Amendments to the Securitisation Law

Broader financing toolbox

While the current Securitisation Law already provides for a broad range of financing options for SVs - including through the issuance of financial instruments and the incurrence of loans (emprunts), understood to cover any form of debt giving rise to a repayment obligation - the Draft Securitisation Bill expands this framework by expressly referring to “any other financial commitment”. This clarification codifies existing market practice and provides greater legal certainty for Islamic financing structures, as well as other structured finance arrangements that do not necessarily qualify as financial instruments or loans. For example, SVs will now be expressly permitted to use repurchase arrangements (repos) to finance or leverage their investments.

Expansion of the pool of assets that can be actively managed

As currently framed, the Securitisation Law permits SVs to actively manage only debt securities, debt-related financial instruments and receivables, and only to the extent that the relevant SVs do not issue financial instruments to the public. In an important step for Luxembourg, the Draft Securitisation Bill significantly relaxes this limitation by providing that, in the context of private securitisation transactions, Luxembourg SVs may actively manage any type of risk exposure, be it in relation to debt instruments, receivables, equity or even physical assets, effectively opening the door to accommodate the investors attracted by strategies extending beyond credit investments.

The Draft Securitisation Bill also introduces a non-exhaustive list of permitted actions (e.g. substitutions of non-performing or non-eligible assets, replenishments during the ramp-up period, etc.) that do not qualify as active management, providing welcome guidance for structuring of public securitisations that would still be required to retain passive attitude with regard to their investments.

Security interests and guarantees

Following the 2022 reform, the Securitisation Law significantly broadened the scope of security interests and guarantees that may be granted by an SV, allowing it to secure or guarantee obligations related to the securitisation transaction, rather than being limited to its own obligations. While this was widely welcomed by the market at the time, questions arose in the context of certain transactions - notably where the SV was required to guarantee the obligations of its investors - as to what constitutes obligations “related to the securitisation transaction”.

In order to address this uncertainty, the Draft Securitisation Bill provides further clarification by expressly confirming that an SV may secure or guarantee: (i) its own obligations, (ii) the obligations of any third party directly or indirectly related to the securitisation transaction, and (iii) the obligations of any third party in connection with a direct or indirect investment in the securitisation.

Intra-compartment investments

A new provision explicitly allows a compartment of an SV to invest into another compartment of the same SV, subject to anti-circularity safeguards.  Namely, a compartment cannot invest into another compartment if such other compartment already invests into the first one. Indeed, such circular investments would be contrary to the requirement to have risk transfer which is one of the cornerstone principles of the Securitisation Law and would underline the integrity of capital. This amendment aligns SVs more closely with the Luxembourg legal framework governing certain investments fund (such RAIFs and SIFs) and enhances structuring optionality for multi-compartment securitisation platforms.

Insolvency-related updates

The amendments also confirm asset segregation between securitisation funds (“fonds de titrisation") and their management companies (“sociétés de gestion”) in case of management company insolvency and update references to Luxembourg’s modernised reorganisation proceedings (following the adoption of Law of 7 August 2023 on the preservation of businesses and the modernisation of bankruptcy law).

Refinement of statutory subordination rules

The Securitisation Law was amended in 2022 in order to provide for statutory subordinations rules that determine the rank of various instruments that can be issued by an SV. According to such rules, inter alia, (i) certain equity interests issued by an SV are subordinated to the other financial instruments issued and loans contracted by the SV and (ii) the debt financial instruments with non-fixed yield (such as income-sharing loans or notes) issued by an SV are subordinated to the debt financial instruments with fixed yield.

The Draft Securitisation Bill now clarifies that instruments with an interest rate calculated based on reference rate plus margin are treated as fixed yield instruments and thus rank (i) senior to non-fixed income debt instruments and (ii) pari passu with other debt instruments with a fixed interest rate.

Deferred payment of statutory share capital for SARLs

Anyone who has had to incorporate a Luxembourg SV is familiar with a well-known roadblock: the need to open a bank account for the payment of the statutory minimum share capital. In practice, this step - and, consequently, the incorporation of the SV - could take several months, as banks need some time to onboard the SVs and run the relevant AML/ KYC checks.

In an environment where losing time could potentially mean losing a deal, the Deferred Capital Law now permits the payment of the statutory minimum share capital (EUR 12,000) for SARLs - a widely preferred corporate form for Luxembourg SVs - to be deferred for up to 12 months following incorporation. As a result, SVs opting for this corporate form are no longer required to open a bank account prior to incorporation, which will undoubtedly be a welcome development for sponsors pursuing time-sensitive investments and will expedite the transactions.

Next step

The Draft Securitisation Bill is currently in the legislative process. While its core elements are unlikely to be fundamentally altered, market participants should monitor developments and assess potential implementation in upcoming transactions.

The expedited timeline for the set-up of the Luxembourg SVs in the form of a SARL, combined with the amendments proposed by the Draft Securitisation Bill, if adopted in its current form, are expected to have a tangible impact on structuring practices, in particular by enabling faster deal execution and greater flexibility in funding structures, facilitating more sophisticated multi-compartment platforms, increasing legal certainty in respect of security packages and insolvency protection, and expanding the scope of actively managed transactions. Overall, the reform continues Luxembourg’s practical and market-driven approach, ensuring that its securitisation framework remains both robust and adaptable to evolving market needs.