Introduction

On 21 May 2021 Bill of Law 7825, which aims (among other things) to amend the Securitisation Law (2 March 2004, as amended), was introduced to the Chamber of Deputies.

The bill clarifies the existing legal framework for securitisations and adapts it in a flexible way to the requirements of the securitisation market.

In particular, the bill:

  • enlarges the means by which a securitisation undertaking can be financed;
  • allows securitisation undertakings to:
    • grant collateral in a more flexible framework; and
    • actively manage their assets within the limits set by the Securitisation Law; and
  • provides certain clarifications as to authorisation requirements for securitisation undertakings.

Further, the bill:

  • extends the choice of legal forms that a securitisation company may take;
  • provides certain clarifications for multi-compartment securitisation undertakings which issue equity instruments; and
  • provides for the registration of securitisation funds with the trade and companies register.

Means of financing securitisation undertakings

The bill specifies that securitisation vehicles may resort to all kinds of borrowing in addition to issuing financial instruments. Certain investors are subject to restrictions on the financial products in which they can invest; these amendments aim to allow securitisation undertakings to cater to those investors and finance their activities by taking out loans where the yield or principal repayment thereof depends on the performance of the underlying securitised risks.

The suggested amendments are consistent with the EU Securitisation Regulation (2017/2402/EU), which allows for securitisations without the issuance of securities but by means of loan positions. The amendments ensure that any securitisation subject to the EU Securitisation Regulation can effectively be carried out through a Luxembourg securitisation undertaking.

Active management of assets

Active management will be possible for risk portfolios which comprise debt securities, financial debt instruments or receivables but will be limited to securitisation undertakings which are not issuing securities to the public.

Granting of collateral

Under the existing framework, a securitisation undertaking may grant collateral over its assets only in favour of its investors or creditors in the context of the securitisation transaction – that is, it cannot grant collateral to a third party, which may affect the structuring of securitisation transactions to a certain extent. The Securitisation Law will be amended to give securitisation undertakings greater flexibility to grant collateral over their assets, while continuing to ensure a high level of investor protection.

Legal subordination

The bill clarifies certain aspects of legal subordination between different types of instruments issued by securitisation undertakings subject to the Securitisation Law, unless contractually agreed otherwise – for example:

  • Units issued by a securitisation fund, or shares or interests issued by a securitisation company, are legally subordinated to debt instruments issued or loans taken out by these entities.
  • Debt instruments with a variable yield issued by a securitisation vehicle are legally subordinated to fixed yield debt instruments issued by such securitisation vehicle.

Authorisation requirements for certain securitisation undertakings

Securitisation undertakings which continuously issue financial instruments offered to the public must be authorised by the Luxembourg Financial Supervisory Authority (CSSF) to carry out their activities. The bill introduces a clarification of these terms and criteria in the Securitisation Law.

'Securitisation undertakings which issue continuously to the public' are defined as undertakings which carry out more than three issues of financial instruments offered to the public during a financial year (carried out by all compartments of the securitisation vehicle during this period).

An 'issue of financial instruments offered to the public' is defined as an issue:

  • which is not intended for professional clients within the meaning of Article 1(5) of the law amended on 5 April 1993 relating to the financial sector;
  • whose denominations are less than €100,000; and
  • which is not distributed as a private placement.

These criteria are cumulative. For example, instruments with a minimum denomination of €100,000 are not considered to be offered to the public.

Comment

The modernisation of the Securitisation Law responds to market needs and practices which have emerged since the law originally took effect. The bill demonstrates the Luxembourg financial sector's aim to allow securitisation transactions to be carried out under Luxembourg law with flexibility and legal certainty, while ensuring effective investor protection.