Bill No 7825 (the Bill), which aims, amongst other things, to amend the Act of 2 March 2004 on securitisation, as amended, was submitted to the Chambre des Députés on 21 May 2021.
The Bill clarifies the existing statutory framework for securitisations and, at the same time, adapts it in a flexible way to the requirements of the securitisation market.
In particular, the Bill:
- broadens the means by which a securitisation vehicle can be financed;
- allows securitisation vehicles to grant collateral in a more flexible framework and actively manage their assets within the limits set by the Securitisation Act; and
- provides clarification of the authorisation requirements for securitisation vehicles.
In addition, the Bill:
- increases the number of corporate forms a securitisation vehicle may take;
- provides certain clarification for multi-compartment securitisation vehicles issuing equity instruments; and
- provides for the registration of securitisation funds with the Trade and Companies Register.
Means of financing a securitisation vehicle – recourse to loans now possible
The Bill specifies that a securitisation vehicle may engage in all types of borrowing in addition to issuing financial instruments. Certain investors are subject to restrictions on the financial products in which they can invest; these amendments aim to allow securitisation vehicles to cater to such investors and finance their activities by taking out loans, the yield or principal repayment of which depends on the performance of the underlying securitised risks.
The proposed amendments are consistent with (EU) Regulation 2017/2402 of 12 December 2017 creating a general framework for securitisation (the Securitisation Regulation), which allows for securitisations without the issuance of securities by means of loan positions, and ensures that any securitisation subject to the Securitisation Regulation can effectively be carried out through a Luxembourg securitisation vehicle.
Active management of assets
Active management will be possible for risk portfolios comprising debt securities, financial debt instruments and receivables, but will be limited to securitisation vehicles not issuing securities to the public.
Grant of collateral
Under the current framework, a securitisation vehicle may grant collateral over its assets only in favour of its investors or creditors in the context of the securitisation transaction, i.e. it cannot grant collateral to a third party, which could impact the structuring of securitisation transactions to a certain extent. The Securitisation Act will be amended to give securitisation vehicles greater flexibility to grant collateral over their assets, while continuing to ensure a high level of investor protection.
Tranching (legal subordination)
The Bill clarifies certain aspects of legal subordination between different types of instruments issued by a securitisation vehicle subject to the Securitisation Act, unless contractually agreed otherwise. For instance,
- units issued by a securitisation fund/shares or units issued by a securitisation company are legally subordinated to debt instruments issued/loans taken out by these entities; and
- debt instruments with a variable yield issued by a securitisation vehicle are legally subordinated to fixed-yield debt instruments issued by the securitisation vehicle.
Authorisation requirements for certain securitisation vehicles
Securitisation vehicles that continuously offer financial instruments to the public must be authorised by the Commission de Surveillance du Secteur Financier to carry out their activities. The Bill introduces into the Securities Act clarification of these concepts.
Securitisation vehicles that continuously issue to the public are defined as undertakings that carry out more than three offerings of financial instruments to the public during a financial year (by all compartments of the vehicle over this period).
An issuance of financial instruments to the public is defined as an offering:
- that is not intended for professional clients, within the meaning of Article 1(5) of the Financial Sector Act of 5 April 1993, as amended;
- of instruments whose denomination is less than 100,000 euros; and
- that is not a private placement.
These criteria are cumulative, so that, for instance, instruments with a minimum denomination of 100,000 euros will not be considered offered to the public.
The modernisation of the Securitisation Act responds to market needs and practices that emerged following its entry into force. The Bill demonstrates the aim to allow securitisation transactions to be carried out under Luxembourg law with flexibility and legal certainty, while ensuring effective investor protection.
