The Luxembourg Law of 22 March 2004 on securitisation (the Securitisation Law) permits a wide range of securitisation activity – "securitization" being defined as any "transaction by which a securitisation undertaking acquires or assumes, directly or indirectly, risks relating to claims, other assets, or obligations assumed by third parties or inherent to all or part of the activities of third parties and issues securities, whose value or yield depends on such risks."
Luxembourg securitisation undertakings have been used increasingly over the last two to three years as direct investment vehicles on aviation transactions, partly because they make very good sense from a legal, regulatory and tax point of view and partly because German KG arrangers have recognised an opportunity to broaden and/or internationalise their (historically domestic) investment base.
The securitisation undertaking (defined under the Securitisation Law to mean in broad terms an investor or participant in a "securitization") is usually a Luxembourg-incorporated public limited company (S.A.) or private limited liability company (S.à r.l.), and usually will participate as the (or a) shareholder of the aircraft owner or as a subordinated lender (mezzanine or junior) to the aircraft owner.
A securitisation undertaking can (if authorised by its articles of incorporation) create one or more "compartments," which correspond to a distinct part of the securitisation undertaking's assets and liabilities. This means that a single S.à r.l. can create multiple units to hold multiple aircraft. Although a compartment does not have separate legal personality, its assets are ring-fenced under the Securitisation Law.
The Securitisation Law is designed to protect the integrity of the securitisation undertaking and its investors for the following principal reasons:
- there is no restriction on the type of investor.
- there is no regulatory oversight by the CSSF (Luxembourg Supervisory Commission of the Financial Sector), unless a securitisation vehicle issues securities to the public on a continuous basis.1
- the scope of permitted activities for a securitisation undertaking is very wide.
Protection is afforded to both the securitisation undertaking and the compartments (if created).
Securitisation undertaking-level protection
- the rights of investors and creditors are limited to the assets of a securitisation undertaking.
- a securitisation undertaking is entitled to assign assets only in accordance with its constitutive documents, which normally will mean assignments to investors only.
- a securitisation undertaking cannot in any circumstances grant security over its assets or transfer its assets for guarantee purposes, except to secure obligations to its investors. This means, for example, that no security (for example, a security interest in the shares of the aircraft owner) can be granted to an aircraft financier on a deal that involves conventional debt financing. Any such security would be void as a matter of
- the Securitisation Law specifically provides that investors and creditors can agree to subordination and non-petitioning covenants (nothing unusual about that), and that any proceedings in breach of such covenants will be inadmissible. Aircraft financiers will need to consider carefully any request to agree to any such subordination/non-petitioning, given the permanent consequences.
As noted above, a compartment does not have separate legal personality. That said, its assets are ring-fenced by the Securitisation Law and its position as against investors and third party creditors is protected. The Securitisation Law specifically provides as follows:
- the rights of investors and creditors are limited to the assets of a compartment.
- the assets of a securitisation compartment are exclusively available to satisfy the investors and creditors in relation to that compartment.
- each compartment is separate and distinct from the other compartments (unless otherwise agreed in the securitisation undertaking's constitutive documents).
Each of the principles set out above also applies in the context of insolvency. This means that there are effective ring-fencing protections and cross-contamination (as between the compartments) protections.
The tax treatment of Luxembourg securitisation undertakings is another attraction for investors, particularly in terms of the ability to achieve almost complete tax neutrality. The following points are worth highlighting:
- although a securitisation undertaking (created as a corporate entity) is subject to Luxembourg corporate taxation, all money paid out to investors and other creditors qualifies as interest on debt (however paid), and as a result is fully deductible for tax purposes.
- distributions to investors in a securitisation undertaking are exempt from Luxembourg withholding tax.
Aircraft investors have many choices as far as investment type and structuring are concerned. A Luxembourg securitisation vehicle is an attractive option in that it allows investment in one or more aircraft in a way that is comparatively simple and certain (in terms of the legal and regulatory framework), and offers the added benefits of enhanced/enshrined bankruptcy protection and tax neutrality.