- What legislation governs securitisation in your jurisdiction? Has your jurisdiction enacted a specific securitisation law?
On 22 March 2004, the Luxembourg legislator enacted a legal framework specifically dedicated to govern risk securitisation transactions in their broadest meaning and entities carrying out securitisation activities (Securitisation Law- https://www.cssf.lu/wp-content/uploads/L_220304_securitisation_upd270516.pdf.)
In addition, various other national or European regulations may apply depending on the activity of the securitisation vehicle and its structuring. In particular, regulation (EU) 2017/2402, which fully applies since 1st January 2019, is laying down a general framework for securitisation and creating a specific framework for simple, transparent and standardized securitisations (Securitisation Regulation). The alternative investment fund manager law of 12 July 2013 may also apply from time to time, in particular if the securitisation vehicle does not qualify as an ad hoc securitisation.
The European Banking Authority and the European Securities and Markets Authority (ESMA) completed the regulatory environment by issuing guidelines and final drafts of regulatory technical standards in relation to definitions and terms of the Securitisation Regulation. The guidelines provide a harmonised interpretation and application of the transaction-level and programme-level criteria applicable to asset-backed commercial paper (ABCP) securitisation and a single point of consistent interpretation for ABCP securitisation and ensure a common understanding of them by the originators, original lenders, sponsors, securitisation special purpose entities (SSPEs), investors, competent authorities and third parties verifying simple, transparent and standardised (STS) compliance (in accordance with Article 28 of Regulation (EU) 2017/2402, throughout the Union).
A Commission delegated regulation (EU) 2020/1732 of 18 September 2020 supplemented Regulation (EU) 2017/2402 of the European Parliament and of the Council with regard to fees charged by the ESMA to securitisation repositories provided for in Article 16 of the Securitisation Regulation. This delegated regulation has been in force since 10 December 2020.
- Does your jurisdiction define which types of transactions constitute securitisations?
The Securitisation Law (article 1) defines a securitisation transaction whereby a securitisation undertaking acquires or assumes, directly or through another undertaking, the risks relating to claims, other assets or obligations assumed by third parties or inherent to all or part of the activities of third parties and issues securities, whose value or yield depends on such risk.
The Securitisation Regulation defines a securitisation as a transaction or scheme, whereby the credit risk associated with an exposure or a pool of exposures is tranched, having all of the following characteristics:
- payments in the transaction or scheme are dependent upon the performance of the exposure or of the pool of exposures;
- the subordination of tranches determines the distribution of losses during the ongoing life of the transaction or scheme; and
- the transaction or scheme does not create specialised lending exposures as set out in Article 147(8) of Regulation (EU) No 575/2013, as amended.
Accordingly, the notion of securitisation is narrowly defined under the Securitisation Regulation with two cumulative features being (i) a credit risk associated with exposures upon whose performance the payments in the transaction or scheme exclusively depend and (ii) securities issued in tranches with subordination that determines the distribution of losses.
Unlike the definition set out under the Securitisation Law, securitisation transactions shall not operate physical assets and re-securitisation is generally prohibited by the Securitisation Regulation.
Any transaction meeting the conditions laid down by the Securitisation Regulation shall primarily be governed by the Securitisation Regulation and, to the extent not derogated under the Securitisation Regulation, by the Securitisation Law. For any other activity being out of the scope of the Securitisation Regulation but fulfilling the conditions stated in the Securitisation Law, the provisions of the Securitisation Law shall exclusively apply.
To qualify as a ‘Securitisation undertaking’ pursuant to the Securitisation Law, an undertaking must carry out the securitisation in full, and participate in such a transaction by assuming all or part of the securitised risks, or by the issuance of securities to ensure the financing of the securitisation transaction and must, whether in his articles of incorporation, management regulations or issue documents, provide that it is specifically subject to the Securitisation Law.
Under the Securitisation Regulation, a securitisation special purpose entity (SSPE) is defined as a corporation, trust or other entity, other than an originator or sponsor, established for the purpose of carrying out one or more securitisations, the activities of which are limited to those appropriate to accomplishing that objective, the structure of which is intended to isolate the obligations of such entity from those of the originator;
The Securitisation Law allows the securitisation of a large variety of risks that can relate to all types of assets. The securitisation undertaking may assume the risks by acquiring the assets but also through other forms of risk transfers. Accordingly, besides the traditional true sale securitisation to a securitisation undertaking, the Securitisation Law also authorises the ‘synthetic’ securitisation that only transfer the risks linked to the assets or whole or partial business securitisation.
With regard to the Securitisation Regulation, only the securitisation of credit risk is provided for. Synthetic securitisation transactions are also within the scope of the Securitisation Regulation but cannot qualify as simple, transparent and standardised (STS) securitisation which allow for a specific and lighter framework.
As per its article 2, the Securitisation Regulation applies to any originators, sponsors, original lenders, securitisation special purpose entities and institutional investors, the latter being defined as:
- any insurance or reinsurance undertaking;
- any institution for occupational retirement provision;
- any alternative investment fund manager (AIFM);
- any undertaking for collective investment in transferable securities (UCITS) management company or internally managed UCITS; or
- any credit institution.
