New Securitisation Law entered into force on 8 March in Luxembourg

Is now permitted except when financial instruments are issued to the public, this should enable Luxembourg to attract more collateralised debt obligations (CDO) and collateralised loan obligations (CLO) structures, which have been historically set up in different jurisdictions.

To enable the securitisation entity to apply active management, following conditions need to be met:

1. The underlying portfolio of the securitisation entity needs to be composed of debt security, loans, receivables or debt financial instruments; and
2. The securitisation entity needs to be financed through financial instruments, which are not offered to the public.

The Amending Law clarifies and broadens the way a securitisation vehicle may fund the acquisition of the underlying investments.

Under the old regime, the securitisation vehicle was required to issues securities, the value or return of which depended on the securitised risks, which is no more the case.

Under the Amending Law, the securitisation vehicle can finance itself either by:

1. Issuing of any financial instruments, such as warrants, future, options etc. or
2. Through any form of loans whose yield or reimbursable principal amount depends on the risks required

The larger scope of funding sources enables a broader category of instruments to be issued and takes into account the flexibility required by the market.

The Amending Law also clarifies when a securitisation entity is to be considered to be issuing to the public on continuous basis.

The securitisation entity could be deemed to be issuing on continuous basis, if more than three issuances are made to the public per calendar year on an all compartment basis and to offer to the public if these financial instruments are fulfilling all three criteria:

1. Not addressed to professional investors
2. Are not distributed by private placements
3. Have a denomination of less that EUR 100,000 per unit

The legal forms in which a securitisation vehicle can be incorporated are extended, which will make securitisation even more attractive and will provide to the investors greater structuring flexibility.

Under old regime, the securitisation entity could take the form of:

• Public limited liability companies (SA)
• Partnerships limited by shares (SCA)
• Private limited liability companies (SARL)
• Cooperative companies (SCOP)

The Amending Law increases the number of legal forms that can be used for securitisation companies by extending them to:

• The unlimited company (SNC)
• The common limited partnership (SCS)
• The special limited partnership (SCSp)
• The simplified limited company (SAS)

The Amending Law defines that the choice to create either a securitisation company or a securitisation fund remains as is, nevertheless it is worth to mention, that certain changes have been reflected in the accounting treatment of approval of compartments balance sheet and profit and loss account.

These changes are applied only to compartments financed by equity.

For these compartments, the balance sheet and the profit and loss account prepared shall be approved only by the shareholders of respective compartment or respective equity instruments holders, unless the articles of securitisation entity provide otherwise.

The distribution of the profit under these type of compartments and distribution of distributable reserves may be determined by reference to each compartment, unless the articles of securitisation entity provide otherwise.

The legally required reserve shall be determined on a compartment basis if this is provided for by the articles of the securitisation entity.

The implementation of the new accounting rules serves to protect a compartment’s investors from other compartments performance.

It is now provided that the securitisation entity can grant security interest for the benefit of any third party provided that this transaction relates to the securitisation transaction. The benefit of such security interest were mostly limited to the holder of the instruments issued by the securitisation vehicle under the previous regime, which was limiting or complexifying certain financings.

The Amending Law clarifies the rules on subordination in the context of a securitisation by adding a comprehensive set of rules in the Amending Law defining subordination of the financial instruments.

• The units of a securitisation fund are subordinated to the other financial instruments issued by, and loans contracted by, such securitisation fund
• The shares or corporate units or partnership interests of a securitisation company are subordinated to other financial instruments issued by, and loans contracted by, such securitisation company
• The shares, corporate units or partnership interests of a securitisation company are subordinated to the profit shares issued by such securitisation company
• The profit shares issued by a securitisation company are subordinated to the debt financial instruments issued and to the loans contracted by such securitisation company
• Non-fixed yield debt financial instruments issued by a securitisation vehicle are subordinated to fixed yield debt financial instruments issued by that securitisation entity

The waterfall can still be determined by the issuance documents but a default scenario is now embedded in the Amending Law.

The Amending Law introduces a legal obligation for existing and future securitisation funds to register with the RCS.

Existing securitisation funds will have to register within six months after entering into force of the Amending Law.

It also introduces the obligation for securitisation funds to draw up and publish annual accounts in accordance with the provisions of the law of 19 December 2002 on the register of commerce and companies and the accounting and annual accounts of companies.