Bill modernising legal framework for securitisation in Luxembourg

1.Diversification of funding sources

The Bill extends the range of funding sources available to securitisation vehicles, enabling them to raise funds through any type of financing or other financial commitment. The objective is to allow securitisation vehicles to obtain financing through means other than the issuance of traditional financial instruments or borrowing.

This amendment responds to growing demand from market participants facing specific constraints in certain investment segments. This is particularly the case in Islamic finance, where the use of conventional loans and traditional financial instruments is prohibited.

2. Broader possibilities for active management

The Bill clarifies the conditions under which active management of a pool of risks securitised by a securitisation undertaking is permissible. Active management is extended to all types of assets, provided that they are not offered to the public, thereby restricting the possibility of active management to securitisations intended for professional or sophisticated investors.

This clarification responds to the need to modernise the Securitisation Law in this area and to ensure a level playing field for Luxembourg securitisation vehicles vis-à-vis securitisation regimes in other jurisdictions. Indeed, certain jurisdictions have long allowed active management of portfolios held by securitisation undertakings, including where such portfolios contain equity positions.

The revised wording of Article 61-1 of the Securitisation Law also seeks to acknowledge that a portfolio of securitised assets, even when managed passively, cannot remain entirely static throughout the life of a securitisation transaction and that certain adjustments are necessary. Accordingly, the revised Article 61-1 specifies that certain transactions aimed at the establishment, renewal or marginal adjustment of the composition of a portfolio of securitised assets must not be regarded as active management.

3. Introduction of intra-compartment investments

Another notable innovation is the possibility for compartments within a securitisation vehicle to invest in other compartment of such vehicle, subject to the articles of association, management regulations and issuance documents applicable to each securitisation vehicle.

This possibility is already recognised in several special laws governing multi-compartment investment vehicles that permit a compartment to invest in one or more other compartments of the same investment vehicle, subject to conditions designed to avoid circular investments.

Accordingly, in order to protect investors, any circular investment is prohibited. A compartment of a securitisation undertaking is not permitted to invest in another compartment of the same undertaking if that compartment already holds an interest in the investing compartment.

With regard to debt securities, the Bill provides, by way of derogation from the merger doctrine (confusion) set out in Article 1300 of the Civil Code, that a compartment investing in another compartment of the same securitisation vehicle enjoys the same rights as a third-party investor, both in financial terms and with respect to voting rights.

4. Guarantee and security interests

The Bill aims to clarify the regime governing the granting of guarantees and security interests by securitisation vehicles by specifying that a securitisation vehicle may grant guarantees or security interests in order to: (i) secure its own obligations; (ii) secure the obligations of a third party directly or indirectly related to the securitisation transaction; or (iii) secure the obligations of a third party in connection with a direct or indirect investment in the securitisation transaction.

5. Subordination

The Bill introduces a clarification regarding the subordination rules applicable to financial instruments issued by securitisation undertakings.

The current Securitisation Law establishes various forms of subordination between categories of financial instruments issued by a securitisation vehicle, notably by providing that debt instruments with a non-fixed return are subordinated to debt instruments with a fixed return.

The proposed amendment clarifies that debt instruments with a non-fixed return are also subordinated to debt instruments bearing interest calculated by reference to a benchmark rate (for example, Euribor) plus a fixed margin. Conversely, instruments bearing interest calculated by reference to a benchmark rate plus a fixed margin ranked without preference with fixed-return debt instruments.

The equal ranking of fixed-return debt instruments and instruments bearing interest calculated by reference to a benchmark rate plus a fixed margin is justified by their nature as claims whose remuneration is determined or determinable independently of the residual performance of the securitisation undertaking’s assets.

The subordination rule described above is limited to the scope of application of the Securitisation Law and does not prejudice the application of similar or different rules arising under other legal provisions.

6. Asset segregation

Inspired by investment fund legislation, the Bill further clarifies that, in the event of the bankruptcy of a management company, the assets of the securitisation vehicles managed by that company do not form part of the management company’s bankruptcy estate and therefore may not be used to satisfy the claims of the management company’s creditors. Consequently, creditors of the management company have no recourse against the assets of the securitisation vehicles for the recovery of their claims.

7. Fine tuning

The references to various insolvency proceedings are being updated, notably following the entry into force of the law of 7 August 2023 on business preservation and the law of 28 October 2022 establishing administrative dissolution without liquidation.

Conclusion

Since the entry into force of the Securitisation Law, Luxembourg has established itself as a leading player in the field of securitisation. The national legislative framework, which is both robust and flexible, has enabled the implementation of financial structures that meet market participants’ needs.

This Bill therefore forms part of the ongoing series of reforms aimed at modernising and enhancing the competitiveness of Luxembourg’s securitisation legal framework.