The Securitisation Regulation also strictly regulates the selling of securitisations to retail clients under its article 3 by prohibiting the transfer of a securitisation position to a retail client unless the following cumulative conditions are met:
- the seller of the securitisation position has performed a suitability test;
- the seller of the securitisation position is satisfied, on the basis of the test referred to above that the securitisation position is suitable for the retail client; and
- the seller of the securitisation position immediately communicates in a report to the retail client the outcome of the suitability test.
- How large is the market for securitisations in your jurisdiction?
Luxembourg is one of the most attractive markets for securitisation in Europe and is a leading country in Europe in terms of number of securitization and structured finance vehicles. Most of the Financial Vehicle Corporation (FVC) are incorporated in Luxembourg, followed by Ireland and Italy. Luxembourg FVC securitizes mainly loans and debt securities but also a large portion In equity and funds (see statistics ECB).
On June 2021, more than 1,400 securitisation vehicles existed in Luxembourg under the Securitisation Law. The volume of securitised assets through the securitisation vehicles increased during the Q1 of 2021 to EUR 339.6 billion, being a slight increase of 0.3 percent. Most of the created securitisation vehicles have several compartments. These compartments enable a securitisation undertaking to create distinct parts of their assets and liabilities. Each asset of a compartment is only available to satisfy the rights of the investors investing into that compartment. Each compartment is considered, in principle, as a true separate entity.
Luxembourg and Ireland represent together almost 60% of the entire Euro securitisation market and Luxembourg remains being one of the most beneficial domiciles for securitisation vehicles.
- Which body has responsibility for the regulation of securitisation?
Only securitisation undertakings that issue securities to the public on a ‘continuous basis’ are subject to prior regulatory authorisation to carry out their activities and to regulatory ongoing supervision (Regulated Securitisation Vehicles). The CSSF is the body responsible for granting the authorisation and effecting that supervision.
The issuance of securities is deemed to be carried out on a continuous basis when the securitisation undertaking performs more than three issues to the public per year. The number of issues to be taken into consideration is the total number of issues of all compartments of the securitisation undertaking.
In order to qualify that an issuance of securities is made to the public, the CSSF relies on the following criteria:
- they are not deemed made to the public if:
- issues are made only to professional clients within the meaning of Annex II to the Directive 2014/65/EU (MiFID II);
- issues have a nominal value equalling or exceeding €125,000; or
- issues are distributed as private placements; and
- the listing of an issue on a regulated market does not systematically mean that the issue is to be considered as a public issue.
The ‘public’ nature of the issues is assessed by the CSSF, in particular in reference to the targeted investors to which the securities are offered.
In addition, the Securitisation Regulation set out a dedicated framework for the registration of a securitisation repository with the ESMA. It also provides further powers to national regulators in respect of regulated entities involved in securitisation transactions.
Licensing and authorisation requirements
- Must originators, servicers or issuers be licensed?
Unless the securitisation undertaking is a Regulated Securitization Vehicle, no specific securitisation-related licence is required from originators, servicers or issuers involved in securitisation transactions under the Securitisation Law. Regulated Securitization Vehicle must entrust their assets to a custodain who must be duly licensed and authorized by the CSSF.
Under the Securitisation Regulation, national financial regulators already in charge of the supervision of institutional investors, original lenders, sponsors, originators and SSPEs in accordance with certain sectoral directives shall also be responsible for the oversight of such regulated entities in relation with the application of the Securitisation Regulation. For originators, original lenders and SSPEs established in the European Union and not covered by such sectoral directives, Member States shall designate one or more competent authorities to supervise compliance with the applicable provisions of the Securitisation Regulation.
The law of 16 July 2019 allowing the implementation of the Securitisation Regulation designated the CSSF and the Commissariat aux Assurances as the competent authorities in Luxembourg to ensure compliance with these provisions.
- What will the regulator consider before granting, refusing or withdrawing authorisation
If a securitisation vehicle qualifies as a Regulated Securitisation Vehicle , the CSSF will review and approve its articles of incorporation or, as applicable, its management regulations or its management company, or both. During the authorisation procedure, the CSSF shall also review a list of documents relating to the securitisation vehicle and operates a thorough screening of its board of directors, human resources and financing before delivering its approval.
The Luxembourg financial regulator shall verify during the authorisation procedure that the securitisation undertaking has an appropriate organisation and can rely on adequate human and material resources to perform properly securitisation activities, in compliance with the Securitisation Law.
The reputation and experience of the members of the administrative, management and supervisory bodies of the securitisation undertaking or, as applicable, its management company shall be examined in order to ascertain that they have the appropriate capacities to manage or be involved in the securitisation structure.
The Securitisation Regulation imposes the registration with ESMA of any securitisation repository operating in the EU. In the course of the registration process, ESMA will verify that the requirements set out under the Securitisation Regulation are duly complied with within 20 working days of the receipt of the application.
