Transactional issues

SPV forms

Which forms can special purpose vehicles take in a securitisation transaction?

Securitisation undertakings or SSPEs, as defined under the Securitisation Regulation, may be set up under the form of incorporated or unincorporated entity (ie, a fund managed by an incorporated management company). Securitisation companies would be generally set up as a limited liability entity under the following forms:

  • a public company limited by shares (SA representing 54 per cent of the SSPEs);
  • a private limited liability company (SARL representing 42 per cent of the SSPEs);
  • a corporate partnership limited by shares;
  • a cooperative company organised as a public limited company.

The choice for an incorporated or unincorporated form depends mainly on the level of tax transparency that investors and securitisation vehicles wish to obtain.

SPV formation process

What is involved in forming the different types of SPVs in your jurisdiction?

Depending on the type of securitisation vehicle and its regulatory status (or absence thereof), the incorporation of a plain vanilla unregulated special purpose vehicle (SPV) may be rather straightforward and be made at reasonable cost. The delay for incorporating a plain vanilla SPV, provided the know-your-client (KYC) formalities with the local banks have been satisfactorily filled out with the depositary and the bank, would not exceed 48 hours. Luxembourg banks aim to closely scrutinise securitisation operations that would not be directed to institutional investor and may be reluctant to act as depositary without a full KYC process and identification of future subscribers.

The main public documentation would consist in the articles of incorporation of the SPV. Another contractual agreement for structuring the securitisation transactions would need to be drafted and remitted to the depositary bank, such as:

  • the claims purchase agreement;
  • the claims risk assignment agreement; and
  • the terms and conditions of the SPV securities issued to its investors.

A regulated securitisation vehicle will require approval of its offering circular by the CSSF, which generally requires several months of application procedure.

Governing law

Is it possible to stipulate which jurisdiction’s law applies to the assignment of receivables to the SPV?

The assignment of the receivables to the SPV concerns the relationship between the originator as assignor and the SPV as assignee. At this level, it is possible to stipulate which jurisdiction’s law applies to the assignment of receivables to the SPV.

For contracts entered into on or after 17 December 2009, the choice of law is governed by Regulation No. 593/2008/EC of 17 June 2008 (Rome I).

Under Rome I, the parties to a contract are free to agree that the contract be governed by the law of any country, irrespective of the law governing the receivables. The Rome Convention and Rome I allow for modification of the parties’ choice only:

  • where all elements of a contract are connected to a country other than the country whose law has been chosen by the parties, and that country has rules that cannot be disapplied by contract;
  • to the extent that the elected law conflicts with overriding mandatory rules of Luxembourg law; or
  • where the applicable foreign law is manifestly incompatible with Luxembourg public policy.

With regard to the rights of the SPV as assignee against the underlying debtor, the position differs. The liabilities (and rights) of the debtor, including the assignability of the claim and the question as to whether the claim has been discharged, will be governed by the governing law of the assigned or underlying claim (namely the receivables contract itself) pursuant to article 14(2) of Rome I.

Asset acquisition and transfer

May an SPV acquire new assets or transfer its assets after issuance of its securities? Under what conditions?

Under the Securitisation Law, an SPV may acquire new assets or transfer its assets after the issuance of its securities, provided that the constitutional documents and the purchase agreement as well the documentation in relation to the securities issued to the investors allow it. An SPV may also create a new sub-fund in relation to the issue of new securities.

Under the Securitisation Regulation, the activities of the SSPE are strictly limited to those appropriate to carry out one or more securitisations, the structure of which are intended to isolate the obligations of the SSPE from those of the originator. Accordingly, the SSPE may only acquire new assets or transfer its assets if this is somehow related to a securitisation transaction.

Registration

What are the registration requirements for a securitisation?

As per the Securitisation Law, a securitisation vehicle that does not have to be authorised by the CSSF as set out in question 4 must not fulfil any securitisation specific registration requirement. As a general matter and, as for any Luxembourg commercial company, a securitisation company, either regulated or not, must be registered with the Luxembourg trade and companies’ registry and file its articles of incorporation, annual accounts and other corporate documents.

A regulated securitisation vehicle must have its articles of incorporation or, as applicable, its management regulations or the articles of its management company, or both, reviewed and approved by the Luxembourg financial regulator. See question 6 for further details on the documents to be filed with the CSSF during the authorisation procedure of a securitisation undertaking.

Any change in the administrative, management and supervisory bodies of a regulated securitisation vehicle must be notified forthwith to the CSSF and any change in control, any replacement of its management company, as well as any amendment to the management regulations or its articles of incorporation are subject to the prior approval of the CSSF.

