The Grand Duchy of Luxembourg enacted the securitisation law in March 2004 and has since then become the perfect location for securitisation vehicles (SVs) due to its innately attractive and flexible financial landscape. The Law of Securitisation aims to boost the securitisation industry of Luxembourg through a highly competitive, legal, regulatory, and fiscal framework. In essence, the country allows securitisation of various assets, revenues, risks, and activities. Luxembourg also makes securitisation more accessible to individual and institutional investors. Issuers offer securitisation as an excellent alternative to conventional bank funding.
Securitisation Law Definition
The securitisation law is defined as an operation which a securitisation vehicle is managed by an intermediary of another entity, all risks connected to claims, goods, and liabilities of third parties or those considered a part of the activities run by third parties through the issuance of securities whose value or return depends on such risks.
The Benefits of Luxembourg Securitisation for Entrepreneurs
The primary benefit of securitisation is that it reduces an entity’s funding costs. It is possible that smaller companies or start-ups with great potential can still maintain their assets while at the same time given the opportunity to borrow at lower rates, utilising their high-quality assets as collateral instead of using unsecured debts.
Allowing financing via loans is a highly attractive addition that will attract more investors that prefer to invest in loans instead of securities. This makes Luxembourg securitisation vehicles more attractive for the securitisation of trade receivables that are typically financed via loans.
Given the highly volatile nature of interest rates issued by most banks, securitisation is considered safer and more beneficial especially among companies that are looking for ways to sustain their operations and gain access to more opportunities and earnings. Additionally, securitisation for small and medium enterprises are safer than traditional banking than mortgage loans and similar types of loans. With greater safety comes lower interest rates and greater credit availability for borrowers. By using securitisation SPV, entrepreneurs can raise capital without giving their portions of equity.
There is a wide range of assets that can be securities as states in the securitisation law:
- Movable and immovable property
- Intellectual property rights
- risks linked to debt (corporate or other forms)
- Securities in the form of shares, loans, subordinated bonds, and non-subordinated bonds
- Any activity that has a certain value or can produce future income
Securitisation undertakings facilitated in Luxembourg are typically incorporated by a promoter to securities of any type, be it risks or assets linked to receivables or any activity implemented by third parties. Simply put, securitisation is risk acquisition from an originator through the issuance of a security, the value of which and associated earnings are linked together by a single asset.
Securitisation Legal Forms
A Luxembourg securitisation company may be incorporated in the following legal forms:
- Public Company Limited by shares (SA)
- Private Company Limited by shares (SaRL)
- Limited Partnership
- Cooperative companies limited by shares
A securitisation fund may be incorporated given the following conditions:
- As a management company with a registered physical office in Luxembourg
- As a stand-alone securitisation fun with a co-ownership contract between its investors
Both of these securitisation undertakings may be used as a Special Purpose Vehicle (SPV) and may be established as an umbrella structure featuring segregated compartments that enable the same vehicles to be utilised for various securitisation activities.
The Key Advantages of the Luxembourg Securitisation Law
- Securitisation is beneficial in that it opens investors to greater opportunities and frees up capital for originators, both of which enhances liquidity in the marketplace.
- True sale and synthetic securitisations, including static indices or actively managed indices are possible.
- A securitisation company may enter into securities lending transactions, derivatives in furtherance of securitisation transactions, and derivatives in furtherance.
- A securitisation company may operate fun repackaging but subject to restrictions in offer jurisdictions.
- An external asset manager may handle the portfolio of securitised assets or remain static otherwise.
- Cash may be securitised provided that it will be used as collateral under an arrangement create to hedge a securitisation company’s obligations under its securities
Granting Loans by a Securitisation Company
A securitisation company may not use the funds received from the public for the purpose of approving loans for its own account.
Any documentation relating to securities issue must contain disclosure of the following:
- Underlying activity finance out of the issue proceeds
- The borrower(s)
- The borrower selection criteria
Return on Activity must be adequate to allow a securitisation company to meet its obligations under which its securities were issued. Additionally, a securitisation company are not allowed to directly negotiate loan terms. Negotiations are to be facilitated by a third party on a securitisation company’s behalf. A securitisation company may also be assisted by a middleman during negotiations.
Bankruptcy Remoteness, Ring Fencing, Segregation, and Synthetic Securitisation
The Securitisation Law offers statutory protection on a few standard securitisation issues, including bankruptcy remoteness, limited recourse on undertaking assets, ring fencing, and true sale vs synthetic securitisation.
As Luxembourg strives to achieve a regime of neutrality, securitisation vehicles function as a pass through organisation from the originator to the investors.
Therefore, a Luxembourg Securitisation Company is covered by the following conditions:
- Subject to normal corporation tax at 29.2%
- Subject to incorporation duties on capital and wealth tax
- All profits realised through securitisation are assessed as normal taxable income
- All costs and commitments as a result of the undertaking by bondholders and shareholders are considered tax deductible expenses. Only remaining profits of a Luxembourg securitisation company will be assessed as taxable profit.