To obtain its registration, a securitisation shall submit to ESMA either:
- an application for registration; or
- an application for extension of registration in the case of a trade repository already registered under Regulation (EU) No 648/ 2012 on OTC derivatives, central counterparties and trade repositories.
ESMA shall withdraw the registration of a securitisation repository where such repository:
- expressly renounces the registration or has provided no services for the preceding six months;
- obtained the registration by making false statements or by other irregular means; or
- no longer meets the conditions under which it was registered.
- What sanctions can the regulator impose?
If the CSSF determines that a regulated securitisation vehicle is not complying with the provisions of the Securitisation Law, its management regulations, articles of incorporation or the agreements relating to the issuance of its securities, or that the rights attached to the securities it has issued may be impaired, it may summon the securitisation undertaking to remedy the situation within a delay that it sets.
If such summons is not complied with, the Luxembourg financial regulator may:
- publish its conclusion in case of non-compliance;
- prohibit any issuance of securities;
- request the suspension of the listing of its issued securities;
- request the competent judge to appoint a provisional administrator acting in lieu of its management; or
- withdraw its authorisation.
In the event that directors, managers and officers of a regulated securitisation vehicle refuse to provide the CSSF with the financial reports and the requested information, or where such documents prove to be incomplete, inaccurate or false, or if the existence of any other serious irregularity is established, the CSSF may impose upon them fines ranging from €125 up to €12,500.
Article 32 of the Securitisation Regulation imposes on Member States to implement at least the following sanctions and measures in the event of certain material infringements to its requirements:
- a public statement which indicates the identity of the natural or legal person and the nature of the infringement;
- an order requiring the natural or legal person to cease the infringing conduct;
- a temporary ban preventing any member of the originator’s, sponsor’s or SSPE’s management body or any other natural person held responsible for the infringement from exercising management functions in such undertakings;
- a temporary ban preventing the originator and sponsor from performing any STS securitisation;
- in the case of a natural person, maximum administrative pecuniary sanctions of at least EUR 5,000,000;
- in the case of a legal entity, maximum administrative pecuniary sanctions of at least EUR 5,000,000, or of up to 10 % of the total annual net turnover of the legal entity according to the last available accounts approved by the management body;
- maximum administrative pecuniary sanctions of at least twice the amount of the benefit derived from the infringement where that benefit can be determined; and
- a temporary withdrawal of the authorisation for a third party to check the compliance of a securitisation with requirements relating to STS securitisations.
Public disclosure requirements
- What are the public disclosure requirements for issuance of a securitisation?
No public disclosure requirement is provided under the Securitisation Law for securitisation undertakings that do not have to be authorised by the CSSF. They remain, however, subject to the customary obligation applicable to all legal entities to file their annual accounts with the Luxembourg Companies and Trade Registry.
In respect of the regulated securitisation vehicles, there is no other specific public disclosure requirement. They are, however, officially listed as a regulated securitisation entity by the CSSF. In addition, the CSSF may publicly advert the failure of regulated vehicles to comply with their legal obligations, if they do not remedy in due course.
There is no further publication requirement under the Securitisation Regulation. However, the originator, sponsor and SSPE of a securitisation shall make at least the following information available to holders of a securitisation position, to his national financial regulator and, upon request to potential investors:
- information on the underlying exposures on a quarterly basis;
- all underlying documentation that is essential for the understanding of the transaction;
- where a prospectus has not been drawn up in accordance with Regulation (EU) 2017/1129, as amended, on the prospectus to be published when securities are offered to the public, a transaction summary or overview of the main features of the securitisation;
- in the case of STS securitisations, the STS notification required under article 27 of the Securitisation Regulation;
- quarterly investor reports;
- any inside information relating to the securitisation that the originator, sponsor or SSPE is obliged to make public in accordance with Regulation (EU) No 596/2014, as amended, on insider dealing and market manipulation, or in the case where such regulation is not applicable, any significant event such as:
- a material breach of the obligations provided for in the documents essential for understanding the transaction;
- a change in the structural features that can materially impact the performance of the securitisation;
- a change in the risk characteristics of the securitisation or of the underlying exposures that can impact the performance of the securitisation; or
- in the case of STS securitisations, where the securitisation ceases to meet the STS requirements or where competent authorities have taken remedial or administrative actions.
- What are the ongoing public disclosure requirements following a securitisation issuance?
There are no public disclosure requirements following a securitisation issuance.
- Outside licensing considerations, are there any restrictions on which entities can be originators?
There are no restrictions on originators other than the licensing considerations.
However, the originator, sponsor or original lender of a securitisation under the Securitisation Regulation shall retain on an ongoing basis a material net economic interest in the securitisation of not less than 5 %. That interest shall be measured at the origination and shall be determined by the notional value for off-balance-sheet items. Where the originator, sponsor or original lender have not agreed between them who will retain the material net economic interest, the originator shall retain the material net economic interest.
- What types of receivables or other assets can be securitised?
The scope of types of receivables or assets that can be securitised under Luxembourg law is considerable. In addition to receivables and assets, whether movable or immovable, tangible or intangible; all risks resulting from the obligations assumed by third parties, or relating to all or part of the activities of third parties, may be securitised.
