03 Mar 22
Update to Luxembourg Securitisation regime
Since the introduction of the Securitisation Law of 22 March 2004 (the Securitisation Law), Luxembourg has continued its reputation as a leading jurisdiction for securitisation transactions. The region’s flexible and stable regulatory regime offers an ideal framework for a broad range of structured finance transactions. On 9 February 2022, the Luxembourg parliament adopted law No. 7825, (the New Law). The New Law introduces a number of amendments which will further enhance and modernise the regulatory regime established via the Securitisation Law, bringing greater flexibility, whilst also enhancing legal certainty and ensuring investor protection.
Under the New Law, the term ‘securities’ has been replaced with the broader term ‘financial instruments’, a change which will significantly expand the type of instruments which can be issued by a securitisation vehicle through enabling the use of financial instruments that did not previously qualify as securities, making this an attractive amendment for investors.
Furthermore, the New Law enables the active management of securitised risks if such pool is made up of debt securities, claims or debt financial instruments in Luxembourg, provided they are issued by way of a private placement, thereby extending Luxembourg’s capability to attract actively managed Collateralised Loan Obligations (CLOs) and Collateralised Debt Obligations (CDOs). The New Law builds on the existing offering in Luxembourg with respect to CLOs and CDOs that are not actively managed which has been in place for some time.
The change introduced by the New Law means that securitisation vehicles for actively managed CLOs and CDOs will no longer be bound to the “buy and hold” strategy and will be able to take active investment decisions with respect to the assets within the portfolio, enabling the portfolio to adapt to market developments.
New Corporate Forms and Regulatory Obligations
The New Law has further increased the scope of legal forms that may be used to set up a securitisation vehicle in Luxembourg. As a result of the enactment of the New Law, permissible legal forms now include:
SNC (société en nom collectif);
SCS (société en commandite simple);
SCSp (société en commandite spéciale); and
SAS (société par actions simplifiée).
Where securitisation vehicles opt to be established in the form of a legal partnership, such as the SCSp, the New Law requires the publication of 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.
Under the Securitisation Law, a securitisation vehicle issuing securities to the public on a continuous basis must be authorised by the Commission de Surveillance du Secteur Financier (CSSF). The CSSF had further clarified the definition of “on a continuous basis” as being a securitisation vehicle which undertakes more than three issues to the public per year.
The New Law clarifies that an offer can only be deemed to be made to the public if all of the following criteria are met:
The securities in question have a denomination of less than €100,000;
The securities would not be addressed to professional investors, as defined in the Luxembourg Law of 5 April 1993; and
The issuance will not be conducted under a private placement.
In addition to providing further clarification on the types of securitisation vehicles which must be authorised by the CSSF in order to carry out their activities, the New Law also brings local regulation in line 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 regulated market.
Under the New Law, the securitisation vehicle may take certain decisions at a compartment level if provided for in their constitutive documents for example: the balance sheet and profit and loss accounts for a specific compartment can be approved by the shareholders of that compartment only. Similarly, 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 aims to protect the investors of each compartment from other compartments.
The New Law clarifies the rules of subordination and priority of rights applicable in a securitisation transaction.
The rules defined in the New Law are 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; and
Non-fixed income debt instruments issued by a securitisation undertaking are subordinated to fixed income debt instruments issued by the securitisation undertaking.
Securitisation undertakings may derogate from the above rules either contractually or under their constitutional documents.