Each CSSF authorised securitisation undertaking must spontaneously communicate to the CSSF the reports and written comments issued by its statutory auditors in the framework of the approval of its annual accounts.

The Securitisation Regulation requires the registration with ESMA of any securitisation repository. In the case of a STS securitisation, ESMA must be notified of such transaction in accordance with article 27 of the Securitisation Regulation.

Obligor notification

Must obligors be informed of the securitisation? How is notification effected?

In accordance with the Securitisation Law, the assignment of an existing claim to or by a securitisation undertaking becomes effective between the parties and against third parties as from the time the assignment is agreed upon. The Securitisation Regulation does not provide for any obligation with regard to the information of the obligors on the securitisation.

However, a notification to the assigned obligor is advisable to the extent that, failing that notification, he or she would validly be discharged from his or her debt when paying it to the assignor.

In practice, the law governing the assignment of claims to a securitisation undertaking would frequently be a foreign law. Accordingly, the conditions for effecting the transfer and making it opposable to third-parties will be governed by that foreign law and an analysis claim by claim and obligor by obligor may be required to determine whether any notification or any other formality would apply.

What confidentiality and data protection measures are required to protect obligors in a securitisation? Is waiver of confidentiality possible?

The rules relating to the protection of confidentiality or personal data and banking secrecy remain applicable after the securitisation of the receivables and may restrain the transfer of information to investors or to the securitisation entity. Luxembourg data protection law requires that any individual whose personal data is stored in a database be entitled to accede to the stored information enabling him to alter or remove such information.

Furthermore, when the assignor of receivables is a credit institution, the confidential information is covered by strict banking secrecy laws, prohibiting the transfer of the information to third parties without prior consent of the concerned obligors.

Credit rating agencies

Are there any rules regulating the relationship between credit rating agencies and issuers? What factors do ratings agencies focus on when rating securitised issuances?

The relationship between credit rating agencies (CRAs) and issuers is regulated by Regulation (EC) No. 1060/2009, as amended in May 2011 by Regulation (EU) No. 513/2011 (CRA II) (in which responsibility for the registration and ongoing supervision of EU-based credit rating agencies was transferred to the ESMA), in May 2013 by Regulation (EU) No. 462/2013 (CRA III) and in December 2017 by Regulation (EU) 2017/2402.

EU Regulation 2017/2402 defines securitisation and establishes due-diligence, risk-retention and transparency requirements. This regulation created a specific framework for STS securitisation and is applicable to EU securitisation transactions whose securities are issued on or after 1 January 2019.

CRA III introduced new measures for structured finance instruments in particular, which require, among others:

  • that issuers who pay for a credit rating on a structured finance instrument will need to obtain ratings from at least two CRAs on that instrument;
  • a mandatory rotation of CRAs every four years; and
  • that the issuer, originator and sponsor be all jointly responsible for making specific information publicly available through a website (the European Rating Platform) established by the ESMA, on an ongoing basis.

In giving a rating to the securitisation, the CRAs disregard the creditworthiness of the originator, insofar as a properly structured securitisation should isolate the securitised assets from the originator’s insolvency. Rather, the CRAs take into account factors including:

  • the historic performance of the securitised assets;
  • any credit enhancement, liquidity facilities and the credit standing of the administrative parties (including hedging counterparties and account banks); and
  • the structure and legal integrity of the transaction.
Directors’ and officers’ duties

What are the chief duties of directors and officers of SPVs? Must they be independent of the originator and owner of the SPV?

There is no legal requirement for the directors and officers of an SPV to be independent of the originator and owner of the SPV. However, pursuant to principles of good governance, directors have a duty to conduct the business of the SPV in accordance with its corporate purpose and laws and manage it in its best corporate interest. Even if the SPV has only one shareholder, the corporate interest of the SPV should not to be aligned to the interest of that sole shareholder and it would be advisable to appoint one or more independent directors.

In addition, the Securitisation Regulation provides for specific sanctions, including temporary bans, to be imposed on the originator’s, sponsor’s or SSPE’s management body if certain key requirements are not complied with in the course of a securitisation transaction.

Risk exposure

Are there regulations requiring originators and arrangers to retain some exposure to risk in a securitisation?

In accordance with article 6 of the Securitisation Regulation, the originator, sponsor or original lender of a securitisation shall retain on an ongoing basis a material net economic interest in the securitisation of not less than 5 per cent. That interest shall be measured at the origination and shall be determined by the notional value for off-balance-sheet items. Where the originator, sponsor or original lender have not agreed between them who will retain the material net economic interest, the originator shall retain the material net economic interest. There shall be no multiple applications of the retention requirements for any given securitisation. The material net economic interest shall not be split amongst different types of retainers and not be subject to any credit-risk mitigation or hedging.