To the contrary, the Securitisation Regulation tightly limits the scope of the assets that can be securitised to any monetary claims, loans or receivables entailing a credit risk which can be pooled and repackaged for the purpose of the securitisation.
- Are there any limitations on the classes of investors that can participate in an offering in a securitisation transaction?
There are no limitations on the classes of investors that can participate in an offering of securities, unless it is intended to be a private offering. If the offering is intended to be public, the rules of the Luxembourg law of 10 May 2016 implementing Directive 2013/50/EU (Prospectus Law) will apply and need to be complied with.
The Securitisation Regulation primarily targets institutional investors but under certain limited circumstances notes issued by securitisation vehicles may be offered to retail investors.
- Who may act as custodian, account bank and portfolio administrator or servicer for the securitised assets and the securities?
According to the Securitisation Law, Regulated Securitisation Vehicles must entrust the custody of their liquid assets and securities with a credit institution established or having its registered office in Luxembourg. There is no such requirement for non-authorised securitisation entities. The same reasoning goes with the Securitisation Regulation.
- Are there any special considerations for securitisations involving receivables with a public-sector element?
There are no specific considerations to be taken into account regarding the features of the receivables themselves (other than possible transfer restrictions and the specificities set forth under question 11 with respect to the eligible assets to securitisation under the Securitisation Regulation). However, public-sector entities may raise their sovereign immunity in case of enforcement for payment of the receivable. Furthermore, certain official notifications, publications or procedures may need to be made for effecting the transfer of the receivables of public institutions.
- Which forms can special purpose vehicles take in a securitisation transaction?
Securitisation undertakings or SSPEs, as defined under the Securitisation Regulation, may be set up under the form of incorporated or unincorporated entity (ie, a fund managed by an incorporated management company). Securitisation companies would be generally set up as a limited limited liability entity under the following forms:
- public company limited by shares (S.A. representing 54% of the SSPEs) ;
- a private limited liability company (SARL representing 42% of the SSPEs);
- a corporate partnership limited by shares;
- a cooperative company organised as a public limited company.
The choice for an incorporated or unincorporated form depends mainly on the level of tax transparency that investors and securitisation vehicles wish to obtain.
SPV formation process
- What is involved in forming the different types of SPVs in your jurisdiction (eg, timing, cost, organisational documents)?
Depending on the type of securitisation vehicle and its regulatory status (or absence thereof), the incorporation of a plain vanilla unregulated special purpose vehicle (SPV) may be rather straightforward and be made at reasonable cost. The delay for incorporating a plain vanilla SPV, provided the know-your-client (KYC) formalities with the local banks have been satisfactorily filled out with the depositary and the bank, would not exceed 48 hours. Luxembourg banks aim to closely scrutinise securitisation operations that would not be directed to institutional investor and may be reluctant to act as depositary without a full KYC process and identification of future subscribers.
The main public documentation would consist in the articles of incorporation of the SPV. Another contractual agreement for structuring the securitisation transactions would need to be drafted and remitted to the depositary bank, such as:
- the claims purchase agreement;
- the claims risk assignment agreement; and
- the terms and conditions of the SPV securities issued to its investors.
A regulated securitisation vehicle will require approval of its offering circular by the CSSF, which generally requires several months of application procedure.
- Is it possible to stipulate which jurisdiction’s law applies to the assignment of receivables to the SPV?
The assignment of the receivables to the SPV concerns the relationship between the originator as assignor and the SPV as assignee. At this level, it is possible to stipulate which jurisdiction’s law applies to the assignment of receivables to the SPV.
For contracts entered into on or after 17 December 2009, the choice of law is governed by Regulation No. 593/2008/EC of 17 June 2008 (Rome I).
Under Rome I, the parties to a contract are free to agree that the contract be governed by the law of any country, irrespective of the law governing the receivables. The Rome Convention and Rome I allow for modification of the parties’ choice only:
- where all elements of a contract are connected to a country other than the country whose law has been chosen by the parties, and that country has rules that cannot be disapplied by contract;
- to the extent that the elected law conflicts with overriding mandatory rules of Luxembourg law; or
- where the applicable foreign law is manifestly incompatible with Luxembourg public policy.
With regard to the rights of the SPV as assignee against the underlying debtor, the position differs. The liabilities (and rights) of the debtor, including the assignability of the claim and the question as to whether the claim has been discharged, will be governed by the governing law of the assigned or underlying claim (namely the receivables contract itself) pursuant to article 14(2) of Rome I.
Asset acquisition and transfer
- May an SPV acquire new assets or transfer its assets after issuance of its securities? Under what conditions?
Under the Securitisation Law, an SPV may acquire new assets or transfer its assets after the issuance of its securities, provided that the constitutional documents and the purchase agreement as well the documentation in relation to the securities issued to the investors allow it. An SPV may also create a new sub-fund in relation to the issue of new securities.
