The Luxembourg Parliament voted on 9 February 2022 in favour of the draft law no. 7825 (Amending Law) amending, among others, the Luxembourg Securitisation Law of 22 March 2004, as amended (Securitisation Law).
The Amending Law introduces several important clarifications within the Securitisation Law allowing it to exclude scenarios of misinterpretation and ensure the Luxembourg securitisation market is more attractive. We have outlined the most important changes below by following the order of the Amending Law1:
Clarification of the term “securities” to be issued
The Amending Law broadens the definition of “securities” and replaces such term by "financial instruments". Prior to the Amending Law, many questions have arisen about the qualification of certain instruments as securities, in particular those not qualified as such by their legal framework under a foreign law. Securitization vehicles will now be able to issue financial instruments within the meaning of the Luxembourg law of 5 August 2005 on financial collateral arrangements, as amended, and therefore, can make use of instruments in the widest sense leading to more structuring solutions.
Possibility to be exclusively financed by borrowings
The Amending Law states that securitisation vehicles can now in addition to financial instruments clearly be fully or partially financed by borrowings such as loans in the widest sense, including indebtedness where the amount repayable depends on the performance of underlying assets or the financial situation of the issuer.
Prior to such clarification, the use of loan financings was only allowed in specific circumstances, considerably restricting the possibilities for investors and reflecting a non-consistency with the Securitisation Regulation that already foresaw loans within its scope.
Extension of corporate forms for set up
The Amending Law further allows securitisation vehicles to be now also set up as general partnership (société en nom collectif), limited or special partnership (société en commandite simple or société en commandite spéciale) and simplified limited company (société par actions simplifiée). Prior to this modification, the Securitisation Law foresaw solely the setup of private limited liability companies (société à responsabilité limitée). The Amending Law promotes hence flexibility and the use of tax transparent corporate forms alongside the current use of securitisation funds.
Registration requirement for securitisation funds
The Amending Law foresees that securitisation funds, as existing or to be established, shall register with the Luxembourg Register of Commerce and Companies in order to provide investors with an additional identification mean, including the attributed registration number, and therefore avoids certain administrative issues, including the inability for a securitisation funds to list their securities on a stock exchange.
A refined definition of the issuance of securities to the public on a continuous basis
Prior to the Amending Law, the Securitisation Law provided that securitisation vehicles that issue securities to the public on a continuous basis must be authorised by the Supervision Commission of the Financial Sector (CSSF) in order to carry out their activities. For the purpose of assessing whether an authorisation is required, the CSSF clarified the notion of a "continuous basis" by stating that an issuance of securities is deemed to be carried out on a continuous basis when the securitisation vehicle undertakes more than three issues to the public per year, the number of issues to be taken into consideration being the total number of issues of all compartments of the securitisation vehicle.
The Amending Law foresees that securitisation vehicles offer financial instruments to the public on a continuous basis more than three times during a financial year, the number of issues corresponding to the total issues made by all the compartments of the securitisation vehicle during that period and
- which is not intended for professional clients (within the meaning of the law of 5 April 1993 on the financial sector, as amended); or
- whose denomination is greater than EUR 100,000; or
- which are not offered by way of a private placement.
Accounting and distribution rules set up on a compartment basis
The Amending Law outlines the possibility for equity-financed compartments to take certain decisions at the compartment level for more investor protection and as such, if provided for in the constitutive documents, only the shareholders or members who hold shares or units issued by issued by that compartment(s) can approve the balance sheet or profit and loss accounts. In the same way, the profit and the distributable reserves can also be determined on a compartment basis, without taking into account the situation of the securitisation undertaking as a whole.
The Amending Law adds an obligation for securitisation vehicles having opted for the partnership form (either general, limited or special limited) to draw up and publish 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. The purpose of this approach is to ensure a degree of transparency and protection for investors, who therefore benefit from financial information about the securitization company in which they invest.
The Amending Law introduces a new article of the Securitisation Law providing for the securitisation vehicles to securitise risk portfolios actively managed by the vehicle itself or a third-party only if the financial instruments are issued by way of a private placement and not via public offer and where the securitised assets consist of debt securities, debt financial instruments or receivables.
This modification will allow Luxembourg to attract actively managed collateralised loan obligations (CLOs) and collateralised debt obligations (CDOs).
Clarification on subordination rules
The Amending Law expressly clarifies the subordination rules as follows:
- Units of a securitisation fund are subordinated to other financial instruments issued by the securitisation fund and borrowings contracted by such 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.
These subordination rules may be overridden by contractually agreed clauses defining the ranking of the rights of investors and creditors differently, such as the constitutive documents, the management rules of the securitisation fund or any contract to which it is party.
The amendment to the Securitisation Law is a great step towards even more flexibility and greater opportunities for investors on the Luxembourg securitisation market.