payments provided by the draft legislation, unless a derogation is agreed contractually, is as follows:

  1. The units of a securitisation fund are subordinated to other financial instruments issued by the securitisation fund and to loans contracted by it.
  2. The shares or interest units of a securitisation company are subordinated to other financial instruments issued by the securitisation company and to loans contracted by it.
  3. The shares or interest units of a securitisation company are subordinated to profit shares (parts bénéficiaires) issued by the securitisation company.
  4. The profit shares issued by a securitisation company are subordinated to the debt instruments issued and loans contracted by the securitisation company.
  5. Non-fixed yield debt instruments issued by a securitisation vehicle are subordinated to fixed-yield debt instruments issued by the securitisation entity.

Rules governing treatment of compartments

Article 11 of the bill provides an important clarification of the accounting treatment of compartments of a securitisation company financed by equity instruments. In future the balance sheet and profit and loss accounts may be prepared at the level of the compartment and approved only by its investors, if this option is included in the articles of association of the securitisation company. Similarly, profit and other distributable reserves may be calculated for each compartment based on its balance sheet and profit and loss accounts, without considering the overall financial situation of the securitisation vehicle.

Conclusion

The bill is more than welcome for the Luxembourg financial community since its sole aim is to enhance the attractiveness and flexibility of the country’s regulatory regime governing securitisation undertakings.

The below table compares the main changes between the current securitisation regime and the draft amendments of the bill submitted to the Luxembourg parliament on May 21, 2021.

 

 Current RegimeDraft amendments
BorrowingNot mentioned. However, the CSSF says in its FAQ on securitisation that borrowing can be used only on an ancillary basis and/or in cases where a credit line is temporarily necessary in view of the type of securitisation.

Article 1 of the bill:

The concept of borrowing, regardless of its accounting treatment, includes any form of indebtedness giving rise to a repayment obligation on the part of the securitisation undertaking
StructureArticle 4 (1) of the 2004 law:

Private limited liability company (S.àr.l.)
Public limited company (S.A.)
Corporate partnership limited by shares (SCA)
Co-operative company organised as a public limited liability company.

Article 2 of the bill:

Private limited liability company (S.àr.l.)
Public limited company (S.A.)
Corporate partnership limited by shares (SCA)
Public limited company, or co-operative company organised as a public limited company.
General corporate partnership/unlimited company (société en nom collectif)
Common limited partnership (SCS)
Special limited partnership (SCSp)
Simplified limited company (société par actions simplifiée)

Public offeringArticle 19 of the 2004 law:

Securitisation undertakings that issue securities to the public on a continuous basis ("authorised securitisation undertakings") must be authorised by the CSSF to exercise their activities, plus CSSF guidelines
Article 7 (2) of the bill:

The issuance of financial instruments offered to the public is:
1. not intended for professional clients within the meaning of Article 1,5 of the amended law of April 5, 1993 on the financial sector;
2. denomination is less than €100,000; and
3. not distributed through a private placement.

Securities or guarantees in context of securitisationThe securitised assets may be used as security or collateral only for the benefit of investors.Article 13 of the bill:

Allows the creation of security interests or guarantees in favour of any third party involved in the securitisation transaction to secure commitments entered into through the securitisation transaction.
Active management of assetsNot allowedArticle 14 of the bill:

A securitisation undertaking may securitise a pool of actively-managed risks providing that the instruments issued to finance the acquisition of the pool of risks are not offered to the public.

For more information, please get in touch with our banking, finance and capital markets team.