The key changes
Loans and financial instruments as new means of financing
The previous version of the Securitisation Law provided that a SV could only finance itself through the issuances of "securities".
The Modernised Securitisation Law extends the means of funding to:
- financial instruments,
- any form of loan.
Adding “financial instruments”, is in essence a reflection of what has been discussed and accepted in the market. By way of example, German law governed promissory notes, so called Schuldscheine, which do not fall under the narrow definition of securities under their governing law have been used in securitisation transactions to the extent that their (contractual) features were similar to those of securities, i.e. being freely transferable. The proposed change to extend to financial instruments adds legal certainly and opens up the means of funding to other forms of financial instruments.
Adding any form of loan to the allowed means of funding is a very welcome and important change. Previously financing via loans was only allowed (i) to the extent it is proportionally less than the funding via securities and (ii) for specific purposes, for example to provide financing in the warehousing phase (for a limited period of time) or as an additional liquidity line to cover any shortage of liquidity during the lifetime of the transaction.
Allowing financing via loans is a new and highly attractive addition which entices investors, preferring to invest via loans instead of securities, to consider securitisation transactions. In particular, this renders Luxembourg SVs more attractive for the securitisation of trade receivables, which are often financed via loans.
Additional company forms made available
The following additional corporate forms are available for SVs:
Clarifications on trigger for approval and supervision of a SV by the CSSF
The Modernised Securitisation Law implements a clarification regarding the criteria of “offer to the public” and “on a continuous basis” for the purpose of the Securitisation Law. These criteria trigger approval and supervision of a SV by the CSSF. The clarification reflects in essence existing CSSF guidance. In case of more than 3 issues per year to the public, the SV is considered to issue on a continuous basis. Furthermore the public character of the offer or issuance is being determined as one which cumulates the 3 following criteria: (i) the issuance is not addressed to professional clients, (ii) the financial instruments have a denomination lower than 100.000 Euros, and (iii) the financial instruments are not distributed in a private placement.
Previously, the CSSF guidance referred for a safe harbour regime to a denomination of 125.000 Euros. This figure is now reduced to 100.000 Euros and aligned to the exemption under the prospectus laws and regulations.
Active management of a debt portfolio constituted of debt securities, financial debt instruments or receivables
The Modernised Securitisation Law introduces the explicit possibility for a SV to actively manage debt portfolios for as long as the related financial instruments issued by the SV are privately placed. The SV could actively manage those assets itself as well as outsource the asset management to a service provider, i.e. an asset manager.
Previously the CSSF guidance allowed passive management of assets. This change therefore has a significant impact on the market as it has the potential to bring CLOs back to Luxembourg. It may also enhance certainty on this matter with respect to repackaging deals.
Equity securitisation transactions – rules at compartment level
The existing compartment rules for debt instruments are being applied more consequently to securitisations financed by the issuance of equity. For example the balance sheet and profit and loss accounts for a specific compartment can be approved by the shareholders of the relevant compartment only. The determination and the distribution of the revenues and reserves can be made at compartment level.
Direct and indirect holding of assets
The Modernised Securitisation Law clarifies that a SV may hold, directly and indirectly, the securitised assets. This means, for example, that the direct holding of real estate by a SV or via a holding subsidiary of the SV would be explicitly permitted. These structures have been subject to discussions in the framework of the Securitisation Law.
More flexibility in granting security interest
Previously the Securitisation Law only allowed the granting of security interest by a SV in favor of its direct creditors or its investors. Hence, in case of leveraged financings a SV assuming a junior tranche of a financing was not able to grant security interest to a senior lender. Furthermore in group scenarios where the SV’s parent entity received financing which is ultimately passed down to the SV, the SV could not grant any security interest to the lender.
The change allows the SV to grant security interest to secure obligations in relation with the securitisation transaction and hence broadens the scope.
Legal subordination implemented in the law
The Modernised Securitisation Law introduces a legal ranking of the financial instruments issued by a SV, however with the possibility to deviate from it. In general, it confirms that equity and fund units are subordinated to debt instruments. Furthermore financial instruments with fixed return rank senior to financial instruments with non-fixed return. The legal subordination corresponds to what is commonly foreseen and applied.
Since it is implemented in a legal and not a contractual framework, it would not constitute tranching in the meaning of the Securitisation Regulation. Hence if no contractual subordination is used, the concerned securitisation transaction can fall outside of the Securitisation Regulation avoiding additional obligations, risk retention and other requirements.
The Modernised Securitisation Law provides for the required flexibility on this matter, i.e. it is possible to deviate from this legal subordination, by providing for other rules in the relevant constitutional documents or relevant contracts.
Securitisation funds to be registered with the RCS (Registre de Commerce et des Sociétés, Luxembourg)
The Modernised Securitisation Law provides that securitisation funds become subject to registration with the RCS and hence obtain an individual registration number. This may help for administrative aspects, namely for admission to trading on certain stock exchanges and offer an additional method for investors to identify the securitisation fund. Existing securitisation funds have a grace period of 6 months following the entry into force of the Modernised Securitisation Law.
The Modernised Securitisation Law does not directly include any specific tax measure regarding SVs, which benefit already under the Securitisation Law from a very appealing tax regime. Indeed, SVs established as corporate vehicles may be able to fully deduct from their taxable base commitments or distributions made to shareholders or investors (e.g., noteholders, bondholders etc.) without triggering any Luxembourg withholding tax, regardless the location of the shareholders and investors. Further, as SVs established as corporate vehicles are fully taxable, they may be eligible to double tax treaty access and EU directives. Finally, management services to SVs may generally rely on a VAT exemption.
Considering the additional flexibility and opportunities adopted with the Modernised Securitisation Law, including active management in some instances, a wider use of SVs is expected that may benefit from the previously mentioned tax regime.
In circumstances where SVs in the form of corporate vehicles would not be required or even desired, the only available form prior to the Modernised Securitisation Law would have been the securitisation fund, which is not always considered as a very interesting vehicle from the perspective of the sponsor or investor. The Modernised Securitisation Law introduces the possibility of establishing the SV in the form of another tax transparent vehicle, such as the very successful common limited partnership or special limited partnership, which will certainly improve the use of tax transparent SVs in the future.
Authored by Ariane Mehrshahi Marks, Valérie Laskowski, Agnes Merz, Carla Valdés Cortés, and Gérard Neiens.
Hogan Lovells (Luxembourg) LLP is registered with the Luxembourg bar.