On 21 May 2021 a new bill of law was submitted to the Luxembourg Chamber of Deputies (Chambre des Députés) with the purpose of amending the Luxemburg law of 22 March 2004 on securitisation (the "Bill of Law" and the "Luxembourg Securitisation Law", respectively).
The Bill of Law is intended to make considerable changes to the Luxembourg Securitisation Law rendering the securitisation regime more flexible with respect to different types of securitisation structures and the specific requirements securitisation market participants might have in particular cases.
In this respect, the Bill of Law's purpose is twofold, i.e. (a) the clarification of specific aspects such as the authorisation requirement with respect to securitisation undertakings offering securities to the public on a continuous basis as well as the legal subordination of specific instruments with respect to tranching and (b) the easing of particular restrictions securitisation undertakings have to comply with under the current regime.
Among other points five main aspects contained in the Bill of Law should be worth focusing upon as they ought to be of particular interest to a lot of market participants. The below overview is not meant to be conclusive and discusses only some of the amendments which are intended to be made to the Luxembourg Securitisation Law.
Issuance of loans in addition to the usual issuance of securities (valeurs mobilières)
Under the current Luxembourg securitisation regime a securitisation undertaking is foremost an issuance vehicle and therefore the entry into borrowing structures by taking out loans to investors should only be done on an ancillary basis.
This restriction is now intended to be lifted given that the Bill of Law foresees changes which would allow a securitisation undertaking to enter into all types of borrowing structures. This would provide a much more flexible framework and allow certain investors, whose investments might be restricted for internal reasons to specific loan products, to also participate in Luxembourg securitisation structures.
The yield or principal repayment of such loans would also depend on the underlying securitised assets as is the case with usual debt securities issued by a securitisation undertaking which are linked to a specific compartment or pool of underlyings. This approach would also be in line with (EU) Regulation 2017/2402 of 12 December 2017 creating a general framework for securitisation (the "EU Securitisation Regulation") given that the EU Securitisation Regulation does not require a securitisation vehicle to issue securities in order to fall under its scope.
Active management of risk portfolio
Furthermore, the restriction that active management is generally not permissible with respect to a Luxembourg securitisation undertaking and therefore any portfolio management should be limited to a prudent man's passive management is intended to be eased as well. Once the Bill of Law has been passed in this respect it should be possible to manage risk portfolios even in accordance with certain short-term market fluctuations and price developments. However, in order for such active management to be permitted it is important to note that the risk portfolio to be actively managed would need to be composed of debt securities, financial debt instruments or receivables. Furthermore, active management would only be allowed in structures in which the securitisation undertaking did not offer securities to the public (i.e. restriction to private placement structures).
Granting of collateral by a Luxembourg securitisation undertaking
The granting of collateral by a Luxembourg securitisation vehicle over its assets is currently limited to situations in which it is done for the benefit of the vehicle's investors (i.e. subscribers of the securities issued) or if the granting of collateral is carried out with a purpose of assuring the securitisation of the underlying in question (i.e. whenever such collateral provision is necessary in order for the vehicle to be able to acquire and securitise the assets). In this respect, the Bill of Law foresees the introduction of a much wider scope which would already allow a Luxembourg securitisation undertaking to provide collateral to any third party provided the granting of collateral were linked to the securitisation structure as a whole (relatifs à l'opération de titrisation).
Authorisation requirement for a Luxembourg securitisation undertaking
Furthermore, the Bill of Law contains an explicit rule regarding the question when a securitisation undertaking is to be considered to be issuing securities to the public on a continuous basis and thus will need to be authorised by the CSSF. The answer to this question is currently still based on the FAQs on Securitisation published by the CSSF which provide that issuances are made to the public continuously if more than three issuances are made to the public per calendar year on an all compartment basis.
In this respect, the current rule that private placements are not to be considered offers to the public will still be applicable. However, certainty will in particular be obtained in relation to the required per unit minimum denomination securities would need to have in order for them not to be deemed to be issued to the public, which the CSSF FAQs currently seem to suggest should at least be EUR 125,000.
The Bill of Law in this respect clarifies that an offer could only be deemed to be made to the public if the securities in question had a per unit denomination of less than EUR 100,000. In addition to this in order for a public offer scenario to arise the securities would also need not to be addressed to professional investors as defined in the Luxembourg law of 5 April 1993 on the banking sector and not be done under the form of a private placement. All three criteria are cumulative.
Issuance of tranched securities
Finally, the Bill of Law also intends to clarify certain aspects regarding the issuance of tranched securities. In this respect it is worth remembering that only structures in which a securitisation undertaking engages in tranching falls under the scope of the EU Securitisation Regulation.
The Bill of Law foresees the introduction of explicit rules regarding the legal subordination between different types of securities, unless contractually agreed otherwise. For instance units issued by a securitisation undertaking relating to the same underlying debt instruments or loans are linked to would have to be considered to be tranched by way of law. Furthermore, debt instruments having a variable yield would also per se be subordinated to debt instruments which contain a fixed-yield rate.
For more information please feel free to contact our Luxembourg securitisation team.
Authors: Isabelle Lentz, Partner; Fabien Debroise, Partner and Markus Waitschies, Senior Associate
