Is Luxembourg poised to become one of the most favourable European jurisdictions for securitisation?

Changes to Luxembourg’s securitisation law give more options and greater flexibility. What will they mean for investors?

Long-awaited changes to Luxembourg’s securitisation law will allow for greater flexibility and make the jurisdiction more attractive as it can now offer a full range of options for structuring deals.

The amendments were passed by parliament on 9 February 2022 and came into force a month later, on 8 March 2022.

The two major changes relate to active management of collateralised loan obligations (CLOs) and collateralised debt obligations (CDOs), as well as refinancing.

The updates will help boost Luxembourg’s attractiveness on the global stage as a key jurisdiction for securitisations.

What are the main amendments to Luxembourg’s securitisation law?

The long-anticipated changes update the 2004 Luxembourg securitisation law that has been in force for the last 18 years.

One key modification enables Luxembourg securitisation vehicles or their investment managers to actively manage repackaged debt in the form of CLOs or CDOs, unless the financing instruments are issued to the public.

This makes it easier to set up actively-managed CDOs and CLOs in Luxembourg. As a result, the country could attract even more of these structures.

Another change is in refinancing and allows domestic securitisation undertakings to be financed through loans. Financing a transaction is no longer limited to securities but can include any financial instruments – such as promissory notes or loans – as long as the return on them depends on the underlying assets.

Meanwhile, additional company forms have been made available for securitisation vehicles. They can now use the following legal forms:

• Société en nom collectif (partnership)
• Société en commandite simple (limited partnership)
• Société en commandite spéciale (special limited partnership)
• Société par actions simplifiée (simplified shareholder company)

These already existed under Luxembourg company law, but were not available in the securitisation space. Enlarging the legal form options increases flexibility for securitisation entities.

This makes securitisation even more attractive for investors like private equity firms who already extensively use partnership structures in Luxembourg or are looking for tax-transparent securitisation structures.

The new law also:

• Clarifies that the treatment and distribution of profits and losses of equity-financed compartments must be done on a compartment basis.
• Allows a securitisation vehicle to grant security interests over the assets to parties involved in a transaction but who are not direct creditors of the vehicle.
• Defines the legal subordination of different types of debt and equity instruments issued by a securitisation vehicle.

How will the changes make Luxembourg securitisations more attractive?

The new law doesn’t make any mandatory changes but has widened investors’ options, clarifying existing rules and increasing flexibility.

It’s expected to boost the local securitisation market and increase Luxembourg’s investor toolkit. It will attract actively-managed CLOs, as well as opening the means of funding to other financial instruments.

For example, we could see Luxembourg-based private equity firms who have active debt funds decide to consolidate and relocate their existing CLO activity to Luxembourg.

In terms of debt refinancing, securitisation will become more attractive for investors who prefer to invest via loans instead of securities – for example banks with trade receivables or leasing transactions. The new law gives banks an additional investment opportunity.

Previously, a bank or a financial institution would set up funds and investment companies investing in securities; now it can invest directly via loans for securitisation.

The changes will bring flexibility to the securitisation market, making it simpler for certain companies to do business in Luxembourg, supporting its continued growth.

This shift will not happen overnight. However, we expect it to become clear by the end of 2022 how the new law enhances the country’s securitisation market.

We believe the new law will make Luxembourg, which already has one of the most flexible investor toolbox in Europe, even more attractive for structuring securitisation deals.

Why Intertrust Group?

• Established in Luxembourg since 1955, our local office offers solutions to every challenge, from corporate conglomerates to high-net-worth individuals and families
• We provide market-leading capital market services in Luxembourg. Our experts can offer scalable solutions achieved through automation. And, they have extensive experience in providing the full scope of services to complex asset classes (including CLOs, trade receivables/supply chain finance, residential mortgage-backed securities, auto asset-backed securities, credit cards, repackaging structures, non-performing loans, synthetic)
• We have a range of services for private capital and funds, such as fund formation and liquidation, fund administration, fund finance advisory and loan administration
• Intertrust Group is a publicly listed company with 70 years’ experience in providing world-class trust and corporate services to clients around the world