Luxembourg: New law on securitization – Global Compliance News
On February 9, 2022, the Luxembourg Parliament adopted the bill amending the Luxembourg law of March 22, 2004 on securitization, as amended (“2004 Act”) governing Luxembourg securitization vehicles (SV) (“Law”).
The law aims to modernize the 2004 law by increasing the flexibility and legal certainty of the Luxembourg regime while ensuring effective protection of investors.
A request for exemption from the second ballot having been filed with the Council of State, the law should come into force in the coming days.
The purpose of this alert is to inform you of the main changes provided for by the Act.
- Setting up the VS
- OAS Funding
- FS Management
New legal forms of companies available
In order to enhance the attractiveness of the Luxembourg securitization framework for private equity and family offices, in addition to the Luxembourg form of public limited company and limited liability company, SVs can take the legal form of partnerships and additional legal person offering tax transparency, namely:
- special limited partnerships (SCSp)
- limited partnerships (SCS)
- general partnerships (SNC)
- simplified joint stock companies (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 financing possibilities
The SV is now required to issue “financial instruments” instead of “securities”. The latter is more closely understood and has raised a lot of uncertainty especially regarding assimilation with popular German debt securities called “Schuldscheine”. The concept of financial instrument is broader and should be understood as this term is defined in the Luxembourg law of August 5, 2005 on financial guarantee contracts, as amended. In addition, the SV can now use any form of debt instruments as long as the repayable amount depends on the performance of the underlying securitized assets.
New rules for equity-funded sub-funds
All SVs will be able to create separate compartments.
The law clearly stipulates that the treatment and allocation of profits and losses of equity-funded compartments must be carried out on a compartment-by-compartment basis.
The law further provides that the constitutive documents could allow the organization compartment by compartment (i) of the votes of the shareholders on the approval of the annual accounts, (ii) of the distributions of profits and reserves and (iii) of the allocations to the capital social reserve by compartment (rather than at the level of the whole of the SV aggregating all the compartments).
New requirements for securitization funds
The Law specifies that securitization funds must be registered with the Trade and Commerce Register (RCS) of Luxembourg.
Existing securitization funds will benefit from a transitional period of six months to register with the RCS from the date of entry into force of the law.
In practice, this means the following:
- When the securitization fund is liquidated, it must be deregistered from the RCS.
- Securitization funds must 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 the stock exchange.
A. Clear definition of ongoing public issuances of financial instruments
The Law confirms that an SV must be subject to the supervision of the Commission de Surveillance du Secteur Financier (CSSF), when it issues to the public on a continuous basis, in accordance with the current interpretation given by the CSSF in its FAQ on the securitization.
The law also specifies the two conditions to be fulfilled in order to consider that an issue of financial instruments is offered to the public on a continuous basis:
- “continuous” issue, i.e. more than three issues of financial instruments offered to the public during a given financial year (i.e. four or more issues).
- delivery to the “public”, meaning, cumulatively, the following:
- A number for non-professional customers
- An issue with denominations below EUR 100,000
- An issue that is not distributed as a private placement
The continuous issue of financial instruments offered to the public without the authorization of the CSSF will be liable to criminal sanctions.
The majority of current VS will continue to benefit from the exemption from such authorization, as only a limited number of VS meet all of these conditions in practice.
B. Scope of security granted by an extended SV
The 2004 law currently does not allow an SV to grant security or guarantees over the assets of an SV for the benefit of third parties except for the purpose of financing a securitization transaction. Only the investors (or a security agent or fiduciary acting on behalf of the investors) of the transaction can benefit from it.
The law allows the SV to grant security to guarantee the obligations linked to the securitization transaction. Accordingly, an SV will be permitted to grant security over its assets to parties involved in a securitization transaction but who are not direct creditors of the SV.
C. Statutory Subordination
The law provides a default framework governing the classification of the different classes of financing and, in particular, confirms that, unless otherwise agreed in the incorporation documents or the issuance documents, any form of debt has priority over shares, units and profit shares and that fixed income debt takes priority over equity debt.
A. Securitized assets
The Law confirms the possibility for an SV to take risks by acquiring, directly or indirectly, the securitized assets since it expressly provides that the SV could acquire the assets to be securitized either by being itself party to the acquisition agreement , either through a partial agreement or a partial 100% owned entity.
The law does not allow the SV to engage in commercial activity. It simply clarifies that the OAS would be a tool to refinance the acquisition of a tangible asset by a subsidiary when that subsidiary owns and operates the asset.
B. Active management
The Act allows active management by the SV or a third party of the risks associated with loans (CLOs), bonds or other debt securities (CDOs), unless the financing instruments are issued to the public.
This is a big change and will allow Luxembourg to attract more CLO/CDO structures, which have historically been implemented in other jurisdictions due to this “passive management” featuring Luxembourg SVs .
For more information and to discuss what this development could mean for you, please contact your usual Baker McKenzie contact.