Introduction
Financing of securitisation vehicle
Active management of assets
Grant of collateral
Tranching (subordination)
Authorisation requirements for certain securitisation vehicles
Comment
The Act of 25 February 2022, which, among other things, amends the act of 2 March 2004 on securitisation (the Securitisation Act), entered into force on 8 March 2022.
The Act clarifies the existing statutory framework on securitisations and adapts it in a flexible way to the requirements of the securitisation market.
In particular, the Act:
- broadens the means by which a securitisation vehicle can be financed;
- allows securitisation vehicles to:
- grant collateral in a more flexible manner; and
- actively manage their assets within the limits set by the Securitisation Act; and
- provides clarification of the authorisation requirements for securitisation vehicles.
In addition, the Act:
- increases the number of corporate forms a securitisation vehicle may take; and
- provides clarification for multi-compartment securitisation vehicles issuing equity instruments.
Financing of securitisation vehicle
The Act specifies that a securitisation vehicle may engage in all types of borrowing in addition to issuing financial instruments. Indeed, certain investors are subject to restrictions on the types of financial products in which they can invest; these amendments are intended to allow securitisation vehicles to cater to such investors and finance their activities by taking out loans whose yield or principal repayment depends on the performance of the underlying securitised assets.
The amendments are consistent with the EU Securitisation Regulation,(1) which allows for securitisation without the issuance of securities by means of loan positions, and ensures that any securitisation falling under the EU Securitisation Regulation can effectively be carried out through a Luxembourg securitisation vehicle.
Active management will now be possible for risk portfolios comprising debt securities, financial debt instruments and receivables, but only for securitisation vehicles not issuing securities to the public. This will make Luxembourg an even more attractive venue for collaterised loan obligation transactions.
Under the previous framework, a securitisation vehicle could grant collateral over its assets only in favour of its investors or creditors in the context of the securitisation transaction; it could not grant collateral to a third party. The amendments give securitisation vehicles greater flexibility to grant collateral over their assets, thus allowing for more flexible structuring of securitisation transactions while continuing to ensure a high level of investor protection.
The Act clarifies certain aspects of the subordination of different types of instruments issued by securitisation vehicles subject to the Securitisation Act, unless contractually agreed otherwise. For instance:
- units issued by a securitisation fund/shares or units issued by a securitisation company are subordinated to debt instruments issued/loans taken out by these entities; and
- variable-yield debt instruments issued by a securitisation vehicle are subordinated to fixed-yield debt instruments issued by the vehicle.
Authorisation requirements for certain securitisation vehicles
Securitisation vehicles that continuously offer financial instruments to the public must be authorised by the Luxembourg Financial Supervisory Authority to carry out their activities. The Act clarifies these concepts.
"Securitisation vehicles that continuously offer financial instruments to the public" are defined as undertakings that carry out more than three offerings of financial instruments to the public over the course of a financial year (by all compartments of the vehicle over this period).
An offer of financial instruments to the public is defined as an offering:
- that is not intended for professional clients, within the meaning of article 1(5) of the Financial Sector Act 1993, as amended;
- of instruments whose denomination is less than €100,000; and
- that is not a private placement.
These criteria are cumulative, meaning, for instance, that a securitisation vehicle offering instruments with a minimum denomination of €100,000 will not fall within the scope of the above definition.
This update is in response to market needs and practices that emerged following the entry into force of the Securitisation Act. The Act allows securitisation transactions to be carried out under Luxembourg law with greater flexibility and legal certainty, while ensuring effective investor protection.
For further information on this topic please contact Josée Weydert or Sara Gerling at NautaDutilh Avocats Luxembourg by telephone (+352 26 12 29 1) or email ([email protected] or [email protected]). The NautaDutilh Avocats Luxembourg website can be accessed at www.nautadutilh.com.
Endnotes
(1) Regulation (EU) 2017/2402 of 12 December 2017 creating a general framework for securitisation.