On 9 February 2022, the Luxembourg legislator has amended the Luxembourg law of 22 March 2004 on securitisation in order to further clarify the existing legal framework and to adapt it to the current requirements of the securitisation market, in particular by simplifying the means by which a securitisation undertaking (SPV) can finance itself, allowing SPVs to grant collateral in a more flexible framework and to actively manage their assets, and, by specifying certain rules relating to compartmentalisation. The innovation achieved by this new law strengthens the Luxembourg securitisation market as the leading market for securitisation in Europe (29 percent of market share) and in mid-May 2020, 1,288 securitisation SPVs were in existence in Luxembourg representing 7,000 compartments.

Issuance of financial instruments in the broad sense

Under the former legislation, SPVs could only issue instruments defined as “securities”. As this term is not clearly defined by Luxembourg law, SPVs were facing legal uncertainty, especially when the law applicable to such instruments was a foreign law. A distinction was made between the law of the SPV and the law of the relevant funding instrument, so that if the law of the funding instrument did not define the issued instruments as “securities” (which is the case of the Schuldscheine under German law), the issued instruments were not necessarily qualified as “securities” from a Luxembourg perspective (even though the market practice, for example for German law Schuldscheine was to accept them as securities, even though, from a German legal perspective they constitute loans).

The new law puts an end to this legal uncertainty and a Luxembourg securitisation SPV is no longer technically limited to “securities” and can now be financed by way of issuance of “financial instruments” in its broadest possible meaning.

Active management of assets

The possibility for active management of the assets acquired by SPVs is one of the major contributions of the new law. The former legislation prohibited any active management of the acquired assets, the reason being that the SPV aim to be tax-neutral and should only allow the transfer of risks from the originator to the investors without creating additional risks. By allowing the active management of the acquired assets in the form of loans (CLOs) or debt securities (CDOs), the legislator brings SPVs closer to the investment funds without, however, introducing additional regulation, thereby achieving substantially higher flexibility.

An “offer of securities to the public on a continuous basis” is clarified

SPVs that offer securities to the public on a continuous basis must be approved by the Luxembourg financial regulator (CSSF); however, the former legislation did not define the notion of an “offer of securities to the public on a continuous basis.” Therefore, historically, the CSSF set out the criteria for presuming an offer of securities to the public on a continuous basis. Based on the criteria originally defined by the CSSF, the new law set forth the conditions to determine an offer of financial instruments to the public:

• Issuance of financial instruments on a continuous basis: the issuance of financial instruments is deemed to be carried out on a continuous basis when the SPV undertakes more than three issues to the public during a financial year.
• Issuance of financial instruments to the public: the issuance of financial instruments is deemed to be to the public when, cumulatively, (a) the SPV does not issue financial instruments to professional clients (b) with financial instruments whose denominations are less than €100,000 (c) and are not distributed as private placements (the assessment of “private placements” will be made on a case-by-case basis).

The financing by loans

Until now, Luxembourg securitisation SPVs have been financed by issuing securities. Only on an ancillary basis could SPVs resort to borrowing (mainly for liquidity).

The new law allows the financing of Luxembourg securitisation SPVs by loans (instead of or in addition to issuing financial instruments).

Granting security to a third party

Under the former legislation, a Luxembourg securitisation SPV could only grant security to cover liabilities that it entered into with a view to carrying out their securitisation, or for the benefit of investors, which prohibited the granting of security interests in favor of third parties generally and limiting the possibility of Luxembourg securitisation SPVs being involved in transactions at a group level. 

Under the new legislation, a Luxembourg securitisation SPV can grant security for the benefit of any third party, for instance, of a bank where the borrower is the mother company (that will use the proceeds of the loan to invest in the SPV). 

Expansion of the legal forms of the securitisation company

Under the former legal framework, a Luxembourg securitisation SPV could only be organized as a public limited liability company (société anonyme) (SA), a partnership limited by shares (société en commandite par actions) (SCA), a private limited liability company (société à responsabilité limitée) (S. à r.l.) or a cooperative organized as a public limited liability company (société cooperative organisée en société anonyme) (ScoopSA).

The new law expands the types of legal form under which an SPV can be organized:

• A general partnership (société en nom collectif) (SNC) is useful when tax transparency and structural flexibility are required (with legal personality) and the sponsors can retain control over the management functions.
• A simplified public company (société par actions simplifiée) (SAS) is useful when flexibility in the management of the company and the balance of powers between the shareholders is required.
• A common limited partnership (société en commandite simple) (SCS) is useful when tax transparency and structural flexibility are required (with legal personality) and the sponsors can retain control over the management functions.
• A special limited partnership (société en commandite spéciale) (SCSp) is useful when tax transparency and structural flexibility are required (without legal personality) and the sponsors can retain control over the management functions.

Legal subordination in securitisation

The new legislation clarifies the rules of subordination and priority of rights applicable in a securitisation: 

• Units of an SPV (organized as a fund) are subordinated to other financial instruments issued by the SPV and loans granted to the SPV.
• Shares (actions), corporate units (part sociales) or partnership interests (parts intérêts) are subordinated to other financial instruments issued by the SPV and to loans granted to it.
• Shares (actions), corporate units (part sociales) or partnership interests (parts intérêts) issued by an SPV are subordinated to the beneficiary shares (parts bénéficiares) issued by it.
• Beneficiary shares (parts bénéficiaires) issued by an SPV are subordinated to other financial instruments issued by the SPV and to loans granted to it.
• Non-fixed debt instruments issued by an SPV are subordinated to fixed-income debt instruments issued by it. 

Registration of SPVs organized as a fund

The new legislation introduces a legal obligation for Luxembourg securitisation SPVs organized as funds to register with the Luxembourg Trade and Companies Register.