Proposed changes to the Luxembourg securitization regime: introduction of more flexibility and new opportunities | Dechert LLP


At the end of May 2021, the Luxembourg government tabled a bill1 (the Law Project) to the Parliament amending the Luxembourg law of 22 March 2004 on securitization (the Law of 2004).

This long-awaited update of the Luxembourg securitization regime aims to clarify certain aspects of the 2004 Law, as well as adapt it to the requirements of the current securitization market. The proposed changes should further increase the attractiveness of Luxembourg securitization vehicles and offer new opportunities to the Luxembourg financial services sector.

This OnPoint deals with the main proposed changes to the 2004 law.

Additional financing options

Under the current regime, the acquisition of the risks that a Luxembourg securitization vehicle (SV) intends to securitize must be financed by issuing securities (securities) and in principle2 the OAS cannot resort to other means of financing, such as entering into a traditional loan agreement that is not structured as a debt obligation.

Under the bill, it is proposed that the VS should also be allowed to finance their activities by entering into contractual loans, partially or totally.

It is also proposed to replace the reference to “securities” by “financial instruments” (financial instruments), as “titles” (securities) is a term which is not clearly defined in Luxembourg law and may lead to problems of interpretation, particularly when the securities issued are not governed by Luxembourg law. However, “financial instruments” are clearly defined in the Luxembourg law of 5 August 2005 on financial guarantee contracts.3.

These proposed changes clarify and expand the means by which the VS can finance their securitization activities. They also align the Luxembourg securitization regime with the European securitization regime by ensuring that any securitization subject to the Securitization Regulation4 can be carried out by Luxembourg SVs (including securitization resulting from the conclusion of loan contracts).

Active management of debt portfolios: opening the door to CLOs?

While the 2004 law is silent on this subject, current regulatory practice is very restrictive on the management by an SV of its securitized assets. CSSF5 considers that “the action of the OAS must be limited to a passive management of” the prudent man “”6 and that such management “may in no case consist of active management of the portfolio aimed at profiting from short-term fluctuations in market prices and resulting in a continuous activity of acquisition and disposal of receivables or (…) a professional credit activity carried out by the securitization body for its own account ‘7.

Taking into account current debt market practices and the opportunities that a more permissive approach would offer the Luxembourg financial service especially for CLO managers. s industry, the bill proposes to authorize the VS to actively manage a portfolio of assets made up of debt or receivables financial instruments, provided that their acquisition is not financed by the issuance of financial instruments in the industry. public8.

Such a development should further increase the attractiveness of the use of Luxembourg VS both as autonomous investment vehicles and as essential elements of larger investment structures managing debt portfolios, in particular for managers of CLOs.

Clarification of the criteria for the approval of VS by the CSSF

SVs issuing securities to the public on a continuous basis must be approved by the CSSF.

The notion of “continuous issuance of securities to the public” is not defined in the 2004 law. It is therefore proposed in the draft law to specify the conditions under which the VS must be approved by the CSSF, in adding the following definitions, in accordance with current regulatory practice:

  • An SV issues financial instruments on a continuous basis when it carries out more than three issues of financial instruments offered to the public during a financial year, taking into account the total number of issues by all sub-funds of the SV;
  • An issue of financial instruments is offered to the public when:
    • It is not reserved for professional customers9; and
    • The nominal value of financial instruments is less than € 100,000; and
    • It is not distributed by way of private placement.

Grant of collateral

Under the 2004 law, the VS can provide collateral on their assets or transfer their assets for collateral purposes, but only in order to “secure the obligations it has assumed for their securitization or in favor of its investors, of their vehicle participating in the securitization ‘ten.

The bill proposes to allow the OAS to grant collateral on its assets to cover the obligations associated with the securitization transaction, expanding the circumstances under which collateral can be granted while preserving investor protection.

Subordination

It is proposed to introduce a set of rules to clarify the classification between the claims that holders of instruments issued by an OAS may have against the OAS. These rules would apply by default and could be canceled by specific contractual provisions between the parties.

More flexibility regarding the legal form of the OAS

The 2004 law11 limits the legal form that can be used to set up a Luxembourg securitization company and in practice most securitization companies take the form of a joint stock company (anonimous society or SA) or a limited liability company (limited liability company or Sàrl).

The bill proposes to offer more flexibility and to allow securitization companies to also constitute themselves in limited partnerships (limited partnership or SCS), special limited partnership (special limited partnership or SCSP), simplified limited liability company (joint stock company or SAS) or general partnership (partnership or SNC). The addition of the SCS and the SCSp will be particularly well received by investors and managers accustomed to such fiscally transparent partnerships.

Accounting requirements

In order to ensure the same level of accounting transparency for investors regardless of the legal form of the SV, the bill provides for an SV incorporated as a SCS, SCSp or SNC (whose legal forms are in principle less strict accounting obligations). ) is subject to the same obligations in terms of establishment and publication of the accounts as a SV incorporated as an SA or Sàrl.

In addition, to strengthen the effectiveness of legal segregation between sub-funds of an SV, within the framework of the changes proposed when a sub-fund is financed by the issue of shares, it will be possible to have the accounts drawn up at the level of the sub-fund only. by the shareholders of this compartment.

Conclusion

The changes proposed to the Luxembourg securitization regime by the bill have been welcomed by the Luxembourg financial services industry, with the additional opportunities and flexibility they would bring for Luxembourg SVs. While it is currently unclear when the bill will be approved, we will provide further updates as the legislation progresses.

Footnotes

1) Bill on: 1 ° amendment of the amended law of 22 March 2004 on securitization; 2 ° modification of the amended law of 23 December 1998 establishing a supervisory commission for the financial sector; 3 ° modification of the amended law of 19 December 2002 concerning the trade and company register as well as the accounting and annual accounts of companies; 4 ° modification of the law of July 16, 2019 implementing the EuVECA, EuSEF, MMF, ELTIF and STS Securitization regulations; and 5 ° implementation of Regulation (EU) 2020/1503 of the European Parliament and of the Council of October 7, 2020 on European crowdfunding services for entrepreneurs, and amending Regulation (EU) 2017/1129 and Directive (EU ) 2019/1973.

2) Except on an ancillary and / or limited basis.

3) Article 1, point 8 of the Luxembourg law of 5 August 2005 on financial guarantee contracts, with the exception of claims and rights referred to in article 1, point 8, f.

4) Regulation (EU) 2017/2402 of the European Parliament and of the Council of 12 December 2017 establishing a general framework for securitization and creating a specific framework for simple, transparent and standardized securitization.

5) the Financial Sector Supervisory Commission, that is to say the Luxembourg financial supervisory authority.

6) Frequently Asked Questions, Securitization of the CSSF of 23 October 2013.

7) Frequently Asked Questions, Securitization of the CSSF of 23 October 2013.

8) See below on the notion of “issuance of securities to the public”.

9) Within the meaning of article 1 of the Luxembourg law of April 5, 1993 on the financial sector.

ten) Article 61, paragraph 3, of the 2004 law.

11) Article 4 of the 2004 law: “Securitization companies must be established in the form of a public limited company, a limited partnership with shares, a limited liability company or a cooperative company organized in the form of a public limited company (cooperative company organized as a public limited company).


About Mallory Brown

Check Also

Opinion: Judge blocking student loan relief for millions gets the law wrong

Editor’s note: Steve Vladeck is a CNN legal analyst and professor at the University of …

Leave a Reply

Your email address will not be published.