Under the Securitisation Regulation, the activities of the SSPE are strictly limited to those appropriate to carry out one or more securitisations, the structure of which are intended to isolate the obligations of the SSPE from those of the originator. Accordingly, the SSPE may only acquire new assets or transfer its assets if this is somehow related to a securitisation transaction.
- What are the registration requirements for a securitisation?
As per the Securitisation Law, a securitisation vehicle that does not have to be authorised by the CSSF -as set out under question 4- must not fulfil any securitisation specific registration requirement. As a general matter and, as for any Luxembourg commercial company, a securitisation company, either regulated or not, must be registered with the Luxembourg trade and companies’ registry and file its articles of incorporation, annual accounts and other corporate documents.
As set out under question 6, a regulated securitisation vehicle must have its articles of incorporation or, as applicable, its management regulations or the articles of its management company, or both, reviewed and approved by the Luxembourg financial regulator.
Any change in the administrative, management and supervisory bodies of a regulated securitisation vehicle must be notified forthwith to the CSSF and any change in control, any replacement of its management company, as well as any amendment to the management regulations or its articles of incorporation are subject to the prior approval of the CSSF.
Each CSSF authorised securitisation undertaking must spontaneously communicate to the CSSF the reports and written comments issued by its statutory auditors in the framework of the approval of its annual accounts.
As explained under questions 4 and 6, the Securitisation Regulation requires the registration with ESMA of any securitisation repository. In the case of a STS securitisation, ESMA must be notified of such transaction in accordance with article 27 of the Securitisation Regulation.
- Must obligors be informed of the securitisation? How is notification effected?
In accordance with the Securitisation Law, the assignment of an existing claim to or by a securitisation undertaking becomes effective between the parties and against third parties as from the time the assignment is agreed upon. The Securitisation Regulation does not provide for any obligation with regard to the information of the obligors on the securitisation.
However, a notification to the assigned obligor is advisable to the extent that, failing that notification, he would validly be discharged from his debt when paying it to the assignor.
In practice, the law governing the assignment of claims to a securitisation undertaking would frequently be a foreign law. Accordingly, the conditions for effecting the transfer and making it opposable to third-parties will be governed by that foreign law and an analysis claim by claim and obligor by obligor may be required to determine whether any notification or any other formality would apply.
- What confidentiality and data protection measures are required to protect obligors in a securitisation? Is waiver of confidentiality possible?
The rules relating to the protection of confidentiality or personal data and banking secrecy remain applicable after the securitisation of the receivables and may restrain the transfer of information to investors or to the securitisation entity. Luxembourg data protection law requires that any individual whose personal data is stored in a database be entitled to accede to the stored information enabling him to alter or remove such information.
Furthermore, when the assignor of receivables is a credit institution, the confidential information is covered by strict banking secrecy laws, prohibiting the transfer of the information to third parties without prior consent of the concerned obligors.
Credit rating agencies
- Are there any rules regulating the relationship between credit rating agencies and issuers? What factors do ratings agencies focus on when rating securitised issuances?
The relationship between credit rating agencies (CRAs) and issuers is regulated by Regulation (EC) No. 1060/2009, as amended in May 2011 by Regulation (EU) No. 513/2011 (CRA II) (in which responsibility for the registration and ongoing supervision of EU-based credit rating agencies was transferred to the European Securities Markets Authority (ESMA), in May 2013 by Regulation (EU) No. 462/2013 (CRA III), and for the last time in December 2017 by Regulation (EU) 2017/2402.
The EU regulation 2017/2402 defines securitisation and establishes due-diligence, risk-retention and transparency requirements. This regulation created a specific framework for STS securitisation and is applicable to EU securitisation transactions whose securities are issued on or after the 1st of January 2019.
CRA III introduced new measures for structured finance instruments in particular, which require, among others:
- that issuers who pay for a credit rating on a structured finance instrument will need to obtain ratings from at least two CRAs on that instrument;
- a mandatory rotation of CRAs every four years; and
- that the issuer, originator and sponsor be all jointly responsible for making specific information publicly available through a website (the European Rating Platform) established by the ESMA, on an ongoing basis.
In giving a rating to the securitisation, the CRAs disregard the creditworthiness of the originator, insofar as a properly structured securitisation should isolate the securitised assets from the originator’s insolvency. Rather, the CRAs take into account factors including:
- the historic performance of the securitised assets;
- any credit enhancement, liquidity facilities and the credit standing of the administrative parties (including hedging counterparties and account banks); and
- the structure and legal integrity of the transaction.
Directors’ and officers’ duties
- What are the chief duties of directors and officers of SPVs? Must they be independent of the originator and owner of the SPV?
There is no legal requirement for the directors and officers of an SPV to be independent of the originator and owner of the SPV. However, pursuant to principles of good governance, directors have a duty to conduct the business of the SPV in accordance with its corporate purpose and laws and manage it in its best corporate interest. Even if the SPV has only one shareholder, the corporate interest of the SPV should not to be aligned to the interest of that sole shareholder and it would be advisable to appoint one or more independent directors.
