While the old Luxembourg Securitization Law has already proven itself an effective and renowned framework for structured financial transactions, amendments are extremely detailed compared to the previous update. The changes are designed to further improve and clarify market participants across all securitization transactions.
Some key pointers under the newly-amended Securitization Law are as follows:
- Previously, the core of financing needed to be provided through the issuance of securities. Under the new law, a securitization vehicle can finance itself and can be extended to any form of financial instruments and loans.
- A securitization vehicle in the form of a company may choose from more legal forms including various types of partnerships.
- The Modernized Security Law delineates what is to be defined as a public offering on a continuous basis, which in turn triggers the supervision of a securitization vehicle by the Luxembourg Commission for the Supervision of the Financial Sector (CSSF).
- Active management of receivables and financial debt instruments held by securitization vehicle is allowed for transaction where issued financial instruments cannot be offered to the public. This is a significant change that allows for Collaterized Loan Obligation structures.
- Within the context of securitization transactions financed by the issuance of equity, the amended law foresees the accounts can be approved at compartment level, including legal reserves and decisions on distribution of reserves.
- The amended law also introduces ranking between financial instruments issued by a securitization vehicle.
- Securitization funds are now subject to registrations with the Luxembourg Register of Commerce and Companies.
A more in-depth look at the Luxembourg Modernized Securitization Law are as follows:
Issuance of Financial Instruments in a More Comprehensive Scope
Under the former Securitization Law, special purpose vehicles may only issue instruments that are clearly categorized as securities. Amendments created the distinction between the law of special purpose vehicles and the law of relevant funding instruments, so that if the latter did not define the issued instrument as securities, the issued instruments will therefore not be qualified as securities from the perspective of the Luxembourg Parliament.
The amended Securitization Law puts an end to legal uncertainties, clarifying that a Luxembourg special purpose vehicle is no longer limited to securities and cannot be financed by way of issuance of financial instruments in its broadest possible definition.
Active Management of Assets
One of the major considerations established by the new law is the possibility of management of assets acquired by a special purpose vehicle. Due to tax-neutrality being granted to special purpose vehicles and only being allowed for the transfer of risks from the originator to the investors without creating additional risks, former legislation did not allow for active management of assets.
With the new legislation, allowing active management of acquired assets in the form of collaterized loan obligations (CLOs) or debt securities (CDOs), legislators bring special purpose vehicles closer to the form of investment finds without the introduction of additional regulations, thereby achieving a greater level of flexibility.
“Offering of securities to the public on a continuous basis” finally clarified
Special purpose vehicles (SPVs) that offer securities to the public on a continuous basic must gain approval from the Luxembourg Commission for the Supervision of the Financial Sector (CSSF).
Formerly, the Commission for the Supervision of the Financial Sector (CSSF) established the criteria for presuming an offer of securities to the public on a continuous basis. The Modernized Securitization Law establishes new conditions to determine if a financial instrument offer to the public may be granted.
On the issuance of financial instruments on a continuous basis
The issuance of financial instruments must be carried out on a continuous basis when a special purpose vehicle conducts more than three issuances to the public during any given financial year.
On the issuance of financial instruments to the public
The issuance of financial instruments to the public is open to the public under the following conditions
- The special purpose vehicle does not issue financial instruments to professional clients.
- Only when financial instruments whose denominations are less than EUR 100,000
- Only when financial instruments are not distributed as private placements.
Loan Financing Amendments
The new law allows for the financing of Luxembourg securitization special purpose vehicles through loans. Formerly, Luxembourh securitization special purpose vehicles were only financed by issuing securities. It was only on an ancillary basis that special purpose vehicles could resort to borrowing money.
Granting securities to third parties
Under the old securitization law, a Luxembourg securitization special purpose vehicle may only grant security to cover liabilities that entered into with a view of carrying out their securitization, or in some instances, for the benefit of investors This prohibited the granting of security interests in favor of third parties, such as in the case of a bank where the borrower is the parent company, and wherein proceeds will be used to invest in the special purpose vehicle.
Legal forms expansion
Under the former legal framework, a Luxembourg securitization special purpose vehicle may only be structured as a public limited company (SA), a partnership limited by shares (SCA), a private limited liability company (SARL), or a cooperative organized as a public limited liability company (ScoopSA).
Under the Modernized Securitization Law, securitization vehicle legal forms have expanded to include the following:
- A general partnership (SNC) that is advantageous when structural flexibility and tax transparency are a requirement. A general partnership has a legal personality with the sponsors having the ability to retain control over its management functions.
- A simplified public company (SAS) is highly advantageous due to its management flexibility feature, with the balance of powers between shareholders is a requirement.
- A common limited partnership (SCS) is highly beneficial when tax transparency and structural flexibility are a requirement, but without a legal personality. Its sponsors may retain control over its management roles.
- A special limited partnership (SCSp) is highly beneficial due to its tax transparency and excellent structural flexibility required, but without legal personality, with its sponsors maintaining control over its management responsibilities.
Legal subordination in securitization
The new Securitization Law delineates the riles of subordination and priority of rights applicable in securitization.
- Units of a special purpose vehicle, organized as a fund, are subordinated to other financial instruments issued by a special purpose vehicle and loans granted to the special purpose vehicle.
- Shares, corporate units, and partnership interests are subordinated to the beneficiary shares issued by it.
- Beneficiary shares issued by a special purpose vehicle are subordinated to other financial instruments issued by an SPV are subordinated to fixed-income debt instruments issued by it.
Special Purpose Vehicles Organized as a Fund Registration Process
The new legislation introduces a legal obligation of Luxembourg securitization special purpose vehicles organized as funds to register with the Luxembourg Trade and Companies Register.
The Luxembourg Modernized Securitization Law brings excellent news for the country’s securitization landscape and will assist in its rapid growth. As a financial consulting company specializing in assisting foreign investors in establishing special purpose vehicles in Luxembourg, our team will be more than delighted to assist you in your securitization initiative. If you want an in-depth discussion about the new Securitization Law, reach out to a Damalion expert today.
This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.