The modernisation of the Luxembourg Securitisation Law now voted

On 9 February 2022 the Luxembourg Parliament voted a new law (the Amending Law) amending the Law of 22 March 2004 on securitisation (the Luxembourg Securitisation Law). The purpose of this Amending Law is to further clarify the existing legal framework on securitisation and to adapt to the current securitisation market.

Luxembourg securitisation legal framework

The Luxembourg Securitisation Law offers an attractive framework for the set-up of securitisation vehicles in Luxembourg, allowing for the securitisation of a broad type of risks and flexibility as per the structure (availability of different legal forms, compartments, etc.). The Luxembourg Securitisation Law is an opt-in regime, meaning the securitisation vehicle can choose to be subject to the benefits and obligations set out therein (contrary to the Regulation (EU) 2017/2402 laying down a general framework for securitisation and creating a specific framework for simple, transparent and standardised securitisation (the Securitisation Regulation) that applies to all EU securitisation of credit risk issued in tranches). Mandatory registration with the CSSF is only required for undertakings which issue securities to the public on a continuous basis (Regulated Undertakings).

Major amendments introduced by the law of 9 February 2022

Financing of the securitisation vehicle: with the Amending Law, a securitisation vehicle will now be able to be financed through the issue financial instruments (and not only securities) and borrowings, which vastly widens the scope of instruments that can be issued by the Luxembourg vehicles. The borrowing element should also permit the securitisation vehicle (i) to borrow 100% generally and (ii) to expose investors to underlying collateral via loans exclusively rather than via financial instruments. Under the previous law, borrowing possibilities by the securitisation vehicle were limited.

Active management: now permitted except when financial instruments are issued to the public, this should enable Luxembourg to attract more collateralised debt obligations (CDO) and collateralised loan obligations (CLO) structures.

CSSF supervision: the Amending Law confirms that an securitisation vehicle must be subject to CSSF supervision, when it issues to the public on a continuous basis. Therefore, only securitisation vehicle issuing more than three times per year non-private placement with a denomination below €100,000 (previously €125,000) to non-professional investors would need to be authorised by the CSSF.

New corporate forms available for securitisation companies: the legal forms in which a securitisation vehicle can be incorporated are extended. A securitisation vehicle can now be incorporated in the form of a société en nom collectif, société en commandite simple, société en commandite spéciale, société par actions simplifiée, société anonyme, société en commandite par actions, société à responsabilité limitée or société coopérative organisée comme une société anonyme.

Flexibility regarding compartmentalisation: the Amending Law defines that the choice to create either a securitisation company or a securitisation fund remains as is.

Equity financing: the treatment and distribution of profits and losses of equity financed compartments is now clearly defined in the Amending Law (to be done on a compartment basis).

Subordination waterfall: the Amending Law also provides a statutory waterfall subordination of different types of debt and equity instruments issued by a securitisation vehicle. The waterfall can still be determined by the issuance documents but a default scenario is now embedded in the Amending Law.

Flexibility in granting security interests: it is now provided that the securitisation vehicle can grant security interest for the benefit of any third party provided that this transaction relates to the securitisation transaction. The benefit of such security interest were mostly limited to the holder of the instruments issued by the securitisation vehicle under the previous regime, which was limiting or complexifying certain financings.

Registration and publication of annual accounts at the RCS (Luxembourg Business Register): securitisation funds will have to be registered six months after the entering into force of the Amending Law.

Focus on the active management of assets

Previous provisions of the Luxembourg Securitisation Law only allowed for a ‘prudent man’ passive management of the securitised debt portfolio, meaning the portfolio is fixed at the date of the transaction and underlying assets cannot be actively replaced from then – except in the event of full repayment or default.

With the adoption of the Amending Law, active management is expressively permitted under new article 61-1 (ie the assets constituting the initial pool of assets of the securitisation undertaking can be replaced following the transaction date in the view of decreasing credit risks, increasing performance and creating profit) to the extent issued securities are not offered to the public.

Undertakings wishing to actively manage their portfolio will have to expressly specify it in their constitutive documents (articles of incorporations or management regulations). The undertaking will also be allowed to delegate active portfolio management to a third-party asset manager.

This amendment brings further flexibility to entities wishing to establish a securitisation undertaking in Luxembourg and contributes to enhance attractivity of the Luxembourg market by creating new opportunities for CLOs.

CLOs are structured finance products that are backed by a pool of senior secured corporate loans. Securitisation undertakings issuing CLOs can be static structures - generally for the purpose of removing assets from an originator’s balance sheet, or actively managed structures - used to create profit.

Most CLO structures are actively managed by CLO managers who trade the underlying loans to maximise performance. These structures allow institutional investors to participate in the loan market through a product providing exposure to a diversified portfolio of loans to highly leveraged businesses. In the recent years, CLO structures have grown rapidly primarily in the US and the EU and the outstanding global CLO market was estimated in 2019, to amount to around USD 740bn globally, which implies that CLOs hold approximately 50% of the global leveraged loan market¹.

As the CLO market continues to grow, a direct expected consequence of the entering into force of the Amending Law is a significant increase in the number of CLO structures being established in Luxembourg.

To the extent the CLO undertaking issues multiple tranches of securities entailing contractual subordination and first loss absorption mechanism, it may also be subject to the Securitisation Regulation – meaning it will be subject to additional requirements such as risk retention, transparency and due diligence.

For further information, please do not hesitate to reach out to the Banking, Capital Market and Regulatory team of our Luxembourg office.

¹ESMA’s Thematic Report EU CLO credit ratings – an overview of Credit Rating Agencies practices and challenges, 13 May 2020 (ESMA80-189-6982).