In addition, the Securitisation Regulation provides for specific sanctions, including temporary bans, to be imposed on the originator’s sponsor’s or SSPE’s management body if certain key requirements are not complied with in the course of a securitisation transaction.
- Are there regulations requiring originators and arrangers to retain some exposure to risk in a securitisation (skin-in-the-game)?
In accordance with article 6 of the Securitisation Regulation, the originator, sponsor or original lender of a securitisation shall retain on an ongoing basis a material net economic interest in the securitisation of not less than 5%. That interest shall be measured at the origination and shall be determined by the notional value for off-balance-sheet items. As mentioned under question 10, where the originator, sponsor or original lender have not agreed between them who will retain the material net economic interest, the originator shall retain the material net economic interest. There shall be no multiple applications of the retention requirements for any given securitisation. The material net economic interest shall not be split amongst different types of retainers and not be subject to any credit-risk mitigation or hedging.
- What types of collateral/security are typically granted to investors in a securitisation in your jurisdiction? (For example, are they granted a security interest in the transferred receivables, in any related bank accounts or collection accounts, etc?)
A Luxembourg securitisation vehicle may not, by any means whatsoever, create security interests over its assets or transfer its assets for guarantee purposes, except to secure the obligations it has assumed for their securitisation or in favour of its investors, their fiduciary-representative or the issuing vehicle participating in the securitisation.
The main type of collateral granted to investors in a securitisation would be a pledge over receivables acquired by the securitisation vehicle as well as a pledge over the SPV’s bank accounts. These types of assets fall under the definition of financial instruments according to the Luxembourg law of 5 August 2005 as amended on financial collateral (Financial Collateral Law) that regulates the creation, perfection and enforcement of security interests over such assets.
The Financial Collateral Law specifically provides that a security interest over financial instruments can be granted to an agent or a trustee acting for itself or for the benefit of all investors, or both, in order to secure the claims of third-party beneficiaries, whether present or future, provided such third-party beneficiaries are determined or determinable.
The legal documentation relating to security interests over assets located in Luxembourg would be governed by Luxembourg law on the basis of the lex rei sitae principle. The pledge over claims will generally be governed by the law governing the receivable, depending on the foreign governing law. The security interest over the receivables may also be by way of a charge or an assignment for security purposes.
Luxembourg law does not provide for the creation of floating charges or debentures. This, however, does not restrict a Luxembourg company to grant a floating charge or a debenture over non-Luxembourg-located assets, which will be governed accordingly by foreign laws.
- How is the interest of investors (or the trustee on behalf of the investors) in a securitisation in the underlying security perfected in your jurisdiction? (For example, how does one perfect a security interest in the underlying receivables or the bank account in which collections are deposited in your jurisdiction?)
Under Luxembourg law, the transfer of the possession (dispossession) of the assets over which the pledge is granted is a condition to the constitution of the pledge. Such dispossession can be done in various ways depending on the type of assets to be pledged. Dispossession is also required to make the pledge enforceable towards third parties. The law of the debtor’s jurisdiction may impose further perfection or notification requirements.
A Luxembourg law-governed claims pledge agreement is perfected by the mere conclusion of the pledge agreement. However, unless the debtor, whose claims are pledged, is party to the pledge agreement (which is highly unlikely in a securitisation operation), such a pledge agreement shall be notified to or acknowledged by the debtor whose claim is pledged. Lacking such notification, the debtor of a pledged claim may validly discharge his or her obligation to the pledger as long as he or she has no knowledge of the pledge’s conclusion. A Luxembourg law-governed pledge over bank accounts shall be notified to, and acknowledged by, the account bank maintaining the accounts.
- How do investors enforce their security interest?
The Financial Collateral Law provides that security interests in relation to financial instruments can be enforced as follows (with the first option being the most common one), unless otherwise agreed by the parties at the moment of contracting. A notice prior to enforcement is not required where:
- appropriate or cause a third party to appropriate the pledged assets at a price fixed, before or after their appropriation, according to the valuation method mutually determined by the parties;
- assign or cause the assignment of the pledged assets by private sale in a commercially reasonable manner, by a sale on the stock exchange or by public auction;
- obtain a court decision ruling that the pledged assets shall remain in his possession up to the amount of the debt, on the basis of an expert’s estimate; or
- in the case of financial instruments, appropriate these financial instruments at the market price, if they are admitted to official listing on a stock exchange located in Luxembourg or elsewhere or are traded on a recognised, functionally operational, regulated market that is open to the public.
- Is commingling risk relating to collections an issue in your jurisdiction? (For example, if collections in respect of transferred receivables are deposited in an account along with collections in respect of non-transferred receivables, would the investors in the securitisation lose their security interest in the collections of transferred receivables? If so, how is this risk normally addressed in your jurisdiction?)
Commingling risk may be an issue in Luxembourg to the extent there is no security interest over the asset (receivable or bank account). On the other hand, any cash deposited in an account with another origin than the securitisation and pledged in favour of the investors (or their agent or trustee), will, in case of enforcement, be assumed to be for the benefit of such investors (or their agent or trustee) and other interested third parties will need to provide evidence of the non-securitisation link of such proceeds.