- All dividends, interest coupons, options, and other financial advantages that a third party may obtain from the securitisation company will be automatically tax exempted; hence will not be assessed with any withholding taxes in Luxembourg.
In essence, a Luxembourg securitisation fund should be tax transparent; hence should not be subjected to any taxation is Luxembourg. The fund is non-taxable, so there should be on withholding tax upon payment to bondholders and shareholders.
2021 Amendments on Luxembourg Securitisation Law
In May 2021, a new bill of law was passed to the Luxembourg Chamber of Deputies with the aim of changing the Luxembourg Securitisation Law passed in 2004.
The Bill of Law aims to make significant changes to the Luxembourg Securitisation Law, making the securitisation rules more flexible in terms of the types of securitisation structures and the specific requirements that market participants may have in certain cases.
The 2021 Bill of Law aims to achieve two things:
- Delineation of specific aspects such as authorisation requirements with respect to securitisation activities offering securities to the public on a long-term basis, as well as legal subordination of specific tools with respect to tranching
- The easing of certain securitisation activity restrictions implemented under the current regime
- There are also five vital points under the Bill of Law that should be given much attention as they have a heavy influence on many market participants. The pointers enumerated below are not conclusive but provides a brief overview on some of the changes that are meant to be implemented under the Luxembourg Securitisation Law
On The Issuance of Loans in Addition to Usual Issuance of Securities
The current Luxembourg Securitisation Law states that a securitisation process is vital on the issuance vehicle and should therefore introduce the entry into borrowing structures by taking out loans to investors an ancillary basis only. After amendment, this restriction was lifted provided that the Bill of Law oversees the changes which typically allow a securitisation undertaking to enter into all types of borrowing structures. This creates a more flexible framework which allows certain investors- those of whom are restricted for internal reasons to specific loan products, to have the right to participate in Luxembourg securitisation structures.
Principal repayments or yield of aforementioned loans will depend on underlying securitised assets, such as those with usual debts securities issued by a securitisation undertaking linked to a specific compartment only. This approach is in sync with the current EU Regulation 2017/2402 of December 2017, thus creating a framework of securitisation provided that the EU Securitisation Regulation does not require a SV to issue securities just to experience leniency in regulations.
On Active Management of Risk Portfolio
The restrictions on active management of any Luxembourg security undertaking and portfolio management will be eased as well. Once the Bill of Law is passed, it will be possible to manage risk portfolios amidst short-term market fluctuations and price developments. For an active management to be allowed, it is vital that the risk portfolio consists of debt securities, financial debt instruments, or receivables. Additionally, active managements will only be permitted to enter structures where securitisation undertakings do not offer securities to the public.
On Collateral Approval by a Luxembourg Securitisation Undertaking
The current collateral granting process by a Luxembourg securitisation vehicle over its assets is only limited to instances where it is only implemented for the benefit of the vehicle’s investors such as the subscribers of the securities issued, or if the granting of collateral is carried out with the aim of assuring the securitisation of the underlying in question.
The Bill of Law aims to introduce a much wider scope which allow Luxembourg securitisation undertakings to grant collateral to any third party provided the collaterals are linked to the securitisation structure as a whole.
On Authorisation Requirement for a Luxembourg Securitisation Undertaking
The Bill of Law includes explicit ruling on questions when a securitisation undertaking is to be granted the ability to issue securities to the public on a continuous basis, and therefore should be duly authorised by the CSSF. According to the FAQs on CSSF Securitisation, issuances are made to the public continuously if there are more than three issuances made to the public per calendar year and on all compartment basis. Therefore, the current rule that private placements are not categorised as public will be applicable. Certainty will be obtained to comply with the required per unit minimum denomination securities to be deemed applicable to be issued to the public. According to CSSF FAQs, the amount is set at EUR 125,000 at the least.
The Bills of Law states that an offer could only be made to the public if the securities in question has a per unit denomination no more than EUR 100,000. In the case that a public offer scenario arises, the securities shouldn’t be necessarily addressed to professional investors as prescribed in the Luxembourg Law of 1993 on the banking sector, and therefore should not be implemented under the form of a private placement.
On Issuance of Tranched Securities
Finally, the Bill of Law intends to clear certain elements on the issuance of tranched securities. Only structures in which a securitisation undertaking that engages in tranching may fall under the scope of the EU Securitisation Regulation.
The Bill of Law will set explicit rules regarding legal subordination between various securities types, unless contractually agreed otherwise. If the units issued by a securitisation undertaking relating to underlying loans are related to, should be considered as tranched under the law. If the debt instruments or loans have variable yield, they are to be considered subordinated to debt instruments which contain a fixed yield rate.
To learn more about the Luxembourg Securitisation Law and updates on The Bill of Law, click here or contact our dedicated Luxembourg securitisation team.