The Luxembourg law of 22 March 2004 on securitisation, as amended (the Securitisation Law) governing Luxembourg securitisation vehicles (SVs) has been in force for almost two decades now and it has become a cornerstone of success for Luxembourg as a leading centre for securitisation and structured finance transactions. It has created a reliable and investor-friendly legal and tax framework for securitisation transactions carried out by Luxembourg SVs featuring a high degree of flexibility. Although they say that all good things must come to an end, some of them just get better. The Luxembourg Parliament (Chambre des Députés) has just passed a new bill amending the Securitisation Law.

So, what's in it for you?

The investors in a securitisation structure will be delighted to hear that while previously an SV was required to fund itself almost exclusively by issuance of securities (valeurs mobilières) and was allowed to incur loans only in limited situations and subject to certain restrictions, there are no limits now to the way the financing arrangements can be structured. To this end, the new Securitisation Law permits an SV to (i) issue financial instruments (which, unlike the previously somewhat vague term “securities”, is defined by the reference to the Luxembourg law of 5 August 2005 on financial collateral arrangements, as amended, and covers a very broad array of instruments), or (ii) contract loans, in order to finance, wholly or in part, the acquisition of underlying assets. The latter, according to the parliamentary works, comprises, irrespective of its accounting treatment, any kind of debt that gives rise to the obligation to reimburse the creditors, including instruments where such reimbursement obligation is dependent on the performance of the underlying assets, or the financial situation of the SV.

For years, financing arrangements involving an SV were hindered by the prohibition imposed on the SV to grant security interests, unless they were granted for its own obligations or in favour of its investors. A structure where the secured debt was incurred at the level of the parent or a subsidiary of the SV was bound to run into some difficulties. The new law introduces a degree of flexibility: it allows an SV to secure the obligations of other persons, and not only its own, as long as such obligations are related to the securitisation transaction. The sanction of nullity for non-compliant transaction has also been removed.

While the Securitisation Law permits any kind of assets to be securitised, the nature of securitisation transactions requires that the securitised risks stem exclusively from the assets acquired or assumed by an SV in the course of the securitisation and not from any entrepreneurial or commercial activity of the SV. Thus, SVs must have a passive attitude when managing their assets.

The new Securitisation Law allows active management only with regard to SVs securitising a portfolio of debt securities, debt financial instruments and receivables, provided that the SVs do not issue financial instruments to the public. This creates opportunities for actively managed CLO structures to be established in Luxembourg.

The new Securitisation Law also clarifies that the SV is allowed to acquire and hold the securitised assets directly or indirectly, i.e. through intermediate holding vehicles. This clarification should not be regarded as distorting the spirit of securitisation, but rather as implementing a more economic, look-through approach.

Catching up with the developments in the Luxembourg companies law, the new Securitisation Law introduces additional corporate forms available for the SVs: unlimited companies (sociétés en nom collectif) (SENC), common limited partnerships (sociétés en commandite simple) (SCS), special limited partnerships (sociétés en commandite spéciale)(SCSp) and simplified public limited liability companies (sociétés par actions simplifiées) (SAS).

All SVs (including SVs in the form of a common limited partnership (société en commandite simple) (SCS), a special limited partnership (société en commandite spéciale) (SCSp) and an unlimited company (société en nom collectif) (SENC)) have to prepare and publish annual accounts, in each case to be audited by one or more approved Luxembourg independent auditors (réviseurs d’entreprises agréés).

In addition, all securitisation funds are now subject to the registration with the Luxembourg Trade and Companies Register.

Luxembourg SVs are unregulated entities and are not subject to any authorisation and supervision, unless the SVs issue financial instruments (i) to the public, and (ii) on a continuous basis. In the latter case, the SVs must be approved and supervised by the by the Luxembourg Supervisory Commission of the Financial Sector (Commission de Surveillance du Secteur Financier) (the CSSF). Up to now, the frequent asked questions of the CSSF included clarifications on what issuances would satisfy these criteria, but the law was mute on the subject. These clarifications have now been helpfully included directly into the Securitisation Law, with minor modifications meant to align it with the latest changes to the European prospectus regime.

In particular, the new Securitisation Law thus clarifies that:

  • financial instruments are deemed to be issued on a continuous basis if there are more than three issuances of financial instruments offered to the public during a financial year (on the basis of the SV as a whole, and not on a compartment-by-compartment basis); and
  • public issuances are issuances of financial instruments:
  • which are not intended for professional clients within the meaning of article 1(5) of the law of 5 April 1993 relating to the financial sector (corresponds to the definition of professional clients for MiFID II purposes);
  • whose denominations are less than €100,000 (previously €125,000); and
  • which are not distributed on a private placement basis.

Criminal sanctions and fines have also been introduced for the public issuance of financial instruments without prior authorisation by CSSF.

The Securitisation Law allows multi-compartments SVs that are financed by equity, to approve the balance sheet and the profit and loss statement of each compartment by virtue of the votes of such compartment’s shareholders only, provided that such option is included in their articles of association. Similarly, the articles of association of an SV may provide that profits, distributable reserves and mandatory legal reserves of a compartment, are determined on a separate basis and without reference to the financial situation of the SV as a whole. 

The makeover of the Securitisation Law is definitely good news to the Luxembourg market. Although the freshly passed bill does not introduce any revolutionary changes, it hones the already existing tools for a better, sharper, more sophisticated securitisation framework.

For a full overview the Luxembourg securitisation regime, you can download our securitisation brochure here.

The makeover of the Securitisation Law is definitely good news to the Luxembourg market. Although the freshly passed bill does not introduce any revolutionary changes, it hones the already existing tools for a better, sharper, more sophisticated securitisation framework.

Luxembourg Securitisation Vehicles
For a full overview of the Luxembourg securitisation regime