- What are the primary tax considerations for originators in your jurisdiction?
The tax neutrality of the securitisation operation is one of the key success drivers so as to optimise investors’ returns and the originator’s funding costs. As such, any tax levied on the securitisation vehicle or in relation to the securitisation itself would clearly increase the overall costs of the transaction and therefore reduce its effectiveness.
Consequently, a securitisation transaction must be structured on a tax-efficient basis in order to prevent any tax leakage.
In particular, all structural features of a securitisation transaction must be clearly analysed from a Luxembourg tax perspective to ensure that none of the features either lead to an additional tax burden or accelerate tax liabilities that would not have been incurred had the securitisation not taken place.
- What are the primary tax considerations for issuers in your jurisdiction? What structures are used to avoid entity-level taxation of issuers?
Tax neutrality is a substantial element to avoid any entity taxation issue in Luxembourg .
The securitisation vehicles are widely organised as corporate entities fully liable to corporate income tax (CIT) and municipal business tax (MBT) at an aggregate tax rate of 24.94 per cent in 2020 and in 2021 (the CIT rate is 18.19% including unemployment surcharge and the MBT rate is 6.75%). The corporate entities are in principle taxed on their net accounting profit of the year. However, securitisation SPV may reduce this taxable basis to possibly nil to the extent that any payment to investors for issued bonds or holding shares (dividends) qualify as tax deductible payments. Furthermore, no withholding tax applies on any distribution made either under the form of interest or dividends. With this technique, a Luxembourg SPV can achieve tax neutrality for the SPV and tax transparency for investors even though there are incorporated as capital companies.
However, it is advisable to undertake a planning of the cash flow so as to leave an arm’s length remuneration on the securitisation vehicle and avoid triggering any tax adjustments with countries involved in the securitisation operations.
Securitisation companies may be liable to a minimum tax liability although their accounting result for the year does not reflect any profits but losses. Indeed, a minimum net wealth tax (NWT) charge was introduced as from 1 January 2016 that replaced the previous provision for the minimum corporate income tax for all corporate entities having their statutory seat or central administration in Luxembourg. This minimum tax applies to companies whose sum of fixed assets, intercompany loans, transferable securities and cash at bank exceeds both 90 per cent of their total gross assets and €350,000. For the fiscal year 2020, if these two criteria are met, the minimum NWT charge would be set at €4,815. Otherwise if these two criteria are not met, the minimum NWT charge would range from €535 to €32,100 depending on the company’s total gross assets amount.
The EU has unveiled an anti-tax avoidance package which is composed by anti-tax avoidance directive 2016/1164 of 12 July 2016 (ATAD 1) and the anti-tax avoidance directive 2017/952 of 29 May 2017 (ATAD 2) as regards hybrid mismatches involving third countries. The law implementing ATAD 2 Into Luxembourg law was passed on 20 December 2019 and will apply from 1 January 2020 except for the reverse hybrid entity provision which will apply from fiscal year 2022. This domestic law consists in neutralising the tax impacts of hybrid mismatches resulting mainly from the use of hybrid financial instruments and hybrid entities involving third party countries. Luxembourg implemented the ATAD directive into domestic tax law on 18 December 2018 (the ATAD law). The ATAD law introduces (I) interest limitation rules imposing a limit of borrowing costs up-to 30% of the EBITDA of the taxpayer, and (ii) anti-hybrid mismatch rules. Securitisation vehicle under the form of mutual funds (tax transparent) are not concerned by the ATAD law. Furthermore, the ATAD law sets out some exemptions in respect of the limitation rules: (a) borrowing costs are deductible up to €3,000,000 per year, (b) borrowing costs prior to 17 June 2016 may be excluded from the excess borrowing costs, ( c) stand-alone entities are also exempt, and (d) securitisation companies within the meaning of Article 2 (2) of the EU regulation 2017/2402 are out of scope of the interest deduction. Finally, the EU and Luxembourg hybrid mismatch rules concern mainly associated enterprises, and therefore would have no implications for the majority of Luxembourg securitisation companies. Although the definition of exceeding borrowing costs has not been clarified by the tax authorities, in practice, these new regulations should not adversely affect the attractiveness of the Luxembourg SSPE.
- What are the primary tax considerations for investors?
Clearly, investors seek tax neutrality, in particular to avoid taxation at the level of the Luxembourg SPV and at source of the payment of their investment income. As any income distributed by a securitisation entity qualify as interests under Luxembourg law and is therefore not subject to withholding taxes.
Any capital gain realised by the Luxembourg SPV if distributed or committed to be distributed to the investors shall be tax deductible and not subject to tax in Luxembourg. Depending on the application of a double tax treaty, dividends paid to a Luxembourg securitisation SPV should benefit from reduced withholding tax as stipulated in the treaty; and dividends received from fully taxable subsidiaries should benefit from the affiliation privilege and so not be subject to tax in Luxembourg.
