Security

Types

What types of collateral/security are typically granted to investors in a securitisation in your jurisdiction?

A Luxembourg securitisation vehicle may not, by any means whatsoever, create security interests over its assets or transfer its assets for guarantee purposes, except to secure the obligations it has assumed for their securitisation or in favour of its investors, their fiduciary-representative or the issuing vehicle participating in the securitisation.

The main type of collateral granted to investors in a securitisation would be a pledge over receivables acquired by the securitisation vehicle as well as a pledge over the SPV’s bank accounts. These types of assets fall under the definition of financial instruments according to the Luxembourg law of 5 August 2005 on financial collateral (Financial Collateral Law) that regulates the creation, perfection and enforcement of security interests over such assets.

The Financial Collateral Law specifically provides that a security interest over financial instruments can be granted to an agent or a trustee acting for itself or for the benefit of all investors, or both, in order to secure the claims of third-party beneficiaries, whether present or future, provided such third-party beneficiaries are determined or determinable.

The legal documentation relating to security interests over assets located in Luxembourg would be governed by Luxembourg law on the basis of the lex rei sitae principle. The pledge over claims will generally be governed by the law governing the receivable, depending on the foreign governing law. the security interest over the receivables may also be by way of a charge or an assignment for security purposes.

Luxembourg law does not provide for the creation of floating charges or debentures. This, however, does not restrict a Luxembourg company to grant a floating charge or a debenture over non-Luxembourg located assets, which will be governed accordingly by foreign laws.

Perfection

How is the interest of investors in a securitisation in the underlying security perfected in your jurisdiction?

Under Luxembourg law, the transfer of the possession (dispossession) of the assets over which the pledge is granted is a condition to the constitution of the pledge. Such dispossession can be done in various ways depending on the type of assets to be pledged. Dispossession is also required to make the pledge enforceable towards third parties. The law of the debtor’s jurisdiction may impose further perfection or notification requirements.

A Luxembourg law-governed claims pledge agreement is perfected by the mere conclusion of the pledge agreement. However, unless the debtor, whose claims are pledged, is party to the pledge agreement (which is highly unlikely in a securitisation operation), such a pledge agreement shall be notified to or acknowledged by the debtor whose claim is pledged. Lacking such notification, the debtor of a pledged claim may validly discharge his or her obligation to the pledger as long as he or she has no knowledge of the pledge’s conclusion. A Luxembourg law-governed pledge over bank accounts shall be notified to, and acknowledged by, the account bank maintaining the accounts.

Enforcement

How do investors enforce their security interest?

The Financial Collateral Law provides that security interests in relation to financial instruments can be enforced as follows (with the first option being the most common one), unless otherwise agreed by the parties at the moment of contracting. A notice prior to enforcement is not required where:

  • appropriate or cause a third party to appropriate the pledged assets at a price fixed, before or after their appropriation, according to the valuation method mutually determined by the parties;
  • assign or cause the assignment of the pledged assets by private sale in a commercially reasonable manner, by a sale on the stock exchange or by public auction;
  • obtain a court decision ruling that the pledged assets shall remain in his or her possession up to the amount of the debt, on the basis of an expert’s estimate; or
  • in the case of financial instruments, appropriate these financial instruments at the market price, if they are admitted to official listing on a stock exchange located in Luxembourg or elsewhere or are traded on a recognised, functionally operational, regulated market that is open to the public.
Commingling risk

Is commingling risk relating to collections an issue in your jurisdiction?

Commingling risk may be an issue in Luxembourg to the extent there is no security interest over the asset (receivable or bank account). On the other hand, any cash deposited in an account with another origin than the securitisation and pledged in favour of the investors (or their agent or trustee), will, in case of enforcement, be assumed to be for the benefit of such investors (or their agent or trustee) and other interested third parties will need to provide evidence of the non-securitisation link of such proceeds.