(R)evolution of the securitisation framework
On 4 March 2022, the law of 25 February 2022 amending the law of 22 March 2004 on securitisation (the 2004 Law) has been published. It entered into force on 8 March 2022. This is a welcomed (r)evolution in the securitisation operations in the Grand Duchy of Luxembourg after 18 years of implementation of a tested and widely admitted legal framework.
Besides some major conceptual changes in the paradigm of securitisation operations that the legal practitioners had been expecting for a long time, the Luxembourg legislator also decided to take this opportunity to introduce additional flexibilities based on the experience acquired over the past 18 years.
This modernisation, which has been called by the professionals over the past years to maintain a competitive flexible framework for securitisation transactions, also confirms some possibilities that had already been engineered by legal and finance professionals and therefore give legal certainty and security to such arrangements.
The main modernisation features inserted in the 2004 Law are summarised in the following paragraphs:
Provide legal certainty as to the scope of activities of a securitisation vehicle
Active portfolio management now authorised by law [1]
In order to provide legal certainty regarding the activities allowed for a securitisation vehicle and the structuring of securitisation operations, the 2004 Law now clearly provides for the possibility for a securitisation vehicle to actively manage itself, or via a third party, a portfolio of securitised debt. This possibility is however restricted to securitisation vehicles that do not finance themselves through issues to the public. The rules applicable to disposal of the securitisation vehicle's assets can be described in its issuing documents (and not necessarily in its articles of association or management regulations).
Clarification on the assumption of risk by securitisation vehicles [2]
It is now clearly foreseen by law that the securitisation of risks can be made by the direct or indirect acquisition of the assets. Such acquiring may be carried out directly by the securitisation vehicle or indirectly through a company wholly or partly owned by it.
Improve the funding framework of securitisation operations
Enlargement of funding sources
In order to enlarge the scope of instruments that can be issued in the context of a securitisation operation, it has been decided to allow the securitisation vehicles to finance themselves through the issuance of financial instruments (instruments financiers) as defined under the law of 5 August 2005 on financial collateral arrangements[3], generally, and not to limit such issuance to “securities" (valeurs mobilières). The latter indeed turned out to be too restrictive in practice to accommodate the requirements of the professionals for these operations.
Furthermore, the 2004 Law provides now the possibility for a securitisation vehicle to be financed through loans that track the performance of the underlying risks, in addition to financial instruments or exclusively[4].
Extension of the possibility to grant collateral over the securised assets [5]
Securitisation vehicles are now allowed to grant securities or guarantees over their assets to any party to a securitisation transaction, as opposed to previous legal regime when it was only possible to do so to cover their own liabilities toward the direct creditor or for the benefit of the investors in the securitisation transaction concerned.
Explicit setting of securities subordination [6]
A legal subordination has been introduced with respect to the financial instruments issued by a securitisation vehicle. Such legal subordination specifies the priority rules applicable to certain types of financial instruments issued by a securitisation vehicle as well as with respect to loans entered into by such vehicle. The legal regime applies unless otherwise provided in the articles of association or management regulations of the securitisation vehicle or in any contractual arrangement entered into by the vehicle.
Corporate related changes
Expansion of the forms of companies available to securitisation vehicles [7]
Besides the legal forms already available to securitisation vehicles (i.e, common fund (fonds commun), public or private limited companies (société anonyme ou société à responsabilité limitée) or corporate partnership limited by shares (société en commandite par actions)), securitisation vehicles can now also be established as general partnership (société en nom collectif), common or special limited partnership (société en commandite simple ou société en commandite spéciale) or a simplified limited company (société par actions simplifiée). This will allow initiators of securitisation operation to choose the most appropriate legal form to address their needs and those of their investors within the Luxembourg structuring toolbox.
Accounting and governance rules [8]
In case of an umbrella securitisation vehicle issuing equity, the constitutive documents can provide that (i) the financial statements will be approved at the level at each compartment individually and (ii) the distribution of profits and the reserves will be calculated at the level of each such compartment.
Regulatory changes
Clarification regarding securitisation vehicles supervised by the Luxembourg supervisory authority of the financial sector (CSSF).
Any securitisation vehicle that issues financial instruments to the public on a continuous basis shall be authorised by the CSSF and registered on a list[9] held by the CSSF. Although these concepts had been clarified by the CSSF in an FAQ, they have now been formally introduced and specified in the 2004 Law[10]. As a result, a securitisation vehicle is considered as issuing financial instruments:
- on a continuous basis, if it carries out more than three issues to the public during its financial year; and
- to the public, if such issuance is cumulatively: (i) not intended for professional clients, and (ii) with a denomination of less than 100,000 Euros, and (iii) not distributed in the form of a private placement.
The law of 25 February 2022 introduces criminal penalties[11] for any securitisation vehicles that would pursue their activities in breach of this obligation, should they fall within the scope thereof. Such penalties include an imprisonment of three months to two years and/or a fine of EUR 500 to EUR 125,000.
Footnotes:
1 Article 61-1 of the 2004 Law
2 Article 53(2) of the 2004 Law
3 Article 1 of the 2004 Law
4 Article 1 of the 2004 Law
5 Article 61(3) of the 2004 Law
6 Article 64(1) of the 2004 Law
7 Article 4 of the 2004 Law
8 Article 47(2) of the 2004 Law
9 Article 21 of the 2004 Law
10 Article 19 of the 2004 Law
11 Article 85-1 of the 2004 Law
