Legal update – New bill of law amending the Luxembourg law of 22 March 2004 on securitisation (the Securitisation Law)

As expected for a few months now, the Luxembourg Minister of Finance has recently submitted the draft bill of law No. 7825 in view of amending the Securitisation Law (the Draft Bill). The legislative approval process has only started and there is no certainty as to when the Draft Bill will be approved by the Luxembourg Parliament and under which form. We will ensure monitoring throughout the process and provide updates when developments materialise.

The Draft Bill intends to build on the success of the existing Securitisation Law and improve legal certainty and flexibility. It is not a revolution of the Luxembourg securitisation environment; rather, it aims at clarifying and improving the existing framework and pushing aside restrictions and caveats that were often hindering securitisation structures. The overall goal is naturally to ensure that the Luxembourg securitisation framework remains among the most attractive in the world, addressing the fierce competition of other jurisdictions. Contrary to the Securitisation Regulation 2017/2402, the Securitisation Law will remain an opt-in law, meaning a vehicle can choose to be subject to the benefits and obligations of the Securitisation Law (or not).

The key takeaways from the Draft Bill are:

• Financing the Securitisation Vehicle (SV): The financing of a transaction is no longer limited to securities but is open to any financial instrument, i.e. including promissory notes or loans, as long as the repayable amount depends on the securitised risks. This aims at putting the Securitisation Law in line with the European Securitisation Regulation, which does not require financing solely in the form of securities.
  
  
• New legal forms for SVs: The options of legal forms that can be used for securitisation companies are extended to the “société en nom collectif ”, “société en commandite simple”, “société en commandite spéciale” and “société par actions simplifiée”. This will make securitisation even more attractive for investors such as private equity houses or family offices who already extensively use partnership structures in Luxembourg.
  
  
• Clarification on supervision by the Luxembourg regulator (CSSF): The Draft Bill confirms that an SV must be subject to CSSF supervision, when it issues to the public on a continuous basis, in line with the current interpretation given by the CSSF in its Frequently Asked Questions. The threshold of denomination for public issuances is proposed to be reduced from EUR 125,000 to EUR 100,000 (to match with the Prospectus Regulation exemption). Therefore, only SVs issuing more than three times per year securities to the public with a denomination below EUR 100,000 to non-professional investors would need to be authorised by the CSSF. A non-respect of application for authorisation by the CSSF in such cases is now also subject to sanctions.
  
  
• Equity financing: The treatment and distribution of profits and losses of equity financed compartments is addressed in the Draft Bill, stating explicitly that this has to be done on a compartment basis. 
  
  
• More flexibility around passive management: With the Draft Bill, active management (by the SV or a third party) will be allowed for SVs for risks linked to bonds, loans or other debt instruments (not for equity type of assets thus), except if the financing instruments are issued to the public. This should enable Luxembourg to attract more CDO/CLO structures (that imply an active management of the securitised assets) which have historically been set up in other jurisdictions.
  
  
• Legal subordination: The Draft Bill aims at implementing a formal legal set of subordination rules applicable to financial instruments issued by an SV. By virtue of law, (i) shares and partnership interests will be subordinated to other financial instruments issued by the SV (or borrowings entered into by the SV), (ii) shares and partnership interests will be subordinated to beneficiary shares issued by the SV, (iii) beneficiary shares will be subordinated to debt financial instruments issued by the SV and (iv) variable floating rate financial instruments will be subordinated to fixed rate financial instruments issued by the SV. There will be room for flexibility though, as the set of subordination rules can be overridden in the constitutional documents or issuance documents.
  
  
• Alleviating restrictions on security interests: The Draft Bill will allow an SV to grant security interests over its assets to parties that are involved in a securitisation transaction but are not direct creditors of the SV.
  
  
• Clarification on securitisation funds: The Draft Bill further clarifies that securitisation funds (and their liquidation) have to be registered with the Luxembourg business register, with existing securitisation funds having to register within six months after entering into force of the Draft Bill.
  
  
• Clarification on securitisation of tangible assets: The Draft Bill aims at improving legal certainty by confirming that tangible assets (such as commodities, aircrafts or boats) can be securitised, even if the securitisation is made indirectly through a dedicated SPV.
  
  
• Tax: The Draft Bill does not address taxation of SVs specifically, meaning that the current tax framework will continue to apply.