On 9 February 2022, the Luxembourg Parliament adopted the draft bill amending the Luxembourg law of 22 March 2004 on securitization, as amended (“2004 Law”) governing Luxembourg securitization vehicles (SVs) (“Law”).
The Law aims at modernizing the 2004 Law by increasing the flexibility and legal certainty of the Luxembourg regime while ensuring effective protection for investors.
Because a request for its exemption from the second round of voting was filed with the State Council, the Law is expected to enter into force in the next few days.
The purpose of this alert is to inform you about the key changes provided for by the Law.
Set up of the SV
New legal forms of companies available
To enhance the attractiveness of the Luxembourg securitization framework for private equity and family offices, in addition to the Luxembourg public liability and private liability company form, SVs may take the legal form of partnerships and one additional corporate entity which offer tax transparency, namely:
- special limited partnerships (société en commandite spéciale (SCSp))
- simple limited partnerships (société en commandite simple (SCS))
- general corporate partnerships (société en nom collectif (SNC))
- simplified joint stock companies (société par actions simplifiée (SAS))
They will all be required to draw up and publish annual accounts regardless of the amount of their turnover for SCS and SNC.
New funding possibilities
The SV is now required to issue “financial instruments” instead of “transferable securities”. The latter is more narrowly understood and raised a lot of uncertainties notably in respect of the assimilation with the German popular debt securities called “Schuldscheine”. The concept of financial instrument is broader and shall be understood as such term is defined in the Luxembourg law dated 5 August 2005 on financial collateral arrangements, as amended. Moreover, the SV may now use any form of indebtedness instruments as long as the repayable amount depends on the performance of the underlying securitized assets.
Financing of the SV
New rules regarding the equity financed compartments
All SVs will be able to create segregated compartments.
The Law clearly states that the treatment and distribution of profits and losses of equity financed compartments must be performed on a compartment basis.
The Law further foresees that the constitutive documents could allow the organization on a compartment-by-compartment basis of (i) shareholders’ votes on the approval of annual accounts, (ii) distributions of profits and reserves and (iii) allocations to the legal reserve per compartment (rather than at the level of the whole SV aggregating all compartments).
New requirements for securitization funds
The Law clarifies that securitization funds have to be registered with the Luxembourg Trade and Commerce Register (RCS).
Existing securitization funds will benefit from a six-month transitional period to register with the RCS from the date of entry into force of the Law.
In practice, it means the following:
- When the securitization fund is liquidated, it will have to be deregistered from the RCS.
- Securitization funds will have to draw up and publish annual accounts in accordance with the law of 19 December 2002 on the RCS.
- Securitization funds will be able to issue their securities on a stock exchange.
A. Clear definition of continuous public issuances of financial instruments
The Law confirms that an SV must be subject to the Commission de Surveillance du Secteur Financier (CSSF) supervision, when it issues to the public on a continuous basis, in line with the current interpretation given by the CSSF in its Securitization FAQ.
The Law further clarifies the two-fold condition that must be met to consider that an issue of financial instruments is offered to the public on a continuous basis:
- “continuous” issuance, i.e., more than three issues of financial instruments offered to the public during a given financial year (i.e., four or more issues).
- issuance to the “public”, i.e., cumulatively, the following:
- An issue intended for non-professional customers
- An issue with denominations of less than EUR 100,000
- An issue that is not distributed in the form of a private placement
Continuous issuance of financial instruments offered to the public without authorization from the CSSF will be subject to criminal sanctions.
The majority of the current SVs will continue to benefit from the exemption of such authorization, as only a limited number of SVs meet all these conditions in practice.
B. Scope of security interests granted by a SV expanded
The 2004 Law currently does not permit an SV to grant securities or guarantees over an SV’s assets for the benefit of third parties if not for the purpose of the financing of a securitization transaction. Only investors (or a security agent or trustee acting on behalf of the investors) of the transaction can benefit of it.
The Law allows the SV to grant security interest to secure obligations in relation to the securitization transaction. As a result, an SV will be permitted to grant security interests over its assets to parties that are involved in a securitization transaction but who are not direct creditors of the SV.
C. Statutory subordination
The Law provides for a default framework governing the ranking of different classes of funding and, in particular confirms that, unless otherwise agreed in the constitutional documents or issuance documents, any form of debt ranks senior to shares, units and beneficiary units and that fixed income debt ranks senior to participating debt.
Management of the SV
A. Securitized assets
The Law confirms the possibility for an SV to undertake risks by acquiring, directly or indirectly, the securitized assets as it expressly provides that the SV could acquire the assets to be securitized either by being a party itself to the acquisition agreement or through a partly or wholly owned entity.
The Law does not permit the SV to carry on commercial activity. It simply clarifies that the SV would be a tool to refinance the acquisition of a tangible asset by a subsidiary where such subsidiary owns and operates the asset.
B. Active management
The Law allows for active management by the SV or a third party of risks linked to loans (CLOs), bonds or other debt instruments (CDOs), except if the financing instruments are issued to the public.
This is a big change and will enable Luxembourg to attract more CLO/CDO structures, which have historically been set up in other jurisdictions due to this “passive management” featuring the Luxembourg SVs.
For further information and to discuss what this development might mean for you, please get in touch with your usual Baker McKenzie contact.