New Luxembourg Securitisation Law
Luxembourg will shortly implement sweeping changes to it’s Securitisation Law, thus enabling further advantages both for investors and promoters of securitisation vehicles in Europe.
The Luxembourg Securitisation Framework has proved to be very popular in Europe, with more than 2600 Securitisation vehicles being created as of 2021. There are currently more than 1500 SVs in Luxembourg, with more than 6500 compartments managing over Euro 350 billion and accounting for around 32% of all European SVs.
Changes to the Law
A. More legal forms now available for use – including Limited Partnerships
Under the current Securitisation Law, Securitisation Vehicles can be established as:
a. Public limited company (SA);
b. Private limited liability company (SARL);
c. Partnership limited by shares (SCA)
d. Cooperative company organized as a public limited company (Scoop SA); and
e. The SV may also be created in the form of a securitisation fund. This fund does not have legal personality and will need to engage a management company, which is also typically established in Luxembourg.
Now, under the new Law, Common Limited Partnership (CLP), Special limited Partnership (SLP), General Partnership (GP) and Public Simplified Company can also be used to create Securitisation Vehicles.
Of special interest is the SLP, since it has been a popular vehicle in the past few years.
B. New funding options
The current Law mandates that the Securitisation Vehicle must be financed through the issue of securities. The value of these securities are a factor of the securitised assets. Securities can be equity or debt securities and equity securities, and can be secured, or unsecured, and can also be issued for specific compartments.
Under the new Law, new funding methods will be possible, since the Law calls for the change of terminology from “securities” to “financial instruments”. Hence the value of the SV can track the performance of the underlying asset and be funded by loans as well.
C. Guidance on authorization requirement for CSSFs
The new Law states that the following three conditions have to be met, in order for the SV to come under the purview of CSSF Regulation:
- The issuance is addressed to Retail Clients;
- The financial instruments have a denomination not higher than EUR 100,000; and
- The financial instruments are not privately placed, and instead available for public distribution.
The new Law will allow for subordination of financial instruments issued by the Securitisation Vehicle; equity and fund units will be subordinated to debt instruments, and instruments with fixed returns will rank senior to those with variable returns.
E. Other changes
Other material changes include the possibility of SVs to grant guarantees to parties involved in the securitisation transaction (including those who are not direct investors/creditors), mandatory registration of SV Funds with the Luxembourg Trade and Companies Register, and approval of compartment-level financials by shareholders of the specific compartment. It is also now possible to actively manage the Securitisation Vehicle – this was not the case earlier.
A GLOBAL CENTRE FOR INVESTMENT FUNDS AND FINANCIAL STRUCTURING
Luxembourg is a global centre for investment funds, the second largest fund jurisdiction in the world, after the United States. It is the largest centre for funds in Europe, with over Euro 4.5 trillion in cumulative assets under management in supervised funds alone.
Why setup in Luxembourg?
The country is:
- A founding member of the EU
- Politically stable
- Financially stable
- Access to over 500 million EU residents
- Reliable investment regulations
- Over 4,200 supervised investment vehicles with around 14,500 sub-funds.
- A competitive framework for passporting of funds within the EU
- Luxembourg funds are sold in more than 70 countries and is the leading jurisdiction for fund distribution
- A responsive and globally recognized financial regulator
- A wide range of supervised and non-supervised investment funds
- UCITS and AIFs
- Umbrella funds
- Non-supervised funds
- Depending on the need of investors, Luxembourg offers tax exempt, tax neutral or taxable investment vehicles,
- Some exemptions for VAT payments;
- Funds may access Double Taxation Avoidance Treaty benefits or establish SPVs that would have access.
What is securitisation?
Some transactions involve the transfer of assets or risks into special purpose vehicles, and then the transformation of such assets or risks into securities that can be traded.
A major advantage of securitisation is the creation of liquidity for the originator of the transaction, and in some cases, the shifting of risks from the balance sheets of corporate issuers.
Securitisation transactions are also commonly used to secure additional funding.
Why setup a securitisation vehicle in Luxembourg?
In Luxembourg, securitisation of a wide range of assets, loans, bonds, incomes and risks is allowed. In addition to this, risks related to debt, movable or immovable property, tangible and intangible assets are also allowed to be securitised.
In general, anything that is a store of future income can be securitised in Luxembourg.
Issuers mainly use securitisation as an alternative to funding from banks and other formal lending institutions. Luxembourg offers many investment vehicles that can be used for securitisation transactions.
Luxembourg has an extensive Securitisation Law, that is innovative and designed for cross-border transactions, especially in the European Union. This has become very popular and there are currently more than 1500 securitisation vehicles, with over 7,000 compartments in Luxembourg, resulting in over 35% market share in all of Europe.
Other advantages include:
(i.)choice between various legal structures – companies and well as investment fund structures.
(ii.)the securitisation vehicle can be supervised or non-supervised.
(iii.)Such vehicles can be listed.
(v.)Higher levels of investor protection.
(vi.)Can create compartments.
(vii.)Recognition of ring-fencing.
Why setup a securitisation vehicle?
A Luxembourg securitisation vehicle can offer the following benefits to the issuers of the securities:
Liquidity – Some assets cannot be sold, but still generate regular income streams. These assets can be securitised, and hence provide the issuer with liquidity, while still maintaining ownership of the asset.
Access to capital markets – The rating of the issuer and the issued security may differ. For instance, the corporate originator may have a BB rating, however, the high-quality assets that are securitised may result in an AAA rating for the securitisation vehicle. In such scenarios, the corporate may be able to access funds at lower interest rates.
What are compartments?
One of the advantages of setting up a securitisation vehicle in Luxembourg is its ability to create compartments in a cost- and time efficient manner. A compartment can be created by a Director’s resolution – there are no other approvals required.
Compartments allow for ring-fencing and segregation of assets and liabilities, thus in effect making compartments a separate entity, without the requirement for creating new companies for each such transaction.
What legal forms are available for securitisation vehicles in Luxembourg?
A securitisation vehicle can be established as a:
1. Public limited company – SA;
2. Private limited liability company – SARL;
3. Partnership limited by shares – SCA; or
4. Cooperative company organized as a public limited company – Scoop SA
A Securitisation Fund can also be incorporated as a standalone fund, or an umbrella fund as well.
Luxembourg structures and the GCC
Luxembourg is a jurisdiction of choice for investors based in the GCC. While the Dubai International Financial Centre (DIFC) and the Abu Dhabi Global Market (ADGM) also offer such structures, Luxembourg securitisation vehicles have more diverse options, including unsupervised structures.
Luxembourg is also an excellent jurisdiction for standalone funds due to lower setup and maintenance costs, in some cases, as low as 35% of the costs in similar onshore jurisdictions in the GCC. They can be established quickly and are more flexible.
Most large banks and investment managers in the UAE and the GCC are familiar with Luxembourg structures. In fact, Luxembourg domiciled investment funds dominate among foreign funds sold in the GCC.
How can we at 10 Leaves help you?
We provide turnkey services for Luxembourg structures.
From initial consulting, to assistance in authorisations, to assistance in preparation of the legal documentation, 10 Leaves Legability helps you navigate the legal framework in Luxembourg and submit an application that is comprehensive, complete and compliant.
Our services include assistance in:
1. Reviewing the business model and advice on the applicable regulatory framework;
2. Preparation of all the required documentation, including Private Placement Memorandums and agreements;
3. Provision of compliance and bookkeeping services; and
4. Finalisation of registered space and bank account opening.
In fact, we can do all this without you having to visit Luxembourg! For More Details, Contact us here