However, dividends paid by a securitisation SPV to a fully taxable Luxembourg joint-stock company will not benefit from the affiliation privilege and will not benefit from an exemption in the hands of the Luxembourg company. Same treatment will apply to capital gains realised by the Luxembourg joint-stock company (amended Income Tax Act of 4 December 1967 (the Tax Act)).
If the interest payment is made for the intermediate benefit of an individual beneficial owner who is resident of Luxembourg, it may be subject to a withholding tax of 20 per cent according to the amended Luxembourg law dated 23 December 2005.
- How are SPVs made bankruptcy-remote? (How does one isolate the SPV from the risk of being consolidated with the originator of the underlying financial assets and owner of the SPV in a bankruptcy of the originator?)
The rights of the investors and of the creditors are limited to the assets of the securitisation undertaking. Where such rights relate to a compartment or have arisen in connection with the creation, the operation or the liquidation of a compartment, they are limited to the assets of that compartment. The assets of a compartment are exclusively available to satisfy the rights of investors in relation to that compartment and the rights of creditors whose claims have arisen in connection with the creation, the operation or the liquidation of that compartment. As between investors, each compartment shall be treated as a separate entity, except if otherwise provided for in the constitutional documents.
The articles of incorporation, the management regulations of a securitisation undertaking and any agreement entered into by the securitisation undertaking may contain provisions by which investors and creditors accept to subordinate the maturity or the enforcement of their rights to the payment of other investors or creditors or undertake not to seize the assets of the securitisation undertaking nor, as the case may be, of the issuing or acquisition vehicle. They may also agree not to petition for bankruptcy nor request the opening of any other collective or reorganisation proceedings against them. Proceedings initiated in breach of such provisions shall be declared inadmissible.
- What factors would a court in your jurisdiction consider in making a determination of true sale of the underlying assets to the SPV (eg, absence of recourse for credit losses, arm’s length)?
There is no specific case law in Luxembourg in relation to true sale operations. Having said that, we assume that a Luxembourg judge would look for certain characteristics in the operation as to consider it as a true sale; namely, that the originator transfers an asset or a pool of assets through an asset sale agreement from its (originator) balance sheet to the SPV. The originator, therefore, transfers the legal and economic title to the assets to the SPV. Through subscription of the securitisation position, the security holder may receive access to the legal and economic rights of the securitised assets pool.
Consolidation of assets and liabilities
- What are the factors that a bankruptcy court would consider in deciding to consolidate the assets and liabilities of the originator and the SPV in your jurisdiction?
Under Luxembourg law, the principle of separate corporate identity is upheld. Only in limited circumstances will the Luxembourg courts treat the assets of the SPV as those of the originator. Examples include where the separate legal personality of a company is being used for fraud, illegality, dishonestly placing assets beyond the reach of creditors, or where an agency or nominee relationship is found to exist.
Update and trends
Key developments of the past year
- Are there any rules governing securitisations pending in your jurisdiction or reforms under way, such as prohibitions on financial firms betting against the securities they package, improved disclosure and oversight of the asset-backed securities market, rules limiting bank compensation structures that incentivise risk, etc?
The Luxembourg government has, on 20 May 2021, introduced a new bill of law (Bill 7825) in order to increase legal certainty and to modernise the Securitisation Law. For instance, Bill 7825, which is currently being negotiated between the Luxembourg lawmakers, contemplates, among other things, to :
- allow securitisation vehicles to finance themselves through loans (in addition to any form of financial instruments);
- clarify the concept of issuance of securities “on a continuous basis to the public”, as this term was previously not defined and could lead to uncertainty on whether the securitisation vehicle need to be authorised by the CSSF (as previously mentioned, only securitisation vehicles that issues securities to the public must be authorised by the CSSF);
- allow a securitisation vehicle to directly or indirectly acquire the assets which it securitises;
- allow a securitisation vehicle to give security for obligations with respect to the securitisation transaction; and
- allow Luxembourg tax transparent partnership to be used as a securitisation vehicle.
If the Bill 7825, which is currently being discussed between Luxembourg lawmakers is adopted, it will significantly modernise the current Securitisation Law and strengthen Luxembourg’s position in Europe and worldwide on securitisation.
- What legislation or government or industry initiatives are in place or contemplated to address the termination of LIBOR and transition to a substitute rate?
Interbank offered rates have long been used as a reference for variable rates, commonly referred to as “Ibor”, such as EURIBOR in the euro zone or LIBOR in the United Kingdom (London). Ibors are calculated on the basis of statements made by participating banks on their average unsecured funding cost on the interbank market for a given maturity and currency. Due to the decline in unsecured interbank funding, these statements are now based more on estimates than on actual transactions, reducing their relevance and increasing risks. Strict regulation of benchmark indices has therefore been introduced by the regulation (EU) 2016/1011, as amended, of the European Parliament and the Council of 8 June 2016 on indices used as benchmarks in financial instruments and financial contracts or to measure the performance of investment funds (Benchmark Regulation), which will allow the entire market to move towards alternative “risk-free” rates after the end of LIBOR in 2021 as announced by the Financial Conduct Authority.
Law stated date
25 January 2022.