The key changes
Loans and financial instruments as new means of financing
The previous version of the law on securitization provided that an SV could only finance itself by issuing “securities”.
The modernized law on securitization extends the means of financing to:
- financial instruments,
- any form of loan.
The addition of “financial instruments” essentially reflects what has been discussed and accepted in the market. For example, German law governed promissory notes, known as Schuldscheine, which do not fall within the narrow definition of transferable securities under their applicable law, were used in securitization transactions to the extent that their (contractual) characteristics were similar to those of transferable securities, i.e. say freely transferable. The proposed amendment to extend to financial instruments adds legal certainty and opens the means of financing to other forms of financial instruments.
The addition of any form of loan to the authorized means of financing is a very welcome and important change. Previously, debt financing was only permitted (i) to the extent that it is proportionately less than equity financing and (ii) for specific purposes, e.g. to provide financing in the warehousing phase (for a limited duration) or as an additional liquidity line to cover any shortage of liquidity during the life of the transaction.
Allowing debt financing is a very attractive novelty that encourages investors, who prefer to invest by debt rather than by securities, to consider securitization transactions. In particular, this makes Luxembourg SVs more attractive for the securitization of trade receivables, which are often financed by loans.
Additional business forms made available
The following additional forms are available for VS:
Details on the trigger for approval and monitoring of an SV by the CSSF
The modernized securitization law implements a clarification regarding the “public offer” and “continuous” criteria for the purposes of the securitization law. These criteria trigger the authorization and supervision of an SV by the CSSF. The clarification essentially reflects the existing CSSF guidelines. In the event of more than 3 broadcasts per year to the public, the SV is considered to be broadcast continuously. In addition, the public nature of the offer or the issue is determined as that which combines the following 3 criteria: (i) the issue is not intended for professional clients, (ii) the financial instruments have a nominal value of less than €100,000, and (iii) the financial instruments are not distributed through a private placement.
Previously, the CSSF guidelines referred for a safe harbor regime to a nominal value of 125,000 euros. This figure is now reduced to 100,000 euros and aligned with the exemption provided by the laws and regulations on prospectuses.
Equity securitization transactions – rules at sub-fund level
The existing compartment rules for debt securities are applied more consistently to securitizations financed by the issuance of shares. For example, the balance sheet and profit and loss accounts of a specific sub-fund can only be approved by the shareholders of the relevant sub-fund. The determination and distribution of income and reserves can be made at sub-fund level.
Active management of a debt portfolio consisting of debt securities, financial debt securities or debt securities
The modernized law on securitization introduces the explicit possibility for an SV to actively manage debt portfolios as long as the related financial instruments issued by the SV are privately placed. The SV could itself actively manage these assets and outsource the management of the assets to a service provider, i.e. an asset manager.
Previously, the CSSF guidelines authorized passive asset management. This change therefore has a significant impact on the market as it has the potential to bring CLOs back to Luxembourg. It may also increase certainty in this regard with respect to repackaging agreements.
Equity securitization transactions – rules at sub-fund level
The existing compartment rules for debt securities are applied more consistently to securitizations financed by the issuance of shares. For example, the balance sheet and profit and loss accounts of a specific sub-fund can only be approved by the shareholders of the relevant sub-fund. The determination and distribution of income and reserves can be made at sub-fund level.
Direct and indirect holding of assets
The modernized law on securitization clarifies that an SV may hold, directly and indirectly, the securitized assets. This means, for example, that the direct holding of real estate by an SV or through a holding subsidiary of the SV would be explicitly permitted. These structures were discussed within the framework of the Securitization Law.
More flexibility in granting collateral
Previously, the law on securitization only authorized the granting of security by an SV in favor of its direct creditors or its investors. Thus, in the case of leveraged financings, an SV assuming a junior tranche of a financing was not able to grant security to a senior lender. Additionally, in group scenarios where the SV’s parent entity received funding that was ultimately passed on to the SV, the SV could not grant any security to the lender.
The change allows the SV to grant collateral to secure obligations in connection with the securitization transaction and thus broadens the scope.
Legal subordination implemented in law
The modernized law on securitization introduces a legal classification of financial instruments issued by an SV, with however the possibility of deviating from it. Generally, it confirms that equity and fund shares are subordinate to debt securities. In addition, fixed-yield financial instruments have priority over non-fixed-yield financial instruments. Legal subordination corresponds to what is commonly provided for and applied.
Being implemented in a legal and non-contractual framework, it would not constitute a slicing within the meaning of the Securitization Regulation. Therefore, if no contractual subordination is used, the relevant securitization transaction may fall outside the Securitization Regulation, thus avoiding additional obligations, risk retention and other requirements.
The modernized law on securitization provides the required flexibility in this matter, ie it is possible to deviate from this legal subordination by providing other rules in the relevant constitutional documents or contracts.
Securitization funds to be registered with the RCS (Registre de Commerce et des Sociétés, Luxembourg)
The modernized securitization law provides that securitization funds become subject to registration with the RCS and thus obtain an individual registration number. This can help with administrative aspects, including admission to trading on certain stock exchanges, and provide an additional method for investors to identify the securitization fund. Existing securitization funds benefit from a grace period of 6 months after the entry into force of the modernized law on securitization.
Tax aspects
The modernized securitization law does not directly include any specific tax measure concerning SVs, which already benefit under the securitization law from a very attractive tax regime. Indeed, SVs incorporated as corporate vehicles may be able to fully deduct from their tax base commitments or distributions made to shareholders or investors (e.g., noteholders, bondholders, etc.) without triggering a withholding tax. the Luxembourg source, regardless of the location of the shareholders and investors. Additionally, since SVs established as company vehicles are fully taxable, they may be eligible for access to double tax treaties and EU directives. Finally, management services to the SV can generally benefit from a VAT exemption.
Given the additional flexibility and opportunities enacted with the Modernized Securitization Act, including active management in some cases, a wider use of SVs is expected which could benefit from the aforementioned tax regime.
In circumstances where SVs in the form of corporate vehicles would not be needed or even desired, the only form available prior to the Modernized Securitization Act would have been the securitization fund, which is not always considered a very attractive vehicle from the perspective of the sponsor or investor. The modernized law on securitization introduces the possibility of establishing the SV in the form of another tax-transparent vehicle, such as the joint limited partnership or the very successful special limited partnership, which will certainly improve the use fiscally transparent